Physician Financial Success Podcast Coach Carson – Real Estate Investing

Wednesday September 26, 2018 by The Mettle Group

Watch our full podcast on VIDEO!

Tune in to hear as Josh talks to Coach Chad Carson about real estate investing and learn

    • Why you would want to invest in real estate.
    • Financial benefits to investing in real estate.
    • How to manage properties from a far distance.

 

Chad Carson:                     I think people are attracted to real estate naturally for a couple reasons. One of those is, sort of the negative people paint of real estate is that it’s more active, that you have to be more involved. Well, the flip side of that coin is because it is more active up front, it is a little bit more of a business, you actually have more control over your outcomes.

Chad Carson:                     And so, if you have an index fund, which is awesome, you’re diversified, you own the entire market, you’re just going ultimate diversification. Well, real estate is sort of the opposite. It’s saying, you know what? I’m gonna go concentrate on one little neighborhood that I have an intuitive feel. And that’s the cool thing about real estate is that we sort of know what a good rental property is because we’ve lived in other homes. We understand what neighborhoods people are looking for. And so you can go- Unlike stocks where you have to pick, like what’s the best tech stock? Who really knows the fundamentals of a tech stock? But you can go look at a piece of property and pretty quickly understand why it’s good and what’s good about the neighborhood and whether that’s up and coming. The numbers are really simple. If you’re a medical professional, you’ve done a lot more complicated math and science than the real estate math.

Chad Carson:                     So, it’s simple, it’s understandable, which is something that Warren Buffet always encourages people to do. Invest in something you understand and that you know. And that’s really what real estate is. It’s a controllable thing. You can get involved. You can affect your outcome. If you’re trying to retire early, which I’m a big- Or reach financial independence is more probably the right word. You can control the timing of that a little better through real estate. And so, for all of those reasons, that tangible quality of it, it’s a real asset. I find people that are attracted naturally to that.

Josh Mettle:                       Hello, and welcome to the Physician Financial Success podcast. My name is Josh Mettle. And this is the podcast dedicated to advising physicians how to avoid financial landmines.

Josh Mettle:                       This podcast is sponsored by the Physician Group at Fairway Independent Mortgage. Fairway recently expanded their physician home loan program to encompass other medical professionals, including CRNA, RN, Nurse Practitioner, Physician Assistants, Veterinarians, Dentists and a host of other medical professionals. Basically, if you have an advanced degree in the medical field, you’ll likely qualify for our medical professional program, and we’d love to hear from you. We invite you to reach out to us through our website, which is fairwayphysicianhomeloans.com, or you can call us at our direct line, 855-260-9932. We’re here, and we’d absolutely love to hear from you.

 

Josh Mettle:                       Today, we will be talking with Coach Chad Carson, author of “Retire Early with Real Estate.” Chad is an active real estate investor who has achieved financial independence at a young age and is now on a mission to share what he’s learned with others through his books, websites, and online courses.

Josh Mettle:                       Chad, welcome to the show my friend. How are you today?

Chad Carson:                     I’m doing great, Josh. It’s great to be here. Thanks for having me.

Josh Mettle:                       I’m super excited. I didn’t tell you this earlier, but I had lunch with my cousins, my two cousins this week. And they invited me to lunch, which was awesome and unusual, and I thought they wanted to borrow money or something.

Chad Carson:                     What are they gonna ask for?

Josh Mettle:                       Yeah, right. What’s the hook? And they took me to a nice restaurant too, so I know there was something up. And they said, “Hey,” Richard and Camilla. And they said- Richard is in the construction business and Camilla is into marketing and she’s just got a great business mind to her. And they want to get together and collaborate and invest in real estate. So, they were coming to me for advice. How do we get started? And I said, “Well, I could tell you all the stuff to do wrong. What not to do, right? But what I really want to do is introduce you to Coach Carson.” So, I immediately sent them your website. I told them they were crazy if they didn’t buy your book. And I’m going to be sending this to them as a gift when we’re done.

Chad Carson:                     Thank you so much.

Josh Mettle:                       The timing of this podcast is perfect, and we’re gonna dedicated this to Camilla and Richard.

Chad Carson:                     Awesome. Let’s do it. Yeah. That’s great. Thank you.

Josh Mettle:                       You’re welcome, man. I appreciate you being here. So, let’s give our listeners a little bit of background on you. How did you achieve financial independence at such a young age.

Chad Carson:                     Well, I mean, it’s kind of interesting. For medical professionals listening to this, I sort of took a detour from what I thought would be my career, which would be medicine. I was a biology major in college. I played football, so that sort of paid for my college. And I applied to medical schools. I had five applications in, and I was kind of going that way. I pulled back and said, “Well, wait a minute.” I was really busy with football during college. I just wanted to take a break. And I decided to become an entrepreneur for a couple years, just to take a break and I figured, I can learn how to invest in real estate. That’ll help me later on when I have a real job.

Chad Carson:                     And I got into it and I had nothing to lose basically. I had my own car and I had a thousand bucks in the bank, so I was like there’s nothing to lose doing this. I started it and I loved it and I figured out how to make a little bit of money from it. I had to scrap by for a while. And one thing led to another and I never went back to my medical school applications, and I decided to continue being an entrepreneur.

Chad Carson:                     So, that’s 16 years ago when I did that. And my real estate businesses have all- I used to flip houses a lot more just to make money and to put food on the table basically. I learned how to find good deals and fix them up. More what I do now is I buy and hold rental properties. A business partner and I do small multi-unit properties that we rent out. I’m in a small college town called Clemson in the foothills of the Appalachian Mountains in South Carolina. So that’s what we do, and I live off the rental income. That’s my financial story. And it’s grown to that point where I can actually live off of it. So, that’s kind of what my story and what the book was about was both the blueprint, but also the inspiration for being able to do that at a younger age. You can do this in your 30s, your 40s, your 50s, instead of having to wait until your 60, 70, 80 to retire or do other things in your life that you want to do.

Josh Mettle:                       Yeah, great back story. And the one thing that I took out of what you said was you decided you were going to be an entrepreneur. And I think that’s an interesting fork in the road. That people get to that fork and then they back off and they get to that fork and they back off, and at the end of the day, if you want to start investing in real estate, you have to decide that you’re going to travel that path. And that doesn’t mean you have to invest every penny that you have, but you actually have to make a decision, you have to get educated, and you have to take a risk.

Chad Carson:                     Yes.

Josh Mettle:                       And I see so many people spend thousands of dollars on researching and time and energy, and they never pull the trigger and actually decide to take action.

Chad Carson:                     Right. Yeah, I think you make a really good point. And that’s the distinction I’ll make about real estate up front is that, real estate is really a business. It’s a unique investment because it actually becomes much more passive and it becomes more like a true investment down the road. Like right now, when I was- For the last two years, I probably- On the management of my properties, because I have other people doing it, I probably spent an hour or two per week on the day-to-day management. So it’s a very part-time investment.

Chad Carson:                     But, when I first started, it was a very intense investment. So, I think that’s what people have to prepare for. If you do what I do, which is more own the properties directly and do it that way, there’s a lot of benefits to that. But also what you said is right on, is that it is a business venture, and so you gotta be prepared. If you have a full-time job, you can still do it, but it’s a side hustle. You gotta know that there’s gonna be some hustle involved. Either you’re gonna have to do it yourself of, if you’re super busy, you’re gonna have to bring other people on board who can be part of your business. You’ve got to look at it that way.

Josh Mettle:                       And my path was very similar to yours. We started flipping homes. We were terrible at it, so quickly we got out of that business, and they turned into long-term rentals.

Chad Carson:                     Yeah.

Josh Mettle:                       Man, I wish I had your book when I was starting out. And so, I gathered my wife and I gathered my mom, and we created a family business. The beginning parts of this business was me on a ladder 30 feet in the air painting a roof at night because we had an open house the next day.

Chad Carson:                     Wow. Yeah.

Josh Mettle:                       I mean, that was the beginning of the business model. And it’s like any other business where there’s a ramp up phase, and you kinda got to get out of the atmosphere and all of the inertia, and then you break free and you’re like, oh, I’ve got enough cash flow here to pay for people. I don’t have to paint 30 feet up in there air at midnight.

Chad Carson:                     Yes.

Josh Mettle:                       But it is a business. You have to push through it if you’re going to get to any kind of sustained momentum.

Chad Carson:                     Agree 100%. Yeah, and I haven’t been on 30- I’m not even good enough as a painter to get 30 foot on a ladder luckily, but I’ve been the grunt person who pulls out insulation from crawl spaces. But I quickly got out of the remodel business. I am a bad contractor. I’m a bad handyman, carpenter person. So, very quickly I said, if I do this deal, I’ve got to hire other people because I’m horrible at this. I can’t cut a straight line, I can’t do any of this. In fact, I don’t know that I want to do any of that. So, if you’re handy, great. If you’re not handy, you can do like me and just pay other people to do it.

Josh Mettle:                       Yeah. Figure a way to- Find a who that’ll do it for you.

Chad Carson:                     Yes, that’s right.

Josh Mettle:                       Okay, so part of your story that I thought was incredibly exciting was you took your family on a 17-month trip to Ecuador, and you funded that incredible journey for your family through the cash flow of your rental properties. That lights a fire in so many people. Like, wow, what an inspiration. So, tell us just a little bit about that.

Chad Carson:                     Right, so my wife and I have always- We love going abroad, learning new languages. My wife’s a Spanish teacher, and both of us are just like as gringo as it gets. We’re not like- My wife isn’t from Latin America or something, but we love the culture there and we love traveling, and so we decided, even before we had kids, we took some little sabbaticals and mini-retirements we call them, where we went and traveled abroad and backpacked in South America. But once we had kids and once the real estate business started doing even better and having income, we just decided that, you know what? This is the time to do it. Our kids are three and five. We wanted them to become fluent in another language early on in their life. It’s kind of an experiment, you know. Let’s see how good they can be at a language and see if they can speak more native early on.

Chad Carson:                     So, we just pushed pause on our life here. We rented our house out for two years. We moved abroad. A lot of the difficulties was just detaching myself from all these local non-profit boards I was on and things. We just went there. We found an apartment. We enrolled our girls in local schools that speak only Spanish.

Josh Mettle:                       Wow.

Chad Carson:                     Just threw them in the deep end and they had like 10 or 20 words when we got there. But it was amazing. They blossomed. They made friends. We had great people we met. And just living in another country to me, wherever you go, the big cool thing is that you just … the change, it makes it new. You’re living in another culture where you see things are done a little bit differently. It’s just subtle things that you can’t really put a finger on from abroad. And you just get to be there and live that life. We ate guinea pig in Ecuador, where we were. Sent pictures back to all our friends at home who like sent a picture of their pet guinea pig and said, “No, this is our pet. You can’t eat that.” So, there’s like just cool things like that that we had a lot of fun with and learning the language and just very lucky and fortunate to be able to do it. It was a lot of fun.

Josh Mettle:                       How old are your kids, Chad?

Chad Carson:                     They’re now five and seven. So, we left when they were three and five. And we’re back in the U.S. Got back a few months ago. And they’re enrolled in a local elementary school and speaking all English again, so we’re kind of re-acclimatizing ourselves back in the U.S.

Josh Mettle:                       Yeah. Was going back to all that English weird for them as well?

Chad Carson:                     It was a little weird, yeah. The first day of school, I said, “They’re gonna speak English the whole-” My little five year old was like, “Are they gonna speak English the whole time in class?” I was like, “Yeah. They don’t speak any Spanish in class now.”

Josh Mettle:                       That’s awesome. What a cool journey, man. Those kids will remember that forever. And I’m glad you got a chance to do that. Really cool.

Chad Carson:                     For sure. For sure.

Josh Mettle:                       So, let’s get into the why behind why you invest in real estate. And I’m thinking more mindset or kind of peace of mind here, but why would a physician or any highly paid individual, or anybody, choose to invest in real estate as opposed to an index fund or a mutual fund or how about just hire a financial advisor and stroke a check for $10,000 a month and call it good?

Chad Carson:                     Yeah, I mean, so I think all those are good too. I don’t think real estate is like the end all be all, and the only thing, although it’s like my main thing. But I think people are attracted to real estate naturally for a couple reasons. One of those is, sort of the negative people paint of real estate is that it’s more active, that you have to be more involved. Well, the flip side of that coin is because it is more active up front, it is a little bit more of a business, you actually have more control over your outcomes.

Chad Carson:                     And so, if you have an index fund, which is awesome, you’re diversified, you own the entire market, you’re just going ultimate diversification. Well, real estate is sort of the opposite. It’s saying, you know what? I’m gonna go concentrate on one little neighborhood that I have an intuitive feel. And that’s the cool thing about real estate is that we sort of know what a good rental property is because we’ve lived in other homes. We understand what neighborhoods people are looking for. And so you can go- Unlike stocks where you have to pick, like what’s the best tech stock? Who really knows the fundamentals of a tech stock? But you can go look at a piece of property and pretty quickly understand why it’s good and what’s good about the neighborhood and whether that’s up and coming. The numbers are really simple. If you’re a medical professional, you’ve done a lot more complicated math and science than the real estate math.

Chad Carson:                     So, it’s simple, it’s understandable, which is something that Warren Buffet always encourages people to do. Invest in something you understand and that you know. And that’s really what real estate is. It’s a controllable thing. You can get involved. You can affect your outcome. If you’re trying to retire early, which I’m a big- Or reach financial independence is more probably the right word. You can control the timing of that a little better through real estate. And so, for all of those reasons, that tangible quality of it, it’s a real asset. I find people that are attracted naturally to that. Some people are gonna say, “I don’t want to have anything to do with that. I want to be completely passive.” Whereas other people say, “You know what? At least for part of my portfolio, I’d like to not depend 100% on passive things, and the timing of the market, and I just want to have some money in the real estate market as well.” I think people will divide themselves based on hearing that kind of benefit of real estate.

Josh Mettle:                       Yeah. And I think what you said was right. You said it’s a more active and involved investment. You have more control over it. But what I was thinking when you said active and involved is, it’s so important who you’re gonna be partnering with. Most of our high income physicians are not, at least initially, gonna go full-time into this thing by themselves. They’re gonna need a partner. They’re gonna need some support. Because they got a surgery to handle. They got anesthesia to administer. And that’s gotta be number one. But if you’re partnering with somebody that brings joy to your life and makes you brighter, then it can really be a cool deal. And for me- It sounds like you’ve got a wonderful business partner that I believe you’ve had for many years.

Josh Mettle:                       For me, it was my mother and my wife and, so we gotta sit down and have reasons to go have business trips, business trips to go talk about our real estate holdings and attend a real estate seminar in Ft. Lauderdale, Florida. How cool is that, right? But we are learning, and we are educating and we’re growing this business as we’re growing a relationship. So, I think if you can combo on those two things, where you have a relationship that brings joy to your life and you have an investment that you have control over, boom. It can be a home run.

Chad Carson:                     Absolutely. Yeah, and I’ll piggyback off your point is that, my parents are actually a really good example of a medical professional having a partnership with a real estate investor because that’s what they did. And it doesn’t necessarily have to be your spouse. It could be another family member, it could be a good friend. I think it needs to be somebody you trust wholeheartedly, right? I mean, that’s one of the big mistakes- My mother’s a dentist. My dad was a CPA actually, but got into real estate investing and rental properties, and they made a really good partnership because my mom was a high earning professional, made very good income, good credit, had the down payments. My dad had some other businesses that he did, but eventually decided that the best thing for them long run would be for him to be sort of the long-term investor for the couple, and then my mom would be the active income earner.

Chad Carson:                     And so, he would go out and buy properties and she would keep on earning money, and they would buy the properties together and eventually, they’re retirement plan a few years ago was that she cashed out of her practice, they sold some land they had, they paid off 100% of their properties at that point, and now they have their own rental pension, you could call it, that’s replaced a big chunk of their income.

Chad Carson:                     And so that combination of real estate entrepreneur plus medical professional is just, for a lot of reasons, works very well. Whether it’s your … spouse would be awesome, if your spouse was interested in it. If not, another family member, or may just a close … somebody you’ve grown to know that you learned … you meet at a local real estate club. You need to trust that person first and foremost, and then they need to be competent. You can’t just, “Hey, I trust my cousin. He’s great.” But can he actually get this done and be competent enough? So, there’s a process to go through for sure for a business professional like many of your listeners. But, if you can find that person, if you can get a plan, build a business plan together, and I think it can be very successful.

Josh Mettle:                       The other thing about your parents’ situation is they’ve got all this principal, right? Which is the equity they have in these properties that are now free and clear. They’ll never touch that. Their entire life, they will live off of that rental income. They don’t care if the values double or go in half. They just stroke a rent check. Maybe that rent check varies five, ten percent if there’s a pull back or something like that, which our rents actually went up in the down period.

Chad Carson:                     Ours did too.

Josh Mettle:                       And the beauty about that is they get to grow something their entire lives and live off it the rest of their lives, and then they get to pass that on in an inheritance to their kids, as compared to an index fund or a mutual fund, which I have some of those as well. But what scares me about that is, I watch 2001, I watched 2008, and I watched people at retirement age. They panicked. They hit the sell button and they never got back in, and there’s no way out of that mess.

Chad Carson:                     Yeah. Real estate, like one of the objections people give me is, “Well, it’s illiquid. You can’t sell it.” And I say, “Well, good. You can’t sell it.” In a downturn, you’re not gonna do something stupid and sell it. And so you’re exactly right. My parents and other people who retire off real estate have these assets. They’re real, they’re there, and if they needed money, they could refinance them, they could borrow from those, they could sell one at a time if they needed to raise some capital. So, they’re there. They’re real assets. But they’re not so easy to sell that you do something irrational.

Chad Carson:                     Every study that I’ve ever read about why investors don’t succeed in stocks and everything else is their own psychology. If you just invest in the market and stick to it, you’re gonna be fine whether you do index funds or real estate, but real estate is sort of built for our built-in biases and our blind spots in that you can’t sell it easily, it’s very predictable, it’s very steady. It’s like the tortoise, not the hare. And then eventually, though, it’s really strong when you can not have to eat your principal. I think one of the other issues about stocks is that you have to sell often because the dividends aren’t high enough. You’re gonna need to sell some of your stocks to live off of in retirement. And real estate is kind of the opposite. You have a high enough income return typically that you just live off the income.

Chad Carson:                     And every once in a while you might sell a property, but you don’t have to eat into principal which psychologically is really important, right? I think for people- Even if the math works selling off property or your stocks, you’re like, “Oh man, I’m eating into my principal during retirement. That scares me.” Whereas if you have a big portfolio of rental properties, they’re just there and you pass them onto your heirs at a stepped up basis, which is really important. Or to a non-profit or whoever you’re gonna donate it to. And that means that you basically have been able to depreciate these properties and benefit from them tax-wise, which is a whole nother conversation, you know? But then your heirs actually get a- They inherit those properties at the full value at the time that you pass away, which means they don’t have to sell them and pay a huge capital gains tax and depreciation recapture and all these kind of gotchas that you might find from the tax code. Your heirs get a really good deal actually.

Josh Mettle:                       Yeah, just to break that down for people that might not be familiar with it, what Coach is saying is that, when his parents and my parents eventually pass away, we will inherit their real estate holdings with a stepped up basis. Which means that, I’m not gonna pay taxes if I ever sell those properties, which I hope not to. My plan is to pass those onto Xander and Aria and my kids. But I will receive those properties at a tax basis, based on whatever the value of the properties were when my mother passes away, as opposed to what she paid for the properties 20 years earlier.

Josh Mettle:                       So, if I did sell those properties, your tax basis is dramatically less, which is an incredible- I mean, that’s like being able to sell a business down the road with no tax ramifications for the gain. It’s an incredible loophole of all loopholes.

Chad Carson:                     Exactly, yes. It’s enormous. I wrote an article one time about tax benefits of real estate and my final one was die. It’s not a good strategy for life, but it’s actually a good strategy for real estate investment.

Josh Mettle:                       No doubt. It can save you millions. Or at least your heirs. Hey, one more thing you mentioned there. I’ve been doing a lot of research into a guy by the name of Dr. Joe Dispenza, and he talks a lot about our thought processes and our mental state and how there’s a connection there between human longevity. And I’ve always just had this hunch intuitively in my brain. I said, okay, I’m gonna build up this money in this stock account. And then when I retire, I’m gonna start pulling off that money. The first thing that goes through my brain is, damn. I hope I die before my money runs out.

Chad Carson:                     Yes.

Josh Mettle:                       Right? So, as soon as you put yourself in that relationship where literally you’d rather die- I would rather die than run out of money in late retirement. You’ve literally picked a date, or at this juncture, I want to be dead. And maybe that’s just me and the way that I kind of look at that relationship, but if you look at it conversely to real estate, you’re never pulling down the principal. If you have enough cash flow to live on, it’s not that type of sands through the hourglass type relationship.

Chad Carson:                     Yeah. No, I think the psychology’s huge, both when you’re building wealth and also when you withdraw from it. The withdraw part, I mean, I’m just getting into that myself where I’m living off income. But the more I study other people who’ve lived off income for years, that point has really come home to me too that you can’t discount the fact that you’ve been working all these years to build wealth. As a medical professional, you’ve been working all these years and making really good salary. And all of a sudden, you’re gonna go and live off your income, and you’re gonna be like just eating away at it.

Chad Carson:                     It’s almost a reverse psychology where you’ve been producing a lot of income, now all you’re doing is eating at it, and so you’ve got to, I think building ahead for that inevitable kind of like, oh, you know. We’re all gonna kind of panic at that a little bit. And maybe not all in on real estate. I mean, I know a lot of people who have kind of a base of real estate and they say, all right. I need $100,000 a year in retirement. Let’s just make sure I have $30,000 or $50,000 coming in from rental properties. And then I’ve got Social Security. You kind of stack those things up.

Josh Mettle:                       Yep.

Chad Carson:                     If stocks are covering half of your retirement, all right, good. I can live off … I can do that. But I know worst case scenario, I’ve got this real estate pension coming in that’s gonna take care of me.

Josh Mettle:                       Yeah. Great point. I don’t know if you’ve ever done this, but the opposite of watching your stocks go down as you eat off the principal in retirement is forecasting your rental income forward by the rule of 72. So, you can figure out how many years it’s gonna take for your rents to double.

Chad Carson:                     Right.

Josh Mettle:                       But, dude, have you thought about how much money you’re gonna be making when you’re 120 years old? It’s like ridiculous, right? You’re like, “I’m definitely gonna live to be 120 ’cause at that age, if I do my math right, I’m gonna be in the French Riviera.”

Chad Carson:                     I like the way you think, Josh. I gotta start doing some of these exercises. I’ve been thinking way too short term. You’ve got me thinking bigger picture here.

Josh Mettle:                       Yeah, 80 years down the road, this is gonna be a sweet deal for you.

Chad Carson:                     Yeah, for sure.

Josh Mettle:                       All right. This was so much fun. Let’s go a little bit into the financial benefits of investing in real estate because, if you never bought a property, if you don’t know real estate, you don’t own them, you really don’t understand the different ways that real estate can add to your income, or reduce your taxes. And let’s talk about how rental properties can impact the wealth of our physician listeners.

Chad Carson:                     Sure. I think I can make it pretty simple here. I think there’s three main levers. You can look at them as the way real estate, particularly rental real estate, can make you money. Number one is the income it produces, the rental income. Number two is the amortization of your debt. So like, one of the cool things I love in my portfolio is that every year, as long as I break even, my tenants are basically paying my properties off for me. They are paying my mortgage, which is the exact opposite- Most people are like panicking ’cause they have to pay their mortgage every month and they’re having to pay the bills. No, my tenants are paying off my properties. They’re going to work and make working hard and paying my properties. So that’s number two.

Chad Carson:                     And then number three is appreciation. And appreciation can come in a couple different forms. You can have some passive appreciation, which real estate, over the big picture in good markets tends to keep up with the inflation rate, that’s what you’ve seen over the last 80 to 100 years is that if inflation is two to three percent, that’s about what you’re gonna see in most real estate markets.

Chad Carson:                     So, those three combined are really interesting. The income in particular, I think we’ve talked about income and living off your income, but all three of those are really good as growth mechanisms too because they’re tax optimized. They’re sort of like a retirement account before there were retirement accounts because, for example, let me- You know, a lot of your listeners will be high income earners and you know how high your tax rate is on your salary. Well, when you make rental income, let’s say you make $40,000 in rental income this year. If you have enough depreciation, which, maybe I need to explain what that is. Basically it’s a tax loss. It’s a paper loss that the IRS requires you to show on your properties. So basically, you take the whole purchase price of your building and you’ve got to take a piece of that every year as a loss. Even though you’ve already spent the money up front, you start taking it as a loss over a 27 and a half year period or so.

Chad Carson:                     And so what that means for you thought as a rental property investor, if theoretically you had $40,000 in paper depreciation loss, and you also have $40,000 in rental income, you’re sheltering, you’re basically protecting that $40,000 in rental income from paying taxes on it. And so, for you, as a medical professional, if you’re in a 40% tax bracket, take 40%, almost 50% of your $40,000, that’s significant money. You’re talking about $15,000, $17,000 per year you’re saving. And so how much faster can you grow your portfolio when you’re saving that much in taxes off your rental income? That’s a really big deal. I don’t know if you want to make any comments on that too, Josh, but I think that’s one of the main mechanisms that I see for high income earners. That’s one of the reasons they want to produce rental income because it can kind of shelter itself and produce kind of a stream of income that is more tax optimized.

Josh Mettle:                       Yeah, you nailed it. Two things I would just say. Most people haven’t looked at an amortization chart. Of the three you mention, income from rental income, amortization and appreciation, the amortization might be the least understood. But basically what happens with a mortgage, most of us intuitively understand that, in the first five or ten years, you’re mostly paying interest and very little principle. But once you hit like the 10-year mark in your properties, and at least my experience has been, the cash flow is wonderful because the appreciation of what you can now charge in rent is pretty incredible.

Chad Carson:                     Yeah.

Josh Mettle:                       That also seems to be a point in our holdings where we start to do some cool upgrades and we get like a really big bump in rent at that point. Like, whoa, rent just went up $300 a month ’cause we did this little bit of capital improvements. And at about the 10-year mark, if you look at an amortization chart, now you are cranking on that principal. I mean, every month you’re four, five, six, eight hundred bucks a month if you got a bigger property, that you’re just crushing in terms of paying down that balance. And so when you look at a real estate investment, it’s a lot of like compound interest in that in the first 10 years, it’s like, man, am I even making any progress? But in year 10 to 20 and 20 to 30, it is exponential.

Chad Carson:                     Right.

Josh Mettle:                       Because those levers that you mentioned, the rent increases which is part of the appreciation. As the properties go up, you’re gonna get more for rents. And the amortization plays in and you start really chunking down the principal. It is just incredibly lucrative business once you get in a little bit.

Chad Carson:                     Yeah. I love how you point that out. Yeah. I’ve kind of experienced the same thing. I’ve been in this 16 years, and my first six years, I mean, rental properties … I’m like, why am I doing a rental property? I’m not making any money. I was having to flip houses just to survive. But now, 16 years later, just as an example for people to get some real numbers, I had a $400 per month apartment, you know, rental. I actually lived in one unit and rented out the other three units. It was a house hack is what we call those. But $400 per month in 2005 is now like $600 per month in my town 10 years, 15 years later.

Chad Carson:                     Then those numbers, if you start off with $1,000 rental, that might be- And so it just happens, and you benefit from it, just like compound interest. If you buy in the right locations. That’s the other thing I’ll say. One of the fundamentals of real estate, in addition to the numbers, is buying locations that have qualities that tend to breed appreciation. You want to be in an area where population is increasing. You want the demographics for jobs to be good. And most big cities and metro areas fit that bill, but I think it pays to spend a little bit of time up front deciding where you’re going to plant your real estate farm. You want to make sure there’s fertile soil there. So, that’s an important step, but if you do that correctly, if you kind of pay your dues up front, then the long-term, like you said, it’s gonna get better and better like good wine. It’s just gonna keep getting better over time.

Josh Mettle:                       Yeah, I agree with you. I think the biggest mistake someone can make is to buy a long-term property where the economic vitality of the area is going down.

Chad Carson:                     Yes.

Josh Mettle:                       You want to look at an area and go, “Wow, there’s a lot of young people here. And they’re all coming for the University. And Morgan Stanley just opened a building next door ’cause they can hire all the young people.” Right? That’s the kind of setup you want to see because if there’s economic vitality coming to an area, your real estate will do just fine. Just hang tight.

Chad Carson:                     Yeah. That’s right.

Josh Mettle:                       Cost segregation studies. Have you looked into those recently?

Chad Carson:                     I’ve never done one myself, but I’ve studied them and I wrote about them in the book a little bit actually. I think it’s an interesting strategy for high income professionals in particular, who might be able to buy a big multi-unit property or a big commercial building and benefit from a whole- Basically, it’s a way to just tsunami your depreciation, or build a big avalanche of depreciation to be able to offset some gains down the road. So, it’s a very advanced- Not a very advanced, but it’s an advanced tax strategy where you have to hire some people, my understanding of it is.

Josh Mettle:                       Yes.

Chad Carson:                     But, if you get somebody to help you execute it correctly, it can be just as good as a 1031 tax-free exchange, which is another kind of popular strategy. And so, yeah, I’m very interested in them. I have not executed them myself, but I would be curious that other people have used them.

Josh Mettle:                       So we just did our first set of cost segregation studies on a few of our properties. I’ll give you some numbers from one that we’re in the middle of right now because this is immediately applicable to our medical professionals if you own an office building or if you’re kicking around the idea of buying your own office building and then retro-fitting it so it works for you.

Chad Carson:                     Right.

Josh Mettle:                       The tax benefits are unbelievable. So, we bought an office warehouse building downtown Salt Lake City. Acquisition cost of the building was a million. It’s a $2.5 million construction loan that we went out and got to do the renovations. So of that $2.5 million that’s all funded by the construction loan, we were able to write off about almost 90% of that. So, in the year that the building goes into service, which it hasn’t gone into service yet, the partners that own that building will get about a $2 million tax deduction.

Chad Carson:                     Wow.

Josh Mettle:                       And then that’s distributed out based on your ownership percentages. But, the way I’m looking at it is like, man, you can almost not pay taxes anymore, if you’re able to buy buildings fast enough. Now the downside to that, cost segregation studies are not cheap. They are expensive. And you’ve pulled forward all your depreciation. So, now I’m not gonna have any of those great tax advantages that you mentioned going forward because I’ve pulled them all forward.

Chad Carson:                     Right. And there might be one other- I think it’s awesome. I think that’s a really interesting angle. The other thing I would throw out there, just maybe like, this is why you work with a CPA or somebody who knows a lot about this, is that everybody can benefit from depreciation differently, depending on what your status as a real estate professional is.

Josh Mettle:                       Right.

Chad Carson:                     So my father, for example, was a real estate- He had a real estate professional status because he worked a certain number of hours per year. So he and my mother were able to use 100% of the depreciation on those properties to offset her medical income, which was amazing. They were able to reduce their taxable income to a very low number. Other people perhaps, though, like for example, if you’re making $500,000 a year as a doctor and you might not … you may or may not be able to use all of that depreciation because it’s a passive loss, my understanding is.

Josh Mettle:                       You’re right.

Chad Carson:                     But there still could be some benefits because, let’s say you sell that building five years from now at a $500,000 gain, which would probably be my strategy if I’d do a cost segregation strategy like that. I would want to sell and make a big gain and then, instead of me paying capital gains and depreciation recapture, I would be able to use all that loss at the time I sold it to offset each other. It’s still a really incredible strategy, but it takes some timing and it takes some knowledge from you and your CPA of like what your situation is. That’s why I think it’s a little bit more advanced but still amazing.

Josh Mettle:                       Yeah. You’re exactly right. I’m glad you brought that up, Coach. My wife qualifies as our real estate professional in the relationship because she does all of the accounting for all of our properties. If it was just me, I wouldn’t be able to have those same advantages. That’s a great point.

Josh Mettle:                       Hey, so let’s transition to I think what is a really common thought process for physicians, which is how do you manage rental properties from a distance? Many of our listeners may not be in the same state for more than three to five years. Maybe they do a residency, fellowship. Then they’ve got their first contract. They decide they don’t like that state. They move on. So, how do you effectively manage real estate from a distance? What options are out there?

Chad Carson:                     Right. So, if you have a small number of rental properties, like you had a house that you used to live in and you rented it out and it’s just a good residential house or something, I think it’s not too hard to do self-management. But I’ll qualify to say I have other managers managing my properties. So, I think both are options. There’s a lot of cool technologies out there. I’m a fan of cozy.co. It is a free property management software online where you can collect rent for free, you can get applications for free. I had a good friend in Ecuador that I lived with. He’s an American, but he has rental properties in Seattle and he has nobody managing there. He just has his tenants pay their rent through Cozy. It goes into his bank account. When there’s maintenance issues, he has a list of people he calls here and there. So he managed two or three rental properties from Ecuador, just like I managed 90 units from Ecuador.

Chad Carson:                     But because I had more units and had a more intensive kind of student rentals, I have people on the ground who I hired to help me. So, either way. If you have a lower management property like a house, I think you might be able to figure out how to do it yourself. I think that’s probably my recommendation up front. But if you’re completely opposed to that, it’s okay to also hire managers. I pay 10% of my rent every month to my property management company. And I found a good one. You know, there’s some bad ones too. But it’s like the team we talked about earlier. If you hire a good team around you, they will make your life wonderful. You won’t take those calls in the middle of the night that everybody’s worried about with tenants and toilets and that kind of stuff. You can have a very, much more passive business if you pay people to do things who are good professionals.

Chad Carson:                     Just like you, you know? I wouldn’t come and do surgery for you. You wouldn’t come in, maybe, and collect rent from somebody or screen a tenant. You can hire somebody to do that if that’s really not your thing.

Josh Mettle:                       Yeah, so is that cozy.com?

Chad Carson:                     Cozy.co.

Josh Mettle:                       Dot co.

Chad Carson:                     Yes. So, C-O-Z-Y dot C-O. And they have a really- My friend, who writes their blog, landlordology.com, has really good information on screening tenants and doing all that. And I actually featured him in the book too. I think that’s a good resource for everybody that doesn’t cost any money. They make their money whenever they screen tenants. So you can charge your tenant 30 or 40 bucks for a tenant screening, which is about normal, and they Cozy makes their money whenever they do that. But they don’t charge you anything else, which I think is incredible. They have a really good service.

Josh Mettle:                       What an incredible business model. And the other thing you said was, he has a team. And they’re not a full-time team. They’re just people he’s used in the past. He’s got an air conditioning guy. He’s got a plumber. He’s got somebody that helps him do some general turnover. And if you know you’re gonna turn your owner-occupied property into an investment property and move on, you want to start building that team and testing them while you’re still in the home.

Chad Carson:                     Yeah.

Josh Mettle:                       And then when you move out, you say, okay, great. I already got my five or six people I know I gotta contact. They come out and they do the summarization and winterization and it just rolls.

Chad Carson:                     Yes. Technology just changed everything. Even 10 years ago when I went on some sabbaticals to South America, I was having to use Skype on a little laptop. Now I have my cell phone wherever I am. So, long distance management is much easier with technologies like Cozy, with your cell phone, call somebody up. You really can do things from a distance if you build some good teams on the ground.

Josh Mettle:                       Cool. That was really valuable. Hey man, I feel like we could go for two hours, but this is gonna be our last question. And I really appreciate you sharing so generous with me.

Chad Carson:                     Sure.

Josh Mettle:                       But I want to talk a little bit about what the ideal steps are if I was a younger physician in training, on a limited income with limited capital, or if I was an attending physician with capital to invest, how would you recommend I get started down the path to building passive investments?

Chad Carson:                     I’m glad you asked this question ’cause you’re kinda letting me get on my soapbox a little bit. So, if I could talk to every person getting out of college or getting out of medical school, if I could just give them one thing in real estate. They don’t have buy rental properties like I’ve done, they don’t have to do all this. If they could just do this one thing when they get out, I think I would change the amount of wealth people have in the country.

Chad Carson:                     And it’s basically doing this. If you turn your home for the first five years of your life, like the first five years when you actually start making some money, whether it’s as a resident or a new physician. If you will, instead of buying the dream home, instead of buying the big house that you deserve ’cause you’ve worked hard, and I know you’ve worked hard. But if you’ll just go out and buy either one or two things. One, if you could live in a duplex and live in one side of the duplex and rent out the other side of the duplex or live in a house that has a basement apartment that you could rent out on Air B&B or to a long-term tenant, and try to produce some income from your home during those first three to five years, we in the real estate nerd world, we call that house hacking, where you’re basically hacking- Like, instead of you going out and paying $1,000 out on your mortgage, you’re now receiving rent. You might even be able to live for free or 50% of your costs. Can you just imagine if you had no housing costs or if you had half your housing costs, how much money you could start saving in those early years and start compounding?

Josh Mettle:                       Definitely.

Chad Carson:                     So, it’s just a big deal. But there’s also benefits of learning the business. So, you’re living there and you just got out of your residency, you just got out of med school or something. You’re used to being kind of living in an apartment or whatever. So, just delay that big house thing for a little while. You’ll get it. You’ll be able to live there. But the benefits of owning that property. You can then move out of that property. You’ve got a mortgage. You’ve got an owner-occupied mortgage, which is the best you can get. You can then move out and rent the property out. And if you do that one or two times, you now have two rental properties that you can keep for the rest of your life. You can pay them off. You can manage them or hire somebody to manage them, and you’ve now built your real estate portfolio in a really solid way. And then you can move on with your life and do everything else you want to do. And just because you started that way, either with a duplex or just a modest house that you can then rent out after you moved out. Either one of those, to me, would be the smartest decision you could make with your housing and it would pay huge dividends down the road.

Josh Mettle:                       Well, I know I said it was the last question, but I got one more question. I gotta follow up. I was actually introduced to you by my friend and one of my financial mentors, Dr. Jim Daly, the White Coat Ambassador.

Chad Carson:                     Oh great.

Josh Mettle:                       And one of his- As I read his book, one of his foundational wealth success rules is for physicians to live like a resident for three to five years after residency. And what happens, like you said, is there’s all that kind of pent up demand for joy. You know, like let’s spend some of this money. Let’s get out there and have because we’ve been scraping for so long. But if you can just let that subside for a little while, he says that it really the linchpin for long-term financial success. So tell us why. Why is it that you and Jim have identified that the key years are from end of schooling for the next, let’s call it three to five years? Why are those years more impactful than maybe any other years of your life?

Chad Carson:                     I mean I think part of it is pure finance, part of it’s psychological. We keep talking psychology today, which I think is important.. But the pure financial part is just compounding. All of you are smart. Go look at what’s called a future value calculator or a time value calculator and just punch in $20,000 today at 7% return for the next 20 to 30 years. You’re just gonna be shocked at how big that gets if you just let it compound. So, that’s the financial part, number one. You just gotta start saving and making smart investments as early as possible. So, those first three to five years are critical for that.

Chad Carson:                     But I also think the psychology is is that you’re sort of just showing yourself that you can be happy wherever you are. And so like now, to me, my wife and I, when we first got married, we lived in a four-plex. It was the happiest years. We’re happy now too, but those were amazing years. We met some wonderful grad students who lived next to us who were from China and we had meals together and we got to know them better.

Chad Carson:                     So, I just think there’s this treadmill that we all kind of get on and we’re kind of put on in society to think like, we’re gonna be happy when we get to this next level. And we think sacrifice is gonna make you not happy, when in reality, there’s been ancient wisdom showing- Look at some of these old philosophers and Aristotle and every religion. Kind of look at all that stuff and let’s just simplify things a little bit.

Chad Carson:                     So, I think when you do that early on in your life, you then start having a little bit more discretion about, well, all right, what’s that next purchase like? I’m not saying a luxury car is a bad purchase. I’m just saying you will have a better gauge on yourself on what you really want and what you don’t and don’t be swept away by other people making decisions for you.

Josh Mettle:                       That was awesome. That was really awesome, man. I got nothing to add to that. That’s about as good as it gets. I think that is such good wisdom. Man, thank you so much for sharing your time with us. I know people are gonna wanna know where to get your book, where to get your website. I also subscribe to your weekly emails, which is not spam. You send out something valuable every single week, at least it feels like every week.

Chad Carson:                     Thank you. Yeah, every Tuesday.

Josh Mettle:                       Every Tuesday. And it is actual valuable, not just trying to get you to buy something. It’s like, just, if you read this and don’t pay Chad a dime, you are gonna be a better investor. So, how do people find you?

Chad Carson:                     So, I live at coachcarson.com online, so I keep it simple there. And I do have a newsletter and I have kind of a starter kit, a real estate investor tool kit, like if you just want to get some of the tools I use, like my deal analysis form and my closing checklist. So I give away some just, kind of my free, kinda essential tools for investors when you sign up for the newsletter. And then my book, if this stuff is interesting to you, if you want sort of a big picture roadmap on how to use real estate to retire early, that’s what the book’s all about. And I also have a lot of profiles of other people who’ve done it. And so that’s- You can look on Amazon, it’s there. I’m getting an audible book. It’s coming out soon, Southern accent and all. I recorded it myself so you’ll get to listen to me for eight hours. And then the book is at Bigger Pockets is my publisher, which is another really good resource. I write on Bigger Pockets as well, and they’re an awesome organization. So, you can buy it there or you can buy it on Amazon.

Josh Mettle:                       Yeah. Okay. Action items for every listener. Go buy the book, and at least sign up for his weekly emails that he gets on his website. If you have time for nothing else, just do that because it is incredible information.

Josh Mettle:                       Coach, thanks so much for sharing with us, man. It was an absolute pleasure.

Chad Carson:                     Thank you so much. This was fun, Josh. Thanks a lot for having me.

 

Learn more about Coach Chad Carson by visiting his website at www.coachcarson.com

Purchase his new book here: “Retire Early With Real Estate”

Looking to purchase or refinance a home? visit www.fairwayphysicianhomeloans.com

This entry was posted in CRNAs, Dentists, Doctor Mortgage, Real Estate Investing, Registered Nurse, Veterinarians.
Copyright©2017 Fairway Independent Mortgage Corporation. NMLS#2289. 4801 S. Biltmore Lane, Madison, WI 53718, 1-877-699-0353. All rights reserved. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates, and programs are subject to change without prior notice. All products are subject to credit and property approval. Not all products are available in all states or for all dollar amounts. Other restrictions and limitations may apply. Fairway is not affiliated with any government agencies. Fairway is required to disclose the following license information. Alaska Mortgage Lender License No. AK2289; Arizona Mortgage Banker License No. 0904162; CA: Licensed by the Department of Business Oversight under the Consumer Finance Lenders Law; Loans made or arranged pursuant to a California Finance Lenders Law License #262571; Illinois Residential Mortgage Licensee No. MB. 0005475; Kansas Licensed Mortgage Company. KS License #MC.0001375; MA Mortgage Broker and Lender License #MC2289"; Minnesota: MN-MO- MN-MO-20183136. This is not an offer to enter into an agreement. Any such offer may only be made in accordance with the requirements of Minn. Stat. Section 47.206 (3) and (4); Mississippi Licensed Mortgage Company; Licensed by the New Hampshire Banking Department Licensed by the NJ Department of Banking and Insurance; Licensed Mortgage Banker-NYS Department of Financial Services; OH MBA License #2289; Oregon Mortgage Lender License ML-3791; Rhode Island Licensed Broker & Lender; VA: NMLS ID # 2289; Washington Consumer Loan Company License No. CL-2289.
As seen on