Real estate and passive investing aren’t just about the numbers. If it was, physicians and doctors would be on it ASAP. It takes more than that to be successful. You need to be risk-averse and you need to build relationships with the right people. There are four quadrants to everyone’s life: Employee, Self-Employed, Business Owner, and Investor. You should start working on that investing side as early as you can. Join Ava Benesocky and August Biniaz as they talk to physician turned entrepreneur and professional investor, Buck Joffrey about his wealth formula for passive investing. He is also the host of the Wealth Formula Podcast where he helps people find eternal wealth. Learn what this formula is and why leverage is so important. Discover what it’s like working with doctors and physicians in this space. Find out where people get wrong in investing and how to solve it. Listen to today’s episode so that you can start passive investing as early as possible!
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- Buck Joffrey – LinkedIn
- Cashflow Quadrant
- Wealth Formula
- Rich Dad Poor Dad
- Amazon – 7 Secrets of Eternal Wealth
About Buck Joffrey
The surgeon turned serial entrepreneur and the real estate professional with over $1 billion AUM. Financial educators and podcasters focused on alternative assets for high-net-worth individuals.
Passive Investing For Doctors – Buck Joffrey
It’s a pleasure to have Buck Joffrey. He is the guru of building wealth with passive income. He outlines the principles that have allowed him and numerous other professionals to transform their own lives. Welcome, Buck.
Thanks for having me.
We would love to start off by why don’t you tell everybody about your background because they see a doctor and a wealth coach. Please tell us about yourself and how you got involved in the field that you’re in now.
It started out like a lot of physicians to where I was A student prep school and was good at school. When you’re good at school and you go to fancy schools, usually most of the time, you’re left with a decision on what you’re going to do for a living. You only think about a couple of things. You think about being a lawyer, doctor, and things like that.
It’s a little bit later decision for me. I started out as a History major and finished that, and ended up doing a Biochemistry major after that. At that point, what do you do with the Biochemistry majors? I went to med school. Medicine was good. I enjoyed it. I became a surgeon. I liked operating, but I have a little bit of an ADD. I’m probably more wired as an entrepreneur than I am as a physician. After a few years of having my own practice and thing, I got more interested in trying to figure out other things to do.
Money in medicine is good and fine, but I was also trying to figure out how to make more. I read a book by Robert Kiyosaki called Cashflow Quadrant right around the time when I finished residency. That inspired me to think about the world of entrepreneurship. Sometimes, when you’re good at school, you get this Pavlovian-type response to positive feedback, and you keep going through the motions and looking for more school and success as that’s defined through school. That was on that path. That’s probably something that a lot of physicians resonate with.
The book Cashflow Quadrant hooked me out of the paradigm. Robert’s book did and made me think about, “This idea of creating your own wealth and being on this different type of path was appealing.” Of course, Robert is famous for advocating for real estate. Even though I came from a real estate family, for the most part, I had rejected my own father’s ideas as being dad’s ideas. At this point, I came back to it and started investing in real estate, buying apartment buildings myself. I had some success with that.
The timing was also good for me. I bought some buildings in Chicago when I was living there. I turned around a few years and sold them for 500% profits. I had some good luck there. Ultimately, I realized that I wasn’t interested in necessarily being a landlord. I had some successes in business after med school with my practice and stuff. I started viewing real estate and investing more at a higher level as a business rather than as a landlord. That’s what I’m doing now. I have created a private equity company with investors. It’s not all physicians, but probably about 70% physicians, dentists, and other healthcare professionals, and there are others in there too.
They all tend to share a highly educated professional background. Some of them are business people who’ve had big liquidity events, but for the most part, most of them fall into that. That’s the story. I’m a podcaster. The podcast itself was generated out of my own interests in alternative investing while I was still practicing. It caught on. A lot of people who had a similar background found my message valuable. I have a podcast called Wealth Formula, and that’s the basis of my investor group.
It’s a great segue into my next question here. You followed the standard roadmap of going to school and getting a job. Not only that, you eventually got to the pinnacle of success in your field as a surgeon working, but there was an a-ha moment where you shifted, saying, “I’ve done perfectly here, but I’m more of in entrepreneurial part.”
How was that transition? That transition and understanding in itself are one of the most difficult hurdles people have to go through in life to make that decision to leave if it’s their job if it’s their career. You were at the pinnacle of success in that goal that you probably took years to achieve and to make that switch. Talk to us about that switch.
There’s a little bit of a trap that’s set up for successful people. I’ll quote Robert Kawasaki again because a lot of my initial paradigm switches were because of Robert’s books, and I’ve told him that, but he talks about how A students work for C students and B students work for the government. A students work for C students because the C students took a lot more chances. Why did they take a lot more chances? It’s because they were used to failure more than the A students.
What is entrepreneurship all about? Entrepreneurship is all about taking risks, and no risk yet, no biscuit. It’s all about that mentality. If you go through life and you constantly get that Pavlovian response of positive feedback from teachers from the A’s, your report card, and all that, you’re unlikely to take a risk because it’s not a comfortable thing, and you’re used to success.
Part of the challenge for successful people, and I’m using success in terms of academics, is that you have to find a reason, and you have to find the guts to move. Unfortunately, I think that there are a lot of unhappy physicians and professionals out there that will keep doing what they’re doing because they’ve spent so much time doing it. You’re right. I did spend a lot of time. I spent four years in college, four years in med school, I did two years of neurosurgery. I did five years of head and neck surgery or plastic surgery. That was my training. That’s a lot of years.
There are two things. One, you have success, and people, you get positive feedback. The other one is, you’re like, “I’m 35 years old in 2022. I’m starting just my career.” Five years into it, you’re not happy. At that point, you’re thinking, “I did put in several years into this. I can’t move now.” The problem is that’s a terrible way to live.
There’s an element of people continuing to do what they do because they’re into it. They’re several years into it. There’s also an element of golden handcuffs where you’re making $500,000 a year or something like that in your comfortable life in the suburbs. It’s hard to change. There are not a lot of things that most physicians are going to do that are going to make them as much money as what they’re doing. That makes it hard.
What’s the alternative to that? The reality is most people shouldn’t do what I did. They shouldn’t because you have to have large coronary arteries. You have to be willing to give it all up, and there’s a significant risk to it. Not everybody’s a good entrepreneur. You may fail miserably. What other options do you have in that situation?
Going back to the idea of the Cashflow Quadrant, which was Robert Kiyosaki’s book. You have the quadrant that talks about the different types of income and the way people make money. I would recommend reading it to anybody out there. It’s a good paradigm shift type of book, but you have the W2 and worker in the upper left corner. Below that, you have a self-employed individual who’s maybe not taking advantage of all the business elements but owns a job. You don’t own a business, but you own a job. Most physicians in private practice own a job. They don’t own a business.A students work for C students while B students work for the government. Click To Tweet
If you go up into the other side, which is the better part of the quadrant, in the upper right corner, you have the larger business owner, and in the lower right, you have the investor. Part of the strategy that I’ve talked about with my group is that it may be the case that we are all good at generating income from our day jobs, W-2 jobs, self-employed jobs, practice, or whatever. Don’t think that the only way out is leaving all of that because your best way of making money may still be, and probably is, what you do, but recognize that if you want to be somewhere else, let’s start focusing on this investment quadrant. That’s what my message is all about. It is building that investment quadrant.
You mentioned Robert Kiyosaki a couple of times. He is the godfather of entrepreneurial mindset and wealth building. I know you’re good friends with Robert. I’ve watched the interview that you had with him on your show. Why don’t you tell us more about the men and the inner workings of his mind? Talked to us about his brilliance if you got the chance to pick his brain.
I don’t know that we’re good friends. I’ve talked to him a few times.
The pictures and the videos online say otherwise. I certainly have spent some time with him, and I’ve interviewed him a few times. I have gotten to pick his brain. We were on an investment cruise, and it so happened. It was a weird thing. I ended up at breakfast with him almost every day because we seemed to be skipping the same morning class, and we ended up sitting somewhere. I did spend a lot of time with him.
Robert is an interesting guy. He’s very smart. At this point, he’s got a lot of political things and all that, that I don’t necessarily agree with. First of all, I think you might find that Rich Dad Poor Dad is the most famous book of all time that he wrote and it’s the number one selling finance book in history. The funny thing is that Robert told me that he wrote that book, not with the intention necessarily of it being like this best-selling book, but he had this game that he and his wife that he talks about.
In Cashflow Quadrant, they’d try to do this game. They have a board game. It’s called CASHFLOW. Robert wrote this book as a promotional piece to try to promote that game. It was not intended to be the number one best-selling book of all time in finance. It was a book that was supposed to promote this CASHFLOW board game. I thought that was interesting.
The other thing with regard to his books, they increase in sophistication. The Rich Dad Poor Dad book is written for the masses. Cashflow Quadrant is written for people like me, other physicians, and professionals to open their eyes to different kinds of income and why they’re trapped where they are. The books that came after that, the level of sophistication goes up over time. I think that was on purpose.
The other thing I think it’s important and useful to know about Robert Kiyosaki is that he believes in real estate, and there is an entire generation or two now of people who have been influenced so much by the idea of real estate, and they came to him from Robert Kiyosaki. Robert will tell you himself, he’s like, “I’m not a real estate guy.” People think of Robert, and they think he’s walking around these apartment buildings, looking at him and all that.
No, he is a guy who’s a business guy. He’s an entrepreneur who invests passively in real estate. Most of the investments he’s made in real estate are with our friend, Kenny McElroy, the rich dad advisor to real estate and a syndicator based out of Arizona. Kenny is nice. He’s a great guy. I know Ken more than I know Robert.
He’s built a lot of wealth through partnering with Ken through limited partnerships and that thing. Understand that investing in real estate isn’t about being a landlord. It’s about the value of finding a good few different partners who do good work and letting them make you money. That’s the other thing. I don’t know him well. I’ve talked to him a few times and had a chance to pick his brain, but those are a few highlights.
I want to talk to you about the Wealth Formula that you created, Wealth 2.0. August, I first heard about this. We thought it was a fun topic, but there’s an actual wealth formula that calculates the wealth-building process.
It’s useful because many of my investors are nerdy equation people. The idea came to me that I was playing around with this idea and Newtonian Physics momentum is mass times velocity. Mass times velocity, there was a little post COVID kicking in there. For me, I was playing and riffing off of that because I was like, “Momentum is mass times velocity. Momentum in creating wealth.” That, to me, is similar, and what are the variables?
What are the variables in creating wealth? Looking back at successful investments and understanding how wealthy people generally tend to look at investing as opposed to a middle class, it occurred to me that there are a few important variables. One is investing money. That’s important. I used mass in the momentum equation. The mass is about how much money you are investing, how much money you invest. Regardless of the returns, if you don’t invest anything, you’re not going to make any money back.
That is obvious until it’s not because if you think about, “Why do the rich get richer? Why do wealthy people get more wealthy?” It’s because a larger percentage of the money that they have goes towards investing. If you’re taking 10% of your paycheck towards investing and growing that wealth, you’re going to end up with probably a lot less money than if you could take 80% of your money that you make in a given year and invest it. It’s a simple concept, but it’s profoundly important.
Philosophically, I don’t advocate for people living way under their means and stuff. Life’s too short for that. I do like the idea of having people think about living more off of their investments rather than off of their paycheck. Invest more, especially early in life, a higher percentage, if you can. Even now, I still invest probably 70% to 80% of every dollar I make. I certainly drink the Kool-Aid on that. That’s important to me. That’s mass.
Velocity is, for me, in the momentum equation. If you transfer that over to the wealth equation is about how quickly you get your money back out of an investment. That is related to what we consider the return on investment, yield, or whatever. Let’s think about what that is. If you’re getting a 10% return on investment and sat around for ten years, you get your money back in ten years. That 10% sounds good until you realize you haven’t made any money on your money for ten years. It doesn’t sound so good anymore.
One of the ideas is, how can you quickly recycle money? If we only have a finite amount of money and if we can only take 10% to 15% of our paycheck and put it into investments, rather than try to make more money to invest more, how can we invest more? We can recycle the same money over again and have it work in multiple places at the same time. There are lots of ways you can do that. In real estate, we have the concept of refinance, being able to pull out money and reinvest that money into another deal. You have the concept of simply flipping. Although, flipping is better if it’s done with a value add perspective rather than anticipating markets to go up. In real estate, you have that, but you have it in other areas too.
I don’t do this much anymore, but I used to play around with the junior mining sector, a speculative thing. In the private placement world, a lot of times, you could buy shares and get these options along with it. One of the plays there was you’d sell your shares as soon as you can make your money back and hold on to these free options you got with it. It’s recycling money into multiple places. We use this in various types of insurance products as well.Investing in real estate isn't just about being a landlord. It's about finding good, trustable partners and letting them make you money. Click To Tweet
There are lots of different ways that you can do it. At the end of the day, the big picture is that the quicker you can get your money to move from one deal to the next deal, the more money you’re going to make. It’s simple math that becomes compounding, and most people don’t do that. The way we’re taught to invest safely, conservatively, and all that is by putting our money, at least here in the US, putting your money into mutual funds and the SP500. Hopefully, you’re growing at an average of 7% per year. Maybe you are, maybe you’re not, who knows, but it’s a passive type of activity that hopefully works. At least for my listeners, the idea of getting involved and pushing those numbers is of value.
Those are the two variables of mass and volume, but the additional one is perhaps the most important because it’s not in the momentum equation. It’s in the wealth equation. That is leverage. Anything is a lever or leverage if it can amplify what it is that you’re doing. It’s a tool to make what you’re doing more powerful and to get more use out of it, to make it more efficient, and leverage is that. What I’m talking about is debt. Robert Kiyosaki would call it good debt. It’s debt that is helping you create wealth. It’s not debt on a credit card to buy a TV or something.
That’s where I think philosophically of what I have to say differs from a lot of the wealth gurus, at least in the US, that Dave Ramsey and all the stuff of the world. Debt is good. I’ll take it another step. It is virtually impossible for somebody who’s not a professional athlete, an entertainer, or somebody who wins the lottery. Unless you’re one of those people, it’s virtually impossible for somebody to become extremely wealthy without debt and leverage.
Real estate is predicated on the use of debt. That’s why we’re used to getting returns that are twenty-plus annualized returns and IRRs like that. Whereas the rest of the world isn’t. It’s because of debt. Leverage is critical to amplifying mass velocity. The other thing that’s key about leverage and debt always, but especially right now, is if you believe that we’re headed towards increasing levels of inflation, which is hard to imagine that we’re not right, we’re printing an awful lot of money. What happens to debt with inflation?
Let’s think about that in terms of our own houses or our parents’ houses. They bought their house several years ago. They put down certain money, and they had a certain amount of debt. They still have that house, and that’s several years later. That debt that they had is now worth less than it was when they borrowed it. We have to have inflation. When you have inflation, it erodes debt. That’s the way, as an individual, you can print your own money.
Think about that from the government standpoint, why in the US is inflation critically important? One of the Federal Reserve’s mandates is to maintain inflation at least 2% to 3%. Why is that? It’s because there’s a debt burden on the government. They have to pay their own debts in the form of sovereign debt.
There are only a couple of ways you can do that. You can have GDP growth that’s substantial that tax money easily covers it, or you can artificially deflate how much debt you have watered it down. That’s what the government does because inflation makes that debt worth less. We can take a lesson out of the book of what the government’s doing and understand for ourselves that if we use debt, we won’t have to pay as much later. That is effectively like printing your own money. Those are the three variables in the wealth formula.
I watched a few of your interviews and saw you had a graph and chart at the presentation. If you, by any chance, have a PDF of that, it’d be great. We can share it with the attendees of this webinar if you have it. If not, that’s fine. The next subject I want to speak with you about rather than being a question. In our webinar, we focused on doctors. The title wasn’t perfect because this formula can work for anyone looking to build well to anyone who is a professional looking to invest. I could compare it to delegating the task of being the active investor and reaping most of the benefits. What we do is the concept of real estate syndication does. Doctors are great at allocating tasks.
At times, as we’re discussing items, even with Ava, I’m like, “I want to set everything up for you. When you show up, you are like a surgeon who shows up in the surgery room.” The nurses and the ophthalmologists are there. Everybody who’s involved in a process is there. Your tools are there. This concept of real estate investing can also be delegated to groups to do that part for the passive investor.
That’s the question or topic I want to talk to you about. I want to transition into doctors here in Canada. Believe it or not, the provincial governments, like provinces, are equivalent to the states in the US. The provincial governments here publish a report on what doctors get paid here in BC and across other provinces. You can see what doctors make.
Doctors, in particular, seem to be a profession where they’re focused on what they do because, in most cases, people’s lives are on the line. They’re focused on what they do. At times, they don’t get to focus on wealth building or investments, and they allocate that task out. I want to discuss that with you. I’ve gone over this, and ophthalmologists seem to be the people who make the most money as far as anytime you see these high numbers of $3 million, ends up being an ophthalmologist.
Almost $5 billion is what’s being paid to doctors. That’s not part of their salary and contracts they have. What the province is paying them is almost $5 billion a year. Good point there, Ava, but how do we get you, Buck, to be in front of the doctors all across Canada? They can see that there is a way to allocate the investment or be a passive investor. Talk to us about that concept. It was not a question. It was more of a discussion.
What you’re getting at is how do you get the information out to doctors, and maybe they should invest in stuff outside of their stock market. If that’s the question, I’ll tell you that doctors are a tough crowd. I assume it’s the same in Canada, but doctors think they’re smart at everything. It’s difficult to convince a doctor that they should be thinking a certain way if they already have their mind set on something. Honestly, I don’t solicit doctors at all. They find me if the message resonates.
The other problem is that they’re used to getting screwed over, especially in the financial services space. When you look at financial advisors, attorneys, and all that, they look at doctors as chum. Doctors are used to that. They know that there are people out there who are looking at them as a paycheck. There’s a level of distrust there in that thing. I would tell you that from a discussion standpoint, I’ve never solicited for doctors. I have probably about 2,000 investors in my group. About 1,500 of them are doctors, but I’ve never actively looked for anybody.
The bottom line is it’s a positioning issue. You educate people. You let them know if you can get in front of people and show them what you’ve done or what you have to offer. That’s part of it. You also have to get people’s trust. How do you do that? A number of people started with me because I’m a fellow physician. That certainly helps. It becomes an issue of, “How do you perform?” Your ball game becomes yours, and it’s more in your control at that point.
It’s a tough question, August. I don’t know the answer to it. I don’t know how you get across to you because I could be wrong, but I don’t think it’s going to be particularly helpful to put up a stand at the medical convention and stuff. You people walk right by, and there’s another person who’s trying to get my money.
I was going to rent a booth.
I’ve never done any of that again. I don’t know the answer to that. I have many investors in my group as I do. Certainly, there’s an element of we’re getting to the point where you’re a critical mass where a lot of people tell other people. That’s the way that physicians work. What the funny thing is with physicians is it’s incredible to me that there are tax firms, insurance firms, or whatever that have somehow, a couple of generations ago, somebody did something right. They earned the trust of physicians. These practices are built on multiple generations of physicians.Anything is a leverage if it can amplify what you're doing. Click To Tweet
The way we find financial advisors, insurance people, any kind of broker, or whatever is by asking other colleagues, who are you using? Who do I go to? That’s how you do it. It’s an uphill battle. Understand that real estate and alternative investing, in general, is in and of itself. It’s a real hurdle. You’re dealing with that same problem as I told you before. If you have people who have succeeded with mainstream ideas and mainstream schooling, how are you going to convince them that they shouldn’t invest in the mainstream? That’s tough.
Ava has a lot of calls with doctors. This whole concept of real estate alternative investments, in particular, being able to passively invest in multifamily and reap most of the benefits. Talk to us about why multifamily or commercial, institutional size type of investment is on top of your list or recommendations to your group. What got you interested in that? You said your family was involved in real estate, but what is it about this asset class that interests you?
I like multifamily best in part because I understand it. I grew up with a multifamily. My dad still does it and does it the old-fashioned way where he has apartment buildings and things like that. He’s always been a hands-on landlord guy. That’s why I hated it. Growing up, I didn’t want any part of it because his phone was ringing off the hook and tenants, toilets, termites, and it was not something I wanted to do.
However, if you look at multifamily, people need it. Right. You have to. You have to live somewhere at the end of the day. If you think about the hierarchy of needs, it starts with food, water, and shelter. Fundamentally for me, it’s always been like, “I get it, I understand it. I’ve been around it, and people need it.” We’ve seen that, at least in the US.
My group’s portfolio has done well throughout COVID. A lot of it, it has to do with what people end up prioritizing on their list of things to pay. It’s what I grew up with and what I’m comfortable with. It makes sense. It’s been lucrative for my family from when I grew up to now. That’s why. That’s not to say there’s no money to be made in these other areas. In my group, we’re also involved a little bit in the self-storage space, which I get, and I understand and has shown significant value even in recessionary times.
It’s not like there’s only one way to skin a cap, but I don’t like to spread myself too thin. I like to understand what it is that I’m doing. You don’t want to end up being the master of none. You want to be able to make sure that you offer your clients or your expertise. That’s what it is right now. Unless somebody can show me or teach me or tell me otherwise, I think multifamily will continue to be 85% to 90% of what it is that I do.
Do you work directly with any Canadian investors? How would a Canadian doctor, for example, get in touch with you, and what would be the process for that?
We have some Canadians for sure. Anybody who joins WealthFormula.com can always sign up for an investor club or something like that. I’m not plugging anything, but that’s how you do it. In the US, there are some challenges with things that are uniquely American, having an LLC in the US, and that thing. We work with Canadians, Israelis, and people all over the world. There’s always a way to invest if people are interested. Great.
I’m going to show your book over here.
That’s a Wealth 1.0 book. It’s not too sophisticated. It talks about basics. I always talk about Wealth 1.0 and 2.0. That book does cover the conceptual stuff that we talked about, which is a little bit more sophisticated and probably more valuable. If you’re brand new to the concept of cashflow and all that, maybe it’d be useful.
We’ve included the link to Amazon. Order a book and write a review. I wrote my review. We want to open up for questions, please. Write your questions in Q&A. This is the chance for all our live webinars. The people to ask the question from our experts. We bring on this is what makes our live webinars better than YouTube. This is also going to be recorded on YouTube as well. You have a question here for you, Buck.
Robert has moved into assisted living taking down a $120 million loan for new development. Is Buck looking at this industry?
I’m not. The challenge with assisted living becomes one of those things where if Robert moved into assisted living, it’s probably because he’s found people who are good at that. I guarantee Robert Kiyosaki has not become an expert in assisted living. The demographics for assisted living are favorable over the course of the next several years.
I did look into assisted living a few years ago. The challenge right now is that there is a little bit of glut. Everybody is looking at the same thing. Nobody is looking at this as a brand new concept, and we know the demographic cliff is coming. What’s interesting is that US banks and some major ones like Chase and stuff were not even issuing loans to assisted living facilities because there were many of them. Because of that, there were a fair number of failures.
I’m not saying it’s a bad space to be in. You got to find the best-in-class providers and operators. For me, I’m not comfortable with that space right now. The other thing I will tell you is that my philosophy has always been boring. I like boring. I shouldn’t say, “Always,” because I wasn’t always like this. I’ve lost millions of dollars in my life because of chasing shiny things.
I’m not saying assisted living is shiny, but what I’m saying is sometimes you find some things that work, but you want to look for other stuff. That’s always been the enemy of great is better. I have not tried hard to go outside of what I’ve been doing because it’s worked well. If you look at it from a risk-adjusted return type profile, I’ve found nothing that competes with multifamily.
We have a great question here for you, Buck.
Someone says, “Thank you for sharing your experience and wisdom. If you could provide one financial advice for a younger you when you finished your surgery fellowship, what would the advice be?”People need multifamily. Everyone has to live somewhere at the end of the day. Click To Tweet
You got married that day you left the university.
I got divorced. That one won’t work. The earlier that you can start acquiring assets, the better. I do think that there’s probably value in understanding yourself and what your own limitations are. Not only limitations in terms of your ability, but your time and what it is that you want to do. One thing that I did that turned out being good. In fact, the best thing I did when I left training was because I had read Robert’s books, and I did have my own background experience growing up in a real estate family who paid for college, paid for med school, and got me a nice upper-middle-class lifestyle growing up. I did trust it. I never invested in stocks. The funny thing is my family stocks are considered dangerous. My mom will call me and she’s saying, “You’re not investing in stocks. Are you?”
The thing is that it’s counter to what you would think conventional wisdom is you’ve invested your 401(k) or your stocks and all that stuff. In my family, that wasn’t the case. It was like you’re investing in real estate or you’re doing something dangerous. I had that mindset. What I did is I made it a goal that I would buy at least one apartment building a year after I finished training. They’re not the kinds of projects that we’re doing now, $100 million projects. I was buying a $1 million building and putting $200,000 as a down payment. I did that for a few years and at least one building a year.
This is a long story we don’t need to get into, but I started a few medical businesses, and one was a cosmetics business that was crushing it in Chicago. I tried to go national with no funding. I ended up losing millions of dollars in that. I didn’t use any funding. I was funding the whole thing myself. I opened 5 or 6 different offices across different states simultaneously.
It was a bad idea, but at that point, everything I had touched had turned to gold. I thought it was going to keep doing that, but it didn’t, and I lost a bunch of money. One of the things that happened was that when I came through this, that was when all these buildings that I bought were up. In terms of the equity I put down, they were up 400% or 500%. I got lucky too. I’m not saying this had a lot of skill, but I was buying the right place at the right time. I was riding a wave.
What I will tell you is that for somebody who’s building a practice and business, one of the things that people do that’s dangerous is they keep putting that money back into their one source of income. That becomes what I call a single-point failure. You got to be careful of that. That’s where the real estate became extremely valuable for me because I’d lost so much money, but all of a sudden, I had all these buildings that were up from my investments by 500%. It saved me. Avoid single-point failure, and get into real assets. Those would be the main things.
I have another question from Joshua, “How do you source new real estate opportunities?”
That was pretty complicated. At this point, the acquisitions team in our group now we have a substantial portfolio. Certainly, it helps to have that portfolio when you’re going into a given market. It’s different. I think your question is getting at when I was back when I was doing a $1 million deal or a $2 million deal, how did I source that? That’s a good question.
The first building I ever bought was a big loser. Fortunately, it was a $500,000 building, and I lost $300,000 on it. It was maximumly efficient at losing money on it. There’s the old saying about how you make money or lose money in real estate on the buy. That’s true. What I had done initially was I didn’t take anybody’s advice in this first building I bought, and I’m basing it on numbers. That’s all I did.
I read Kenny McElroy, who’s my friend. I read ABC of real estate, advanced real estate, and all this stuff. I was like, “This is easy. It’s a bunch of numbers. I’m a math guy.” I did the numbers, and this deal looks great. I couldn’t have been more wrong about it in real estate, especially in the smaller stuff like this. It’s easy to fudge numbers, and property management becomes such a big deal.
There was a lot of nefarious activity in this acquisition from the seller’s side, and I didn’t know any of that. I lost money on it. The numbers were good if they were real, but I didn’t know how to look at a deal to make sure they were real. From that day onward, I never went out there and looked at random deals and did them.
I had the good fortune at this point of knowing some lenders. I knew, particularly one guy who kept feeding me these deals. He would underwrite them, and he would know the seller. He would know me, and they were off-market deals that kept happening for me. It was a good situation. It wasn’t because the numbers were hard to figure out. The off-market deals, especially when there were known quantities on the sell side and people who were bringing it to me were people I trusted. I could believe in the numbers. That’s an ongoing theme in this space.
If it were just numbers, all of us doctors and engineers would be crushing it because we’re good at numbers, but it’s not. It’s a lot more than that. It’s about operations and knowing the right people. Real estate is ultimately like anything else. Success in this space is about knowing the right people. Now when you’re dealing with assets that are $50 million to $100 million assets, it’s a different ballgame because you can’t fudge those numbers.
You’re talking about small businesses. These are no longer $1 million to $2 million apartment buildings where the landlord can go mess around with numbers and make it seem fake. You can’t do that. It’s a great big asset. It’s a small business. This is no longer real estate. This is a small business. Those are a lot easier to go on market and bid because you know that, and you have an entire scalable due diligence team and all that. It’s a completely different world.
For small-time investors, the smartest thing you can do, honestly, if you’re like looking at buying your own buildings and stuff, is to create relationships with lenders and brokers that run deep to the point where they know that you are somebody who’s going to be a repeat customer if you do them right. I must have bought 5 to 6 apartment buildings from the same seller over and over again because of this one lender that we both knew.
A lot of this ends up being what sounds like luck, and there is some luck to it. The thing is, you have to be looking for luck. A lot of times, things happen around you that are good luck, but they’re not good luck unless you’re looking for them. This is the name of the game. Long story short, particularly when you’re looking at small assets, it has to be based on a relationship. I would never buy something right now that was $2 million to $3 million without knowing somebody, it being off-market and all this stuff, and that is relationship.
We got a couple of questions ourselves, but I think Buck has already answered that. We can go through the next one.
Do you sell your real estate? If so, how do you handle the big tax event?One thing that people do that's very dangerous is they keep putting money back into their one source of income. Click To Tweet
The challenge on this is that I think part of the challenge in answering this question for me is that I’m assuming Canadian tax laws are quite different from the US.
It is in particular about the 1031 exchange, for example. That’s a big tax benefit that is used in the US, which can’t be used here in Canada. There are certain benefits as far as Canadians looking to invest in the US and the tree that exists, which allows them to be relieved from double taxation and what have you. Real estate is an investment for individuals to make. There are benefits, but they are not as business-friendly or as beneficial as in the US.
The good thing is the question is from the US.
Let me explain that one to you from the US perspective because it’s something in my group that we call the golden hamster wheel. We don’t know how long this is going to last, but my group is very much focused on tax efficiency in investing. Let’s say we acquire an asset. Depreciation is a huge thing in the US and with the Us tax law.
What is depreciation again? I don’t know if you have it in Canada, but there’s this idea that if you acquire an asset that inherently loses value over time and therefore you can write off the value of that. The funny thing with real estate is we know that generally, real estate doesn’t lose value. It gains value. We have this tax advantage where we’re showing losses over a period of time, even though we’re not experiencing them.
In the case of multifamily real estate, if you did nothing else, you would have what’s called straight-line depreciation of 27 and a half years. If you had an apartment building that was $1 million or whatever, divide that by 27 and a half. That’s what you get in terms of your depreciation per year. Not bad. Let’s add another layer to that. The other layer is that you can depreciate, even though you didn’t pay for the whole thing. In other words, you used leverage. It’s a $1 million building, but you only put in $200,000 of equity. You’re still depreciating the $1 million building.
There’s another layer of that. Another layer of that is something called cost segregation and analysis. Cost segregation and analysis in the US is where an engineering study has been done. It pulls apart what is determined as real property. Real property is the asset itself. You can’t pull stuff out of it. There’s a determination between real property and personal property.
What is personal property? Pretty much anything that you could pull out and throw out the window, even if you need to pull hard. As it turns out, in multifamily real estate, it’s consistent. I’ve done probably 100 cost segregation analyses. It turns out that approximately 30% of any given asset can be determined to be personal property, whereas 70% of it will end up being real property. Why is that important? It’s because the real property, as we mentioned before, is straight-line depreciation, 27 and a half years. Personal property, which makes up 30%, as I said, typically in the US, you can depreciate that over five years.
That’s great because now you’re accelerating depreciation. That’s why you do a cost segregation analysis. You’re taking 30% of that $1 million property. Now you’re saying, “I’m going to depreciate that over five years instead of 27 and a half. Your K-1 is looking even more negative. Let’s add one more layer to this, and that is the 2017 Trump tax law changes.
What Trump allowed us to do was to take that 30% that we were depreciating over five years and lump it all into the first year. Think about that for a second. Thirty depreciation of this property in the first year. What if it only required 20% to 25% equity? In theory, in this situation, you would have a tax deduction greater than the amount of equity you put into a deal. That works out nicely. In theory, with value add real estate, you don’t ever get 100%. Sometimes you do. We had one in 2021. That was 106% for our investors. Most of the time, it’s going to be somewhere between 70% and 90% because you have raised a bunch of money for capital expenditures as well.
Here’s the thing. I brought you all to this because when you sell that property, the IRS isn’t dumb. They know you didn’t lose money if you have a huge profit coming. You have taken all those depreciation dollars. You depreciated all that. Now, you have to pay the recapture on that. In other words, “You deducted this, but you didn’t depreciate it. You’re getting money. You have to pay the recapture on that.” Recapture is something you’re going to have to pay.
In the US, in theory, it’s like, “That sucks. Now, I have to pay it anyway.” No, here’s the thing. You would’ve had to pay ordinary income taxes, which is for the highest bracket is 37%, and federal taxes in the US. On recapture, you’re only paying 23%. You have saved a bunch of money in recapture, which is great. As long as you hold that property for a year, you’re talking about your long-term capital gains. I think that comes out to about 23% or something.
In that situation, you still have a tax bill to pay. Yes, you do, but what if you took the money because you have listened to the Wealth Formula equation, and you’re not going to take that money and sit on it and buy a Lamborghini, but you’re going to invest it into something else immediately? As long as the Trump law stays in place, you can now eliminate most of that tax burden by investing everything that comes back into the next deal because you’ve cycled that back into another deal, and now you’re getting all the depreciation there.
In our group, what ends up happening is, in practice, people end up creating this wall of losses and depreciation. Every time there is a divestment, they end up with capital gains and recapture, but they don’t have to pay it because they’re taking this wall of losses they have and applying those losses. It’s a little bit of a hamster wheel, but it’s a good hamster wheel. That’s why we call it the golden hamster wheel.
We’re getting to the end of the episode here. Thanks, everybody, for reading.
We have two questions that we like for our guests.
What is your number one advice to passive investors, and by passive investors, we mean someone who wants to invest in real estate, but does it passively, not be actively involved, or would that advice, number one be, advice be?
You’ve got to know, like and trust. It’s about the people. It’s not about the numbers. You have to find the right jockey for you. That’s the biggest thing. It’s about people because It’s a people thing.
The second question is, what is your number one advice to active investors?
An active investor also means groups or individuals who are looking to become active real estate investors. You mentioned a few experiences you personally had. There was great advice there, but broadly speaking. If you tell starting out an active investor or someone who is in the bus business, what would be your advice to an active investor?
I would say with active investors, make sure you want to do this. Unless you do active investing well, based on the kinds of returns you can get as a passive, could you do better than you can as a passive? In theory, you can because you wouldn’t have any split, but in reality, most active investors, unless they get into this game, are not squeezing every penny out of every deal. Their returns are probably not going to be any better than being passive and could be worse. Certainly, the risk element is significantly worse.
A $1 million building required $200,000 to $250,000 to acquire. You could take that $200,000 to $250,000 and spread it across 4, 5 deals or more, and have exposure to thousands of doors across several different markets in the hands of experienced operators. I would be sure that that’s what you want to do now. My dad is an active guy. He made good money doing it. I finally got him investing in my stuff now, and it’s because he’s 82.
He is ready to sit back a little bit more.
He’s realizing the returns we’re getting are good, if not better than his. He’s like, “Why am I doing this?”
This was wonderful. We appreciated it, Buck. We’re glad that you feel better. We look forward to possibly having you on again at some point. We watched and followed you. It was great.
Everybody, tune into Buck’s podcast because he brings some pretty awesome people in there too.
Thanks for having me, guys.