Today we are talking about whether it is better to pay off debt or invest. Like most financial questions, the answer is: it depends. We discuss what to do if you have a chunk of money sitting in a savings account and what to do with the money you are saving to purchase a home. We also update you on some important changes to PSLF. The requirements are being relaxed to include more people and more types of loans through October 2022. And finally, we have a guest on the podcast to share about a real estate investment opportunity.
Listen to the Pay Off Debt or Invest podcast here.
In This Show:
- Pay Off Debt or Invest?
- What to Do with Money Just Sitting in a Savings Account
- Saving to Buy a Home—Should You Invest in a Taxable Account?
- New Tax Bill in Congress
- HarbourVest from Vanguard
- Peak Housing REIT
- Public Service Loan Forgiveness
- Sponsor
- White Coat Investor Champion Program
- Milestones to Millionaire Podcast
- Quote of the Day
- Full Transcript
Pay Off Debt or Invest?
“Hi, Dr. Dahle. My wife and I are both about 40 years old. We're both physicians and our current net worth is about $4 million. We maxed out our 401(k) plans. We do Backdoor Roth IRAs for $6,000 each. We have two kids. We put $600 per month per kid toward a 529, $800 per month per kid toward a brokerage account for each of them, currently in Wealthfront.
And then on top of this, we save about anywhere between $50,000-$90,000 a year. I've been putting this excess savings toward a brokerage account mostly, and occasionally I will use some of it to pay off my mortgage, which sits at 3.5% with a balance of $900,000. The mortgage is my only debt right now.
My question for you is, should I be taking the excess savings that I have each year and be paying off the mortgage and ignoring brokerage accounts for the time being, since I have the 401(k) and Backdoor Roth?
My thought was that if the stock market returns 6%, even after long-term capital gains, maybe I come out ahead by putting it toward the brokerage account as opposed to my mortgage. Any insight you can offer would be great. Thanks again for all that you do, it's extremely helpful.”
This is actually the most common question I get. It's super common because everybody struggles with this, but I think you said it very well. You said, “Well, shoot, I have this mortgage at 3.5%. It's a big mortgage, $900,000. So, I could spend a lot of time and a lot of money toward that, or I could make 6% or even more in the stock market or in real estate or in something else.”
Well, I think you said it exactly right. “Maybe” you earn more in the stock market or real estate or something else. Because here's the deal. That 3.5% is a guaranteed return. Anytime you pay off debt, it's a guaranteed return.Now, if that's deductible interest to you, maybe the rate is slightly lower than that. Maybe it's 2.7% or something like that and that's your guaranteed return. But whatever it is, that's a guaranteed return.If you look at your other guaranteed return investments out there, like a treasury bond or something like that, it's not paying 3.5%. That's a very attractive, safe investment for you.
The question comes down to, “Do you need safe investments or do you need more risky investments?” So, let's step back and just talk about this dilemma that everybody has, at least all those who still have any debt at all, and just give you some general guidelines on it.
Probably the best advice I can give you with regards to the payoff debt vs. invest question is to avoid the extremes. With this question, 95% of the time there is no right answer, but 5% of the time there is. So, don't botch it that 5% of the time. For example, if you're giving up an employer match in order to pay off debt, you're making a mistake. You're leaving part of your salary on the table. Likewise, if you're carrying around 30% credit card debt and hope that your investments are going to outperform it, you're making a mistake.
But for just about everything else in between, I can come up with a situation where it makes sense to invest, but I could also come up with a situation where it makes sense to pay off the debt. No matter what kind of debt that might be.These are both good things. It's good to pay off debt. It builds your net worth. It is good to invest. That also builds your net worth. So, it’s not like one of them is wrong and one of them is right. They're both right. If you can't tell which one is better for you, it probably doesn't matter much.
You could even just split the difference between the two. Just do something. What happens to a lot of people is they don't invest and they don't pay down debt. They just leave the money sitting in their checking account. That's the wrong move. Do one or the other, but make a decision.
This decision is not going to be the one that decides whether you're going to be financially successful or not. The most important decision in this regard is what percentage of your income is going toward building wealth, whether that's investing or whether that's paying down debt. That's far more important than exactly how much of it goes to which of those.
Let's talk about some principles that help you determine whether you should pay off debt or invest. First, determine your attitude about debt. If you hate debt, then you're going to lean more toward paying off debt. If you have a low-risk tolerance, you're going to lean more toward paying off debt because that's a guaranteed return. If you have a very high-risk tolerance, you may want to invest more aggressively and even do it on margin, which is essentially what you're doing anytime you have debt.
Another thing to consider is your available investment accounts. This had a major effect on how we made our choices about paying off debt vs. investing. We never paid off debt unless we had already maxed out all of our tax-protected and asset-protected accounts like 401(k)s, Roth IRAs, etc.
And so, it wasn't until we started looking at a taxable account before we actually started putting chunks down on our mortgage. That should have a pretty significant effect because investments in those accounts are way better than investments outside of them.
Next, think about your anticipated investment. What are you going to do with the money you don't put in there? If you're going to put it into bonds instead of paying off a 3.5% mortgage, that's dumb, right?If you're going to put it into this great small business idea you have that might pay off incredibly well, millions of dollars over the years, well then it probably makes sense to do that instead of paying off 3.5% debt. The interest rate has to play into it, right? You're smarter to pay off a 12% loan than you are a 4% or a 2% loan, especially right now with inflation running around 5%. Even if you have a 3% loan, technically right now, they're paying you to have the money. Even though you have to pay interest, the loan becomes worth less and less every year.
You also need to consider your level of wealth. The wealthier you are, the less you have to worry about this stuff and the more you don't have to optimize your finances to reach your financial goals once you've already met them.
In fact, William Bernstein likes to say, “When you win the game, stop playing.” And that's the way we felt when we paid off our mortgage. We just said, “You know what? We don't have to do this anymore in order to reach our goals.” We just sent in a few checks and paid off our mortgage. But if you have a four-figure portfolio and you are decades away from financial independence, maybe your priority shouldn't be paying off a 3% or 4% mortgage.
Finally, depending on your state laws, sometimes it makes sense to pay down a mortgage. If you're in Florida or Texas or a similar state with unlimited homestead exemption, that money is all asset protected. If you invest in a brokerage account, that is totally exposed to your creditors. And then of course, there can also be some estate planning considerations. Imagine you're old and you've got some taxable investments with a low basis. Do you sell those investments to live off of or do you borrow against them? One of them has a tax bill. The other one has an interest bill, and you have to weigh those two factors against each other. And so, in that case, it might be better to leave the money invested and take out additional debt. It's kind of a tax play that way.
If you need some specific instructions, let me give you some specific instructions, but realize that these are not set in stone. Reasonable people might disagree slightly about them, but if you follow this, you're going to do fine.
Step 1, make sure you get any employer match. Step 2, pay off high-interest debt. If it's 8% or higher, that is a fantastic guaranteed return. Step 3, max out your available retirement accounts. If you're in your peak earning years, we're talking about tax-deferred accounts. If in your non-peak earnings years, we're talking about tax-free or Roth accounts. You might even consider non-retirement tax-protected accounts if they are aligned with your goals, like an HSA, a 529, a UTMA, that sort of stuff.
Step 4, invest in assets with high expected returns. If you're not going to get a high expected return, paying off debt starts looking a lot better. Next, I'd pay off moderate interest rate debt—4% to 7% kind of debt. Then, I would invest in assets with moderate expected returns. And then I would pay off low-interest rate debt. And finally, invest in assets with low expected returns.
Hopefully, it's helpful to you to have a list that will allow you to know what to do in this situation. Just realize you shouldn't stress a lot about it. Just do something. Concentrate on how much of your income is going toward wealth building. And don't stress too much about how much of it goes toward debt and how much of it goes toward investing.
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Pay Off Debt or Invest?
What to Do with Money Just Sitting in a Savings Account
“Hello, Dr. Dahle. My name is Bee from the East Coast. I'm new to finance and I have been reading your books and listening to your podcast to gain more financial literacy this year. I am three years out of training and I practice in primary care in a high cost of living area. We are a household with a gross income of $390,000 between me and my spouse.
Thanks to your help so far, I have started maxing out my 401(k). I opened up an IRA and did a backdoor conversion to Roth this year. And I also started a 529 plan for my children. I'm taking baby steps. I do not have any other investments. I have a primary residence home, which I'm paying for the mortgage monthly.
My question is, I shamefully have $150,000 sitting in my savings account. Can you give me some advice on what to do with this money? I do not have any plans to use it soon. I would like your advice on some ways that I can invest this money long term with relatively low risk. Thank you for your time to answer my question.”
First of all, don't feel shameful about your finances. You're doing awesome. You make $390,000 a year. You've got $150,000 in cash. You're maxing out retirement accounts. You're saving for college. You're doing awesome. So, don't feel shame about any of this. Now, is leaving that money sitting in your checking account the very smartest thing you could do? Probably not. But there are lots of dumber things you could do with it. So, don't beat yourself up about it.
What should you do with it? Well, I know we all like to be told what to do, like there's an exact answer. But as you just heard with the previous caller, there's not an exact answer. It really comes down to your goals. So, you need to look at your goals and how long you want until you reach them, and how much money you're putting toward each of those goals every year. For example, if you have a goal to have a certain amount in retirement at a certain date, then you can calculate backward and determine how much you need to put toward retirement each year.
Now, if just putting money in your 401(k) and your Backdoor Roth is not enough money to get to that goal, then you need to invest more money each year toward that goal, even if you have to do it in a taxable account. And so, this really comes down to your financial plan, and you need a financial plan.
Now you might have other goals. For example, college. You might want to have a certain amount for college at a certain time. Is the amount you're putting in there adequate to get there with some reasonable assumptions? If it is, then you don't need to put more money toward that goal. If it's not, you might need to put more money toward saving for college.You might have a goal to pay off your mortgage early. Well, how much extra do you need to put toward it every year? If you're not putting enough toward it, then some of that money might need to go toward that.
But if you're looking for low-risk investments, paying down that mortgage is probably the lowest-risk investment you've got. It's got a guaranteed return. Maybe that's the best way to go for you. But you really have to look at this as an entire financial plan. If you need help getting a financial plan, there are really three ways to do it. One is hiring a financial planner. We've got on a list of them at whitecoatinvestor.com. Right under our “recommended” tab, there's a financial advisor list. You can hire someone to help you draft a financial plan. It'll cost you a few thousand dollars.
The second option is taking our Fire Your Financial Advisor online course. That's $800, but you can even buy a version for a little bit more that'll give you CME. You can use your CME funds to buy it. But basically, that'll help you learn to write the plan yourself. The great thing about that is, well, you know it in and out because you wrote it. I think that's a really great way to do it, especially if you don't want to pay a few thousand dollars to a financial advisor.
The third way is to just become a hobbyist. Consume financial information like crazy, read books, follow blogs, participate on the forums, etc. And eventually, you're going to go, “You know what? This isn't that hard. I can write my own financial plan.” That's kind of what I did. It takes the most time and hassle, but it is the cheapest.
So, you just have to weigh which one of those ways is best for you to get a financial plan in place. It sounds to me like you need a financial plan to help you decide what to do with your money.
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Financial Planning for Doctors. You Need an Investing Plan!
Saving to Buy a Home—Should You Invest in a Taxable Account?
“Hi, Dr. Dahle. I'm an oncologist in Houston with a growing family. I'm putting about $5,000 a month into a savings account to buy a home in about 12-18 months from now. Since the savings account hardly pays any interest, would it be wise to invest in a taxable account for the time being? Can you give a few examples of ETFs or other type investments that I can consider? Thanks.”
I know it sucks to not earn much on your money. If you're putting it into something that's very liquid and very low risk, it's not going to pay you very much. And in fact, with inflation running right now about 5%, you're losing money on a real after-inflation basis in any of those sorts of investments.
Whether you put it in savings bonds or whether you put it in a short-term bond fund or whether you put it in a money market fund or a high-yield savings account, it's all going to be about the same. You're going to make 0.5% to 1%, maybe 1.5% and that's it. You're essentially losing money on an after-inflation basis.
If you need this money to buy a house in 12 months or you need this money in four months to pay your taxes or you need this money to buy a Tesla in six months, that's not money you take a risk with. The money you're taking risks with is money that you don't need for retirement for 20 years or money your kids don't need for college for a decade.
There are really three things to consider when we're talking about short-term investing. The first is liquidity. If you need the money exactly 12 months from now, you better keep it very liquid. If you don't really need the money in 12 months or you wouldn't mind putting off that house purchase until 18 months, for example, then maybe you can take a little more risk with it. Maybe you can put it into a short-term bond fund or even a balanced fund with some stocks and some bonds in it.
But there are some things that are very illiquid, that you wouldn't want to use, obviously. You wouldn't want to invest them in real estate down the street. That's terribly illiquid. You want it in something that you can get your money out of right away. Now, stocks and bonds and mutual funds all qualify as being liquid enough for this purpose but, in that case, it's more about the amount of risk you're taking.
The second thing is the risk issue—the risk of loss. How big of a deal is it going to be if you lose some of this money between now and 12-18 months from now. If it's not that big of a deal, then maybe you can take more risk with it. Maybe a short-term bond fund or a balanced fund would be fine with you. If it doesn't bother you, if you lose 5% or 10% of that money over the course of the next year, then you can probably go ahead and take a little bit more risk there.
But to put it all in stocks, that's probably not very wise. The annualized return over the last century is basically about 10% on the stock market, but that ranged anywhere in any given year from 54% to -43%. That's a lot of risk for money that you're going to need in a year. You wouldn't want to take that because in this case, the return of your principal matters a whole lot more than the return on your principal.
As you look at other types of investments outside of stocks or real estate, you'll see that you can get a whole lot less volatility, a whole lot less risk of loss in the short term by dialing way back on the amount of money in stocks and dialing up the amount in bonds or cash.
And then of course the final thing to consider is the consequences of loss. How big of a deal is it if the money's not there in a year? If you need the money very liquid, you can't lose any of it because you can't deal with the consequences or you can't risk that, then you're stuck. You're stuck in your savings account for the next 18 months and that's OK. That's where I put my short-term savings.
A lot of people just can't stand only making 1% of their money. And so, they put it into stocks, and sometimes it pays off, sometimes it doesn't. Or you can take even more risk and you can gamble. You can put it down on the roulette table or you can put it in Bitcoin for the next year. But I tell you, Bitcoin in a year, no matter how you feel about Bitcoin long-term, Bitcoin for one year is a huge risk. You could easily lose a big chunk of that money. And most people aren't willing to do that with something they need for a short-term savings goal, like buying a house in a year.
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Short Term Investing
New Tax Bill in Congress
“Hey Dr. Dahle. My name is Eric from Arizona. Thanks for everything you do. I recently finished your podcast #230 about the tax bill for high income earners. You briefly mentioned that you have already written to your representative to oppose this bill.
And I wanted to know what your thoughts would be in sharing this email through your blog post so we can all have access to it. And then with quick editing, make it our own and then we can each one send it to our representative and hopefully have an impact on some of these tax bill changes. Thanks for everything you do. I appreciate your time. Have a great day. Bye.”
I've seen lots of people do that when trying to influence legislators or other public events. However, in my experience, the ones that really work are the ones that are personalized and talk about the things you actually care about.
I think a really strong argument can be made if the goal of the tax bill is to only raise taxes on people that make more than $400,000. I think you can make a really strong argument against changes to the Backdoor Roth IRA, because lots of people that only make $200,000 use the Backdoor Roth IRA. And the Mega Backdoor Roth IRA is used by people who might only make $50,000 or $60,000 a year.
I think you can make a pretty good argument to your legislator to not include those changes. But I was against most of the changes in that tax bill. So, when I emailed my legislator, I basically just told them, “Hey, I don't see anything in here that I consider to be good policy.” And told them, “I know you're probably already completely against this, but I just want to support you in that decision.” And a few days later, I got an email back probably written by a staff member.
I don't know that a form letter is the best way to go about it. I would keep it brief. I would say, “I oppose the tax bill” and include one or two specific reasons why you do and send it off. It's a pretty quick process.
How much does it influence legislators? I think it depends on the legislator. Some people are going to be for this, no matter how much mail they get about it. And some people are going to be against it, no matter how much mail they get about it. But there are probably a few people in the middle that can be swayed. If you think your legislator is one of those, I would really prioritize communicating with them about this tax bill.
HarbourVest from Vanguard
“Jim, I just got a letter from Vanguard announcing their association with a private equity fund called HarbourVest. Do you know anything about this? Thanks.”
You must have gotten that email from Vanguard because you're doing very well. It sounds like this is a partnership between Vanguard and HarbourVest. HarbourVest does private equity investments.
I'm not a huge fan of private equity investments. I find the space pretty opaque. When I'm looking at small companies or new up-and-coming companies, I like it to be a company I can actually influence and in a space that I know more about than the vast majority of other people. And I don't know that's necessarily the case when you're just investing broadly into private equity. So, I don't have any investments in private equity funds or anything like that.
For this particular fund, I believe Vanguard’s requirement or HarbourVest's requirement is you have to be a qualified purchaser. Qualified purchaser is of a higher standard than an accredited investor. You have to have basically $5 million in investable assets. They are aiming this at institutions and qualified purchasers.
If you are interested in having that asset class in your portfolio—if you want a slice of your portfolio, 5% or 10% in private equity—this might be a decent way to do it. I don't have that asset class in my portfolio. I don't know that I need to add it. I haven't been super impressed by the data I've seen on it.
But if you are convinced that private equity should be added to your portfolio, Vanguard's usually a lower cost option to add something like that. So, I'd take a look at it and see if you're interested. I don't know anything particularly bad about this particular option, but I don't know anything particularly good about it either. I just don't have a lot of exposure to HarbourVest, but that is what's going on at Vanguard.
Peak Housing REIT
Our guest today is Joe Ollis. Joe is the chairman of the board and advises the Peak Housing REIT as the investment officer for the company. He co-founded and served as a COO of Smart Cap prior to this, where he did 11 syndications, as well as running four funds. And then connected with the Peak Group primarily to diversify into single-family homes.
Single-family home investments are what Peak does. They have a real estate investment trust, a REIT called the Peak Housing REIT, and have been partnering with us because they have some great investments and they're looking for great investors to invest in them.
We asked Joe to share what is unique about the Peak Housing REIT and what is different about this compared to a lot of other opportunities out there.
“The Peak Housing REIT is an investment into the single-family rental marketplace. Think of it as having three separate strategies built within it. The first is as a REIT: we're taking investors’ money and we're using it to go buy single-family rental homes. And those are rental homes today that might be in existence that are already rentals. We're buying from previous owners.
The second strategy, though, is that we're building new homes. And so, those new homes might be built in neighborhoods that are already existing or in whole new neighborhoods, which is often referred to as built-to-rent communities.
And then finally the third strategy, because we're REIT, we can support what's called an UPREIT exchange, which allows investors who already own a rental home to contribute their home to the REIT itself in exchange for shares of the REIT in a tax-free exchange.
Those three strategies allow us to really aggregate a large portfolio of homes. And this is our total investment premise. With an aggregated portfolio of homes, we believe we can acquire homes for a cheaper cost than what a larger institution will want to pay for those homes in the future. With an aggregated set of larger portfolios of homes, we can drive down costs. We can optimize for leasing income. Those are things that really set our REIT apart from other investment strategies pertaining to single-family rental homes.”
This is a real synergy with you and the other principles in the company. You come with experience of running funds and syndications in the past, and the Bowers—Ryan and Todd, the CEO and the CCO—come in with experience in single-family homes and have been doing that for years and years and years. So, this is a little bit unique. I think a lot of the investment opportunities we've told our audience about have been multifamily homes. And this one is the first one I know that we brought to our audience that is single-family homes.
It's a diversification play into a different part of the market. And one that I've noticed especially in the last week or two has been in the news a lot about the opportunities of getting into single-family homes. The REIT has been open for 18 months, and you guys have had pretty spectacular returns since it started.
“We launched 18 months ago. And in those 18 months, we've had a share price increase of over 20% and we've been paying a very consistent dividend yield on a quarterly basis to our investors.
That dividend yield today is around 2% and it will be growing as we add more houses to the portfolio and as the net operating income in the portfolio goes up.
We have over 1,300 houses in the portfolio at the end of September. We have a pipeline today of nearly 500 houses that will be added over the next 3-6 months. The portfolio's concentration is primarily in Texas, but we have small subsets of our portfolio outside of Texas including Indianapolis and Springfield, Missouri.”
If you are interested in this, you have to be an accredited investor and must make $200,000 a year or have investable assets of $1 million or more. The minimum investment is $25,000 and then you can invest in any increment once you meet that. The fees on it are 1.35% a year, and then there is a 1.35% acquisition fee for each asset in the portfolio. And then there is an 8% preferred return. Above 8% it's split 80/20 with no catch-up.
You can go towhitecoatinvestor.com/peak and get more information. I just invested with Peak this week actually, as we're recording this. It's pretty easy, pretty straightforward on their website portal. You just go to the portal and put in your information. Then, obviously, you have to fund it. You will then sign the paperwork, through a DocuSign signature kind of thing. You will also have to actually prove you're an accredited investor. There's an easy, free way to do that. You just basically have to upload something that proves your income or net worth. It’s pretty easy. I did it all in about 20 minutes.
How much communication should they expect from you after they invest?
“We do have somebody that handholds along the way when you are investing, so if there are any questions, you don't hesitate to reach out to us. Now, after you have invested, you should expect to hear from us monthly with a quick monthly update, which will include commentary from me or from other principles pertaining to the operations and the net operating income of the portfolio. What houses are added, what we believe the strategy will be going forward, etc.
And then on a quarterly basis, in addition to that monthly update, you will also receive unaudited financials coming from our fund controller. Finally, you'll receive your 1099 dividend statement early in January. Close to the middle of the year, you'll receive the full audited financials for the REIT. So, there is a lot of communication that comes from our company. We like to say we're operating in a similar strategy to what a publicly traded REIT would be operating, but we still are private.”
This is another great benefit of the particular structure you've chosen for this fund. Instead of getting a K-1 in March or July or September, requiring you to file an extension on your taxes, you get a 1099 in January or February. It's far easier to deal with your taxes. It costs you less in tax preparation or in your own time if you're doing your own taxes and doesn't cause you to have to file in a whole bunch of different states and file extensions and all of that. Tax-wise, this is about as easy as it gets in private real estate. I appreciate that.
What else should investors know about this opportunity?
“Well, I think one of the unique things about The Peak Group and our Peak Housing REIT is that we are a full vertical aligned company for the operations of the REIT itself. What that means is not only are we managing the REIT, but we also have within vertical, a property management company, a title company, a construction company, and a maintenance company.
What that allows us to do is to really streamline operations, have a lot of central control, and also reduce costs. That's a very unique strategy to our REIT from some other similar type operators.”
With the move of investors, this has kind of been in the mom-and-pop investor space for a long time in single-family homes. And it seems like institutions like this REIT are getting more and more into it all the time. What effects do you think that'll have on the market both for people wanting to buy homes and for investors?
“That's something that we take very seriously and think about a lot. What I call the ESG (Environmental, Social, and Governance) component of our business. Let's first start at the macro point and then talk down to what we're thinking about internally within the REIT.
The first point at the macro, you're right. Right now, over 96% of all single-family rental homes today are owned by what would commonly be called a mom-and-pop investor. We refer to that as somebody who has 10 homes or less in a portfolio of rental homes. That remaining 4% is the true institutions. We believe between now and the end of the decade, that we're going to see that 4% grow to be between 15%-30%. There are a lot of people that are coming into this space. When I say people, I mean these institutions. That's where that aggregation strategy comes into play that I'm referring to. From a cost perspective, though, what is that doing to the average homeowner? Well, we're buying houses that are already rentals. That is one thing that we clearly want to articulate here.
The second is we're also building new houses. If you think about the pricing today of why houses are so expensive, most of it is being referred to as the supply constraint, which has been as a result of the last 10 years of underdevelopment of new homes. We're trying to help with that from the standpoint of building new homes.
But finally, the houses that we're buying are houses that are really renting for this what I call median income component. Think of somebody that might be moving beyond a multi-family apartment to wanting more space for their kids or their dog, or their toys that they put in the garage, and it's still affordable. So, we target that 30% of median income as our rent. And that 30% by the way is much lower than the publicly traded REITs for targeting 40%-45% of median income.
What that means is we are playing in the realm of really providing a service for many of these middle-income earners that might be trying to save money for their own down payment on a house while having a good experience of living in a single-family house that has more amenities and more space.”
A big thanks to Joe for coming on The White Coat Investor podcast. This is kind of a unique investment—$25,000 minimum is a lot lower than a lot of our other partners. In fact, one of them, DLP is going up or just went up, by the time you hear this, from $100,000 to $200,000 minimum. For a lot of docs, that just prices them out of this market. So, here's a chance to get in at $25,000.
If you're interested in single-family home investing, if you're interested in that diversification play, that part of the real estate market, this is a great opportunity. If you don't want to manage tenants, if you don't want to pick the houses yourself, if you don't want to maintain them or manage them, this is an easy way to get into single-family homes without having to deal with any of that.
Public Service Loan Forgiveness
There have been a bunch of changes to public service loan forgiveness that now makes it easier to qualify.
Some people that otherwise were not qualifying now do, and they're calling this a limited waiver. But it comes with a deadline. In order to qualify under these new changes, you have to have consolidated your loans, not refinanced, but consolidated your loans by October 2022. The deadline is still a year away, but you do need to do some things in order to qualify for this.
The main thing is FFEL loan payments you made under the FFEL program now count toward your 120 payments, if you consolidate those loans into a direct loan by October 2022. Remember the public service loan forgiveness requirements are that you have to have qualifying loans, direct loans. You also have to have a qualified employer, a nonprofit or 501(c)(3). You also have to be working full time and have to make 120 on-time monthly payments. Those requirements are now being relaxed.
You still have to have a qualifying employer, but now FFEL loans count, which they did not in the past. In fact, the payments you make under any payment program now count. Even if you made them a few days late, even if they're a few dollars short, they count.
Now, obviously this sort of a change comes with more questions than it does answers. So, we're getting all kinds of questions on the blog from people who are wondering about their unique situations.If you need some help with this, the best person to contact is Andrew Paulson at studentloanadvice.com. For an hour of your time and a few hundred bucks, he'll help you through all your questions. So, be sure to check that out if you have any questions about this.
There are also changes if you are in the military. If you put your loans in forbearances, which is usually the wrong move, admittedly, you're going to get a mulligan on this. If you put your loans in forbearance, every month you are on active duty counts as one of your 120 payments, even if you never made a payment.
Obviously, if you've already refinanced your loans with a private lender, those payments aren't going to qualify for public service loan forgiveness. So, keep that in mind.
Why are they doing this? Well, apparently the Department of Education found an obscure passage in The Heroes Act of 2003, that allows it to waive certain federal student loan rules during periods of national emergency. The COVID pandemic qualifies. So, the national emergency is scheduled to end Halloween 2022. So, you have until then to take advantage of these emergency changes.
So, what should you do? The first thing you should do is find out what loans you actually have. Go to studentaid.gov, scroll down to the loan breakdown section and look at the names of the loans. If it's direct, you're already good. If it starts with FFEL, these are the ones you need to consolidate into a direct loan. Perkins loans also now qualify if you consolidate them into a direct loan by October 2022.
Then of course, once you found out that you have those loans and you've consolidated them, you also have to apply for public service loan forgiveness using the standard public service loan forgiveness form, which is very easy to find online if you just Google those words. Again, if you need help with any of this go to studentloanadvice.com, and Andrew will help you with all of it.
Sponsor
At some point in our financial lives, it will be time to buy a home.
A physician mortgage can be a good vehicle for a young doctor who’s just out of school and has a more effective place to use their money than on a big down payment. These loans allow doctors to secure a mortgage with fewer restrictions and a lower down payment than a conventional mortgage. But if you’re further advanced in your career or deeper into your journey to financial freedom, buying a home with a conventional mortgage and then, later on, potentially refinancing that loan to a better rate with a shorter time frame could be a great move.
Wherever you are in your financial journey, make sure you use the mortgage that will be most financially beneficial for you. Hop over to our recommended tab to learn more about all of your mortgage and refinancing options at whitecoatinvestor.com/mortgage.
You can do this and The White Coat Investor can help.
White Coat Investor Champion Program
If you want to be a champion for The White Coat Investor and you are a first-year medical or dental student, sign up here. We will send a copy of “The White Coat Investor's Guide for Students” for you and every person in your class. As the champion, you will receive a Lifetime WCI T-shirt and, if you send us a picture of your class with the book, a WCI Yeti Tumbler.
Milestones to Millionaire Podcast
#38 – Dentist Achieves $0 Net Worth
This dentist just recently got back to broke! He finished training with a net worth of negative $510,000. Five years later they have reached a net worth of $40,000. Consistently chipping away at your debt and managing your finances pays off. Make a plan early and track your financial goals with these four measurements.
Sponsor: WCI Financial Advisor Recommended List
Quote of the Day
Seth Godin said,
“Instead of wondering when your next vacation is, maybe you should set up a life you don't need to escape from.”
Full Transcript
Transcription – WCI – 235
Intro:
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dahle.
Dr. Jim Dahle:
This is White Coat Investor podcast number 235 – Pay off debt or invest.
Dr. Jim Dahle:
Welcome back to the podcast. We're recording this on October 21st. It's going to run on November 4th. So, happy November to you. I hope you're getting ready for a nice Thanksgiving. Hopefully you can get a Turkey. I hear you need to get it early this year if you want to get it due to all the supply chain snafus going on in the world right now.
Dr. Jim Dahle:
At some point in our financial lives, it will be time to buy a home. A physician mortgage can be a good vehicle for a young doctor who’s just out of school and has a more effective place to use their money than on a big down payment. These loans allow doctors to secure a mortgage with fewer restrictions and a lower down payment than a conventional mortgage. But if you’re further advanced in your career or deeper into your journey to financial freedom, buying a home with a conventional mortgage and then, later on, potentially refinancing that loan to a better rate with a shorter time frame could be a great move. Wherever you are in your financial journey, make sure you use the mortgage that will be most financially beneficial for you. Hop over to our recommended tab to learn more about all of your mortgage and refinancing options at whitecoatinvestor.com/mortgage. You can do this and The White Coat Investor can help.
Dr. Jim Dahle:
All right. Lots of new things are going on these days. We need some champions. What's a champion? Well, a champion is a first year medical or dental student who's willing to pass out books, free books to their classmates.
Dr. Jim Dahle:
“The White Coat Investor's Guide for Students”, we're giving it away to every first year medical and dental student in the country. But the way we're giving it away is by sending it to one person in your class and having them pass that out.
Dr. Jim Dahle:
So, you can sign up for that. All you have to do is go to whitecoatinvestor.com/champion and sign up. Now we don't need 10 people from each class, but we do need one person from each class. We did this this spring and gave it away to about three quarters of the medical and dental students in the country. But that means there's a quarter of them that didn't get it. So, I don't want that to happen again this year.
Dr. Jim Dahle:
If you would like to be the champion, please do that. We'll send you a WCI t-shirt for your efforts. If you send us a picture of you and your classmates with the books, we'll even send you a WCI Tumblr.
Dr. Jim Dahle:
It's a great book. It's super useful. It's written exactly for you. You are the target audience, if you are a first year medical or dental student. And you can have it absolutely free for you and your classmates.
Dr. Jim Dahle:
Now, this sort of information early in your career might be worth a couple million bucks to you combined with your high income. And so, multiply a couple million by the 100 or 200 people in your class, that's a lot of value. And it's coming to you absolutely free. whitecoatinvestor.com/champion.
Dr. Jim Dahle:
Don't forget, the end of this month is the due date, the deadline for signing up for WCI con 22, the Physician Wellness & Financial Literacy Conference. Whether you're coming in person. And I recommend you sign up sooner than that if you're coming in person, because the hotel block is going fast and that'll sell out before the conference does. So, if you actually want to stay at the conference hotel, you need to sign up ASAP.
Dr. Jim Dahle:
But if you want the swag back, whether you're coming in person or whether you're coming virtually, you have to sign up by December 1st. Those books have to be printed. We need time to print them before the conference starts. So that's the last day. If you don't sign up by then, you don't get the swag bag.
Dr. Jim Dahle:
If you're coming virtually, we're going to mail it out to you. You'll have it before the conference starts. If you're coming in person, it'll be there for you when you get there. But if you haven't signed up yet for the conference, whitecoatinvestor.com/wcicon22.
Dr. Jim Dahle:
All right, we need to talk about public service loan forgiveness. I ran a blog post about this a couple of weeks ago. Those who also followed the blog have heard about this, but there have been a bunch of changes to public service loan forgiveness that basically makes it easier to qualify.
Dr. Jim Dahle:
So, some people that otherwise were not qualifying now do, and they're calling this a limited waiver, but it comes with a deadline. In order to qualify under these new changes, you have to have consolidated your loans, consolidated, not refinanced, but consolidated your loans by October, 2022. The deadline is still a year away, but you do need to do some things in order to qualify for this.
Dr. Jim Dahle:
The main thing is FFEL loans payments you made under the FFEL program now count, if you consolidate those loans into a direct loan by October, 2022. So, this is really big, right? These previously did not count. And now all those payments count toward your 120 payments.
Dr. Jim Dahle:
Remember the public service loan forgiveness requirements. You got to have qualifying loans, direct loans. You have to have a qualified employer, a nonprofit or 501(c)(3). You have to be working full time. You have to make 120 on time monthly payments. Those are the requirements, but they're loosening them.
Dr. Jim Dahle:
You still have to have a qualifying employer, but now FFEL loans count, which they did not in the past. In fact, the payments you make under any payment program, now count. Even if you made them a few days late, even if they're a few dollars short, they count.
Dr. Jim Dahle:
Now, obviously this sort of a change comes with more questions than it does answers. So, we're getting all kinds of questions on the blog from people who are wondering about their unique situations.
Dr. Jim Dahle:
If you need some help with this, the best person to contact is Andrew Paulson at studentloanadvice.com. For an hour of your time and a few hundred bucks, he'll help you through all your questions. So, be sure to check that out if you have any questions about this.
Dr. Jim Dahle:
All right. So, that's the main change. There are a few other things, though. If you are in the military and you put your loans in forbearances, which is usually the wrong move, admittedly, you're going to get a mulligan on this. If you put your loans in forbearance, every month you are on active duty counts as one of your 120 payments, even if you never made a payment.
Dr. Jim Dahle:
So, it's a huge benefit for the military. I hope you enjoy that. I feel a little bad for those who made their payments and then found out later on that those payments would count, even though they didn't make them. But for those who didn't make their payments, this is a huge boon for you. So, be sure to check that out.
Dr. Jim Dahle:
Obviously, if you've already refinanced your loans with the private lender, those payments aren't going to qualify for public service loan forgiveness. So, keep that in mind.
Dr. Jim Dahle:
Why are they doing this? Well, apparently the department of education found an obscure passage in The Heroes Act of 2003, that allows it to waive certain federal student loan rules during periods of national emergency. And the COVID pandemic qualifies. So, the national emergency is scheduled to end Halloween 2022. So, you have until then to take advantage of these emergency changes.
Dr. Jim Dahle:
So, what should you do? Well, the first thing you should do is find out what loans you actually have. So, go to studentaid.gov, scroll down to the loan breakdown section, look at the names of the loans. If it's direct, you're already good. If it starts with FFEL, these are the ones you need to consolidate into a direct loan. Same with Perkins loans. If you have a Perkins loan that needs to be consolidated into a direct loan by the end of next year for those payments to count.
Dr. Jim Dahle:
And then of course, once you found out that you have those loans and you've consolidated them, you also have to apply for public service loan forgiveness using the standard public service loan forgiveness form, which is very easy to find online if you just Google those words. But if you need help with any of this studentloanadvice.com and Andrew will help you with that.
Dr. Jim Dahle:
All right, let's get into some questions from you guys. This one comes from David, and I think this is the one we named the episode after. So, let's take a listen to David's question.
David:
Hi, Dr. Dahle. My wife and I were both about 40 years old. We're both physicians and our current net worth is about $4 million. We maxed out our 401(k) plans. We do backdoor Roth IRAs for $6,000 each. We have two kids. We put $600 per month per kid towards a 529, $800 per month per kid towards a brokerage account for each of them currently in Wealthfront.
David:
And then on top of this, we save about anywhere between $50,000 and $90,000 a year. I've been putting this excess savings towards a brokerage account mostly, and occasionally I will use some of it to pay off my mortgage, which sits at 3.5% with a balance of $900,000. The mortgage is my only debt right now.
David:
My question for you is, should I be taking the excess savings that I have each year and paying off the mortgage and ignoring brokerage accounts at the time for the time being, since I have the 401(k) and backdoor a Roth?
David:
My thought was that if the stock market returns 6%, even after long term capital gains, maybe I come out ahead by putting it towards the brokerage account as opposed to my mortgage. Any insight you can offer would be great. Thanks again for all that you do, it's extremely helpful.
Dr. Jim Dahle:
You're killing it, David. You're doing great. I'm sure some listeners are like, “Why is this guy calling? He is just humble bragging”. But you got to have those details. And the wonderful thing about the White Coat Investor community is yes, we spend all day talking about first world problems, but at least at some place you can come and talk about your first world problems.
Dr. Jim Dahle:
This is actually the most common question I get. It's super common because everybody struggles with this, but I think you said it very well. You said, “Well, shoot, I got this mortgage at 3.5%. It's a big mortgage, $900,000. So, I could spend a lot of time and a lot of money towards that, or I could make 6% or even more in the stock market or in real estate or in something else”.
Dr. Jim Dahle:
Well, I think you said it exactly right. “Maybe” you earn more in the stock market or real estate or something else. Because here's the deal. That 3.5% is a guaranteed return. Anytime you pay off debt, it's a guaranteed return.
Dr. Jim Dahle:
Now, if that's deductible interest to you or whatever, maybe the rate is slightly lower than that. Maybe it's 2.7% or something like that and that's your guaranteed return. But whatever it is, that's a guaranteed return.
Dr. Jim Dahle:
And if you look at your other guaranteed return investments out there, like a treasury bond or something like that, it's not paying 3.5%. That's a very attractive, safe investment for you.
Dr. Jim Dahle:
The question comes down to, “Do you need safe investments or do you need more risky investments?” So, let's step back and just talk about this dilemma that everybody has, at least all those who still have any debt at all and just give you some general guidelines on it.
Dr. Jim Dahle:
Probably the best advice I can give you with regards to the payoff debt versus invest question is to avoid the extremes. With this question 95% of the time, there is no right answer, but 5% of the time there is. So, don't botch it that 5% of the time.
Dr. Jim Dahle:
For example, if you're giving up an employer match in order to pay off debt, you're making a mistake. You're leaving part of your salary on the table. Likewise, if you're carrying around 30% credit card debt and hope that your investments are going to outperform it, you're making a mistake.
Dr. Jim Dahle:
But for just about everything else in between, I can come up with a situation where it makes sense to invest, but I could also come up with a situation where it makes sense to pay off the debt. No matter what kind of debt that might be.
Dr. Jim Dahle:
These are both good things. It's good to pay off debt. That is a good thing to do. It builds your net worth. It is good to invest. That also builds your net worth. So, it’s not like one of them is wrong and one of them is right. They're both right. And it's worse that one of them is a little more right than the other. And if you can't tell which one is better for you, it probably doesn't matter much.
Dr. Jim Dahle:
So, don't worry about it. You could even just split the difference between the two, but don't let it paralyze you from doing either. Because what happens to a lot of people, they don't invest, they don't pay down debt. They just leave the money sitting in their checking account. That's the wrong move. Do one or the other, but make a decision.
Dr. Jim Dahle:
This decision is not going to be the one that decides whether you're going to be financially successful or not. The most important decision in this regard is what percentage of your income is going toward building wealth, whether that's investing or whether that's paying down debt. That's far more important than exactly how much of it goes to which of those.
Dr. Jim Dahle:
But let's talk about seven principles that help you determine whether you should pay off debt or invest. The first one is your attitude about debt. If you hate debt, then you're going to lean more toward paying off debt.
Dr. Jim Dahle:
Likewise, if you have a low risk tolerance, you're going to lean more toward paying off debt because that's a guaranteed return. If you have a very high-risk tolerance, you may want to invest more aggressively and even doing it on margin, which is essentially what you're doing anytime you have debt.
Dr. Jim Dahle:
The third one is your available investment accounts. This had a major effect on how we made our choices about paying off debt versus investing. We never paid off debt unless we had already maxed out all of our tax protected and asset protected accounts like 401(k)s, Roth IRAs, et cetera.
Dr. Jim Dahle:
And so, it wasn't until we started looking at a taxable account before we actually started putting chunks down on our mortgage. So, that should have a pretty significant effect because investments in those accounts are way better than investments outside of them.
Dr. Jim Dahle:
The fourth one is your anticipated investment. What are you going to do with the money you don't put in there? If you're going to put it into bonds instead of paying off a 3.5% mortgage, that's dumb, right?
Dr. Jim Dahle:
If you're going to put it into this great small business idea you have that might pay off incredibly well, millions of dollars over the years well then it probably makes sense to do that instead of paying off 3.5% debt.
Dr. Jim Dahle:
The interest rate has to play into it, right? You're smarter to pay off a 12% loan than you are a 4% or a 2% loan, especially right now with inflation running around 5%. Even if you have a 3% loan, technically right now, they're paying you to have the money. Even though you got to pay interest, the loan becomes worth less and less every year.
Dr. Jim Dahle:
The sixth factor is your level of wealth. The wealthier you are the less you have to worry about this stuff. The more you don't have to optimize your finances to reach your financial goals once you've already met them.
Dr. Jim Dahle:
In fact, William Bernstein likes to say, “When you win the game stop playing”. And that's the way we felt when we paid off our mortgage. We just said, “You know what? We don't have to do this anymore in order to reach our goals”. We just sent in a few checks and paid off our mortgage. But if you have a four-figure portfolio and you are decades away from financial independence, maybe your priority shouldn't be paying off a 3% or 4% mortgage.
Dr. Jim Dahle:
Final factor as far as paying off debt versus investing is asset protection and estate planning considerations. Depending on your state laws, sometimes it makes sense to pay down a mortgage.
Dr. Jim Dahle:
If you're in Florida or Texas or a similar state with unlimited homestead exemption, that money is all asset protected. Whereas if you invest in a brokerage account, that's totally exposed to your creditors. And then of course, also there can be some estate planning considerations.
Dr. Jim Dahle:
Imagine you're old, you've got some taxable investments with a low basis. Do you sell those investments to live off of or do you borrow against them? One of them has a tax bill. The other one has an interest bill and you have to weigh those two factors against each other. And so, in that case, it might be better to leave the money invested and take out additional debt. It's kind of a tax play that way.
Dr. Jim Dahle:
If you need some specific instructions, let me give you some specific instructions, but realize that these are not set in stone. Reasonable people might disagree slightly about them but if you follow this, you're going to do fine.
Dr. Jim Dahle:
Step one, make sure you get any employer match. Step two, pay off high interest debt. If it's 8% or higher, that is a fantastic guaranteed return. Step three, max out your available retirement accounts. If you're in your peak earnings years, we're talking about tax deferred accounts. If in your non peak earnings years, we're talking about tax free or Roth accounts. You might even consider non-retirement tax protected accounts if they are aligned with your goals, like an HSA, a 529, a UTMA, that sort of stuff.
Dr. Jim Dahle:
Step four, investing in assets with high expected returns. Obviously, it makes sense to do that. If you're not going to get a high expected return, paying off debt starts looking a lot better.
Dr. Jim Dahle:
Next, I'd pay off moderate interest rate debt. 4% to 7% kind of debt. Next, I would invest in assets with moderate expected returns. And then I would pay off low interest rate debt. And finally invest in assets with low expected returns. Hopefully that's helpful to you to have a list that will allow you to know what to do in this situation.
Dr. Jim Dahle:
Just realize you shouldn't stress a lot about it. Just do something. Concentrate on how much of your income is going toward wealth building. And don't stress too much about how much of it goes toward debt and how much of it goes toward investing. I hope that's helpful David, both to you and to other listeners.
Dr. Jim Dahle:
All right, let's take our next Speak Pipe we got here. This one's about money sitting in a savings account.
Bee:
Hello, Dr. Dahle. My name is Bee from the east coast. I'm new to finance and I have been reading your books and listening to your podcast to gain more financial literacy this year.
Bee:
I am three years out of training and I practice in primary care in a high cost of living area. We are a household with a gross income of $390,000 between me and my spouse.
Bee:
Thanks to your help so far, I have started maxing out my 401(k). I opened up an IRA and did a door conversion to Roth this year. And I also started a 529 plan for my children. I'm taking baby steps. I do not have any other investments. I have a primary residence home, which I'm paying for the mortgage monthly.
Bee:
My question is I shamefully have $150,000 sitting in my savings account. Can you give me some advice on what to do with this money? I do not have any plans to use them soon. I would like your advice on some ways that I can invest this money long term with relatively low risk. Thank you for your time to answer my question.
Dr. Jim Dahle:
All right. First of all, don't feel shameful about your finances. You're doing awesome. You make $390,000 a year. You've got $150,000 in cash. You're maxing out retirement accounts. You're saving for college. You're doing awesome. So, don't feel shame about any of this.
Dr. Jim Dahle:
Now is leaving that money sitting in your checking account the very smartest thing you could do? Probably not. But there are lots of dumber things you could do with it. So, don't beat yourself up about it.
Dr. Jim Dahle:
What should you do with it? Well, I know we all like to be told what to do. Like there's an exact answer, but as you just heard with the previous caller, there's not an exact answer. It really comes down to your goals. So, you got to look at your goals and how long you want until you reach them and how much money you're putting toward each of those goals every year.
Dr. Jim Dahle:
For example, if you have a goal to have a certain amount in retirement at a certain date, then you can calculate backwards and determine how much you need to put toward retirement each year.
Dr. Jim Dahle:
Now, if just putting money in your 401(k) and your backdoor Roth is not enough money to get to that goal, then you need to invest more money each year toward that goal. Even if you have to do it in a taxable account. And so, this really comes down to your financial plan and you need a financial plan.
Dr. Jim Dahle:
Now you might have other goals. For example, college. You might want to have a certain amount for college at a certain time. And so, is the amount you're putting in there adequate to get there with some reasonable assumptions? If it is, then you don't need to put more money toward that goal. If it's not, you might need to put more money toward saving for college.
Dr. Jim Dahle:
You might have a goal to pay off your mortgage early. Well, how much extra do you need to put toward it every year? If you're not putting enough toward it, then some of that money might need to go toward that.
Dr. Jim Dahle:
But if you're looking for low risk investments, paying down that mortgage is probably the lowest risk investment you've got. It's got a guaranteed return. And so, maybe that's the best way to go for you.
Dr. Jim Dahle:
But you really have to look at this as an entire financial plan. If you need help getting a financial plan, there are really three ways to do it. One is hiring a financial planner. We've got on a list of them at whitecoatinvestor.com. Right under our recommended tab there's a financial advisor. You can hire someone to help you draft a financial plan. It'll cost you a few thousand dollars.
Dr. Jim Dahle:
The second option is taking our Fire Your Financial Advisor online course. That's $800 but you can even buy a version for a little bit more that'll give you CME. You can use your CME funds to buy it. But basically, that'll help you learn to write the plan yourself. The great thing about that is, well, you know it in and out because you wrote it. And so, I think that's a really great way to do it, especially if you don't want to pay a few thousand dollars to a financial advisor.
Dr. Jim Dahle:
The third way is to just become a hobbyist. Consume financial information like crazy, read books, follow blogs, participate on the forums, et cetera. And eventually you're going to go, “You know what? This isn't that hard. I can write my own financial plan”.
Dr. Jim Dahle:
That's kind of what I did. It takes the most time and hassle, but it is the cheapest, right? Blogs are free. Books are very cheap. It's super cheap to do it that way, but it does take some time and some hassle.
Dr. Jim Dahle:
So, you just have to weigh which one of those ways is best for you to get a financial plan in place. But it sounds to me you need a financial plan to help you decide what to do with your money.
Dr. Jim Dahle:
All right, we've got a guest we're going to bring on the podcast here. Let's bring him on. Our guest today is Joe Ollis. Joe is the chairman of the board and advises the Peak Housing REIT as the investment officer for the company.
Dr. Jim Dahle:
He co-founded and served as a COO of Smart Cap prior to this, where he did 11 syndications, as well as running four funds. And then connected with the Peak group primarily to diversify into single family homes.
Dr. Jim Dahle:
Single family home investments are what Peak does. They have a real estate investment trust, a REIT called the Peak Housing REIT and have been partnering with us because they have some great investments and they're looking for great investors to invest in them. So, Joe, welcome to the White Coat Investor podcast.
Joe Ollis:
Thank you very much. It's nice to be here, Jim, and nice to have a chance to talk with you and your audience. Thank you for that nice introduction.
Dr. Jim Dahle:
You're very welcome. The Peak Housing REIT. Tell us what is unique about it. What is different about this compared to a lot of other opportunities out there?
Joe Ollis:
Yeah, that's great. Thank you. The Peak Housing REIT is an investment into the single-family rental marketplace. And think of it as having three separate strategies built within it.
Joe Ollis:
The first is as a REIT, we're taking investors’ money and we're using it to go buy single family rental home homes. And those are rental homes today that might be in existence that are already rentals. We're buying from previous owners.
Joe Ollis:
The second strategy though is that we're building new homes. And so, those new homes might be built in neighborhoods that are already existing or in whole new neighborhoods, which is often referred to as built to rent communities.
Joe Ollis:
And then finally the third strategy, because we're REIT, we can support what's called an UPREIT exchange, which allows investors who already own a rental home to contribute their home to the REIT itself in exchange for shares of the REIT in a tax-free exchange.
Joe Ollis:
And those three strategies allow us to really aggregate a large portfolio of homes. And this is our total investment premise. With an aggregated portfolio of homes, we believe we can acquire homes for a cheaper cost than what a larger institution will want to pay for those homes in the future.
Joe Ollis:
With an aggregated set of larger portfolios of homes, we can drive down costs. We can optimize for leasing income. And those are things that really set our REIT apart from other investment strategies pertaining to single family rental homes.
Dr. Jim Dahle:
Awesome. This is kind of a real synergy with you and the other principles in the company. You come with experience of running funds in the past and syndications, and the Bowers, Ryan and Todd, the CEO, and the CCO come in with experience in single family homes. And have been doing that for years and years and years.
Dr. Jim Dahle:
So, this is a little bit unique. I think a lot of the investment opportunities we've told our audience about have been multifamily homes. And this one is the first one I know that we brought to our audience that is single family homes.
Dr. Jim Dahle:
So, it's a diversification play into a different part of the market. And one that I've noticed especially in the last week or two has been in the news a lot about the opportunities of getting into single family homes.
Dr. Jim Dahle:
The REIT has been open for 18 months and you guys have had pretty spectacular returns since it started. Can you tell us a little bit about those?
Joe Ollis:
Yeah, that's right. We launched 18 months ago. And in those 18 months we've had a share price increase of over 20% and we've been paying a very consistent dividend yield on a quarterly basis to our investors.
Joe Ollis:
That dividend yield today is around 2% and it will be growing as we add more houses to the portfolio and as the net operating income in the portfolio goes up.
Dr. Jim Dahle:
Can you tell us how, how many houses are in the portfolio and where they're located?
Joe Ollis:
Yeah, that's great. We have over 1,300 houses in the portfolio at the end of September. We have a pipeline today of nearly 500 houses that will be added over the next three to six months. The portfolio's concentration is primarily in Texas, but we have small subsets of our portfolio outside of Texas including Indianapolis and Springfield, Missouri.
Dr. Jim Dahle:
Okay. Let's get into some of the details here if somebody's interested in this. Well, they've got to be an accredited investor. They've got to make $200,000 a year or have investable assets of a million or more.
Dr. Jim Dahle:
The minimum investment is $25,000 and then you can invest in any increment once you meet that. The fees on it are 1.35% a year, and then there is a 1.35% acquisition fee for each asset in the portfolio. And then there is an 8% preferred return. Above 8% it's split 80/20 with no catch up. Is that all correct?
Joe Ollis:
That is all correct.
Dr. Jim Dahle:
All right. And if people are interested in that, you can get more information at whitecoatinvestor.com/peak and get more information. I just invested with Peak this week actually, as we're recording this. It's pretty easy, pretty straightforward on their website portal. You just got to go in there and put in your information. You've got to obviously fund it. You've got to sign the paperwork, which is really easy. Just kind of a DocuSign signature kind of thing.
Dr. Jim Dahle:
And then you've got to actually prove you're an accredited investor, like most of these investments. But there's an easy, free way to do that. You just basically have to upload something that proves your income or something that proves your net worth. It’s pretty easy. I did it all in about 20 minutes. So, not terribly painful and that's how you would invest in this investment.
Dr. Jim Dahle:
How much communication should they expect from you after they invest? Can you tell us about that?
Joe Ollis:
Yeah. Thank you. We do have somebody that handholds along the way when you are investing so if there are any questions you don't hesitate to reach out to us. Now, after you have invested, you should expect to hear from us monthly with a quick monthly update, which will include commentary from me or from other principles pertaining to the operations and the net operating income of the portfolio. What houses are added, what we believe the strategy will be going forward, et cetera.
Joe Ollis:
And then on a quarterly basis, in addition to that monthly update, you will also receive unaudited financials coming from our fund controller. Finally, you'll receive your 1099 dividend statement early in January. And close to the middle of the year you'll receive the full audited financials for the REIT.
Joe Ollis:
And so, there is a lot of communication that comes from our company. And we like to say we're operating in a similar strategy to what a publicly traded REIT would be operating, but we still are private.
Dr. Jim Dahle:
Awesome. This is another great benefit of the particular structure you've chosen for this fund. Instead of getting a K-1 in March or July or September, requiring you to file an extension on your taxes, you get a 1099 in January or February. It's far easier to deal with your taxes, it costs you less in tax preparation or in your own time, if you're doing your own taxes and doesn't cause you to have to file in a whole bunch of different states and file extensions and all of that.
Dr. Jim Dahle:
Tax wise, this is about as easy as it gets in private real estate. I appreciate that for sure. I just got done filing my 2020 taxes this last week. And I ended up filing in nine states. It cost me way more money. This is my first year. I'm paying somebody else to do it. It’s way more money than I expected it to be.
Dr. Jim Dahle:
And so, I can totally understand the pain some private real estate investors have if you've got investments spread all over the country in the tax preparation. But a 1099 from a REIT? That's pretty darn easy to deal with. So, I appreciate that.
Dr. Jim Dahle:
What else should investors know about this opportunity, Joe?
Joe Ollis:
Well, I think one of the unique things about the Peak Group and our Peak Housing REIT is that we are a full vertical aligned company for the operations of the REIT itself. What that means is not only are we managing the REIT, but we also have within vertical, a property management company, a title company, a construction company, and a maintenance company.
Joe Ollis:
And what that allows us to do is to really streamline operations, have a lot of central control and also reduce costs. And so, that's a very unique strategy to our REIT from some other similar type operators.
Dr. Jim Dahle:
With the move of investors, this has kind of been in the mom-and-pop investor space for a long time in single family homes. And it seems like institutions like this REIT are getting more and more into it all the time. What effects do you think that'll have on the market both for people wanting to buy homes and for investors?
Joe Ollis:
Yeah, that's a really good question. That's something that we take very seriously and think about a lot. What I call the ESG component of our business. Let's first start at the macro point and then talk down to what we're thinking about internally within the REIT.
Joe Ollis:
The first point at the macro, you're right. Right now, over 96% of all single-family rental homes today are owned by what would commonly be called a mom-and-pop investor. We refer to that as somebody who has 10 homes or less in a portfolio of rental homes. That remaining 4% is the true institutions.
Joe Ollis:
We believe between now and the end of the decade, that we're going to see that 4% grow to be between 15% and 30%. There are a lot of people that are coming into this space. And when I mean people, I mean these institutions. And that's where that aggregation strategy comes into play that I'm referring to.
Joe Ollis:
From a cost perspective, though, what is that doing to the average homeowner? Well, we're buying houses that are already rentals. That is one thing that we clearly want to articulate here.
Joe Ollis:
The second is we're also building new houses. If you think about the pricing today of why houses are so expensive, most of it is being referred to as the supply constraint, which has been as a result of the last 10 years of underdevelopment of new homes. We're trying to help with that from the standpoint of building new homes.
Joe Ollis:
But finally, the houses that we're buying are houses that are really renting for this what I call median income component. Think of somebody that might be moving beyond a multi-family apartment to wanting more space for their kids or their dog, or their toys that they put in the garage, and it's still affordable. So, we target that 30% of median income as our rent. And that 30% by the way is much lower than the publicly traded REITs for targeting 40 to 45% of median income.
Joe Ollis:
What that means is we are playing in the realm of really providing a service for many of these middle-income earners that might be trying to save money for their own down payment on a house while having a good experience of living in a single-family house that has more amenities and more space.
Dr. Jim Dahle:
Awesome. Well, Joe, thank you for your time and for coming on the White Coat Investor podcast. This has been a discussion with Joe Ollis. He's the CIO of the Peak Housing REIT. If you're interested in learning more about that or investing in the Peak Housing REIT you can do so at whitecoatinvestor.com/peak. Thanks again, Joe.
Joe Ollis:
Thank you. Have a great day.
Dr. Jim Dahle:
All right, I hope you enjoyed that. It's kind of a unique investment. $25,000 minimum is a lot lower than a lot of our other partners. In fact, one of them, DLP is going up or just went up, by the time you hear this, from $100,000 to $200,000 minimum. And for a lot of docs that just prices them out of this market. So, here's a chance to get in at $25,000.
Dr. Jim Dahle:
If you're interested in single family home investing, if you're interested in that diversification play, that part of the real estate market, this is a great opportunity. If you don't want to manage tenants, if you don't want to pick the houses yourself, if you don't want to maintain them or manage them or deal with any of that, 3:00 AM toilet calls are the infamous thing, this is an easy way to get into single family homes without having to deal with any of that.
Dr. Jim Dahle:
All right, let's take our next question. This one is another invest versus debt question, another variation on the theme. So, let's take a listen.
Speaker:
Hi, Dr. Dahle. I'm an oncologist in Houston with a growing family. I'm putting about $5,000 a month into a savings account to buy a home in about 12 to 18 months from now. Since the savings account hardly pays any interest, would it be wise to invest in a taxable account for the time being? Can you give a few examples of ETFs or type investments that I can consider? Thanks.
Dr. Jim Dahle:
All right. Great question. Well, why don't you just split it between Bitcoin and Ethereum and put it in there? No, I'm just kidding. The money you need soon, the money you need in 12 or 18 months, you really shouldn't be taking much risk with.
Dr. Jim Dahle:
Now I know it sucks to not earn much on your money, right? If you're putting it into something that's very liquid and very low risk, it's not going to pay you very much. And in fact, with inflation running right now about 5%, you're losing money on a real after inflation basis in any of those sorts of investments.
Dr. Jim Dahle:
Whether you put it in savings bonds, or whether you put it in a short-term bond fund, or whether you put it in a money market fund or a high yield savings account, it's all going to be about the same. You're going to make 0,5% to 1%, maybe 1.5% and that's it. You're essentially losing money under an after-inflation basis.
Dr. Jim Dahle:
But if you need this money to buy a house in 12 months, or you need this money in 4 months to pay your taxes, or you need this money to buy a Tesla in 6 months, that's not money you take a risk with. The money you're taking risks with is money that you don't need for retirement for 20 years or money your kids don't need for college for a decade.
Dr. Jim Dahle:
There are really three things to consider when we're talking about short term investing. And I recommend you take a look at a blog post I did on this at whitecoatinvestor.com/short-term-investing. I've got a whole blog post that basically is written for people with questions like yours.
Dr. Jim Dahle:
But the first thing to consider is liquidity. If you need the money exactly 12 months from now, you better keep it very liquid. If the money you don't really need in 12 months, you wouldn't mind putting off that house purchase till 18 months for example, then maybe you can take a little more risk with it. Maybe you can put it into a short-term bond fund, or even a balance fund with some stocks and some bonds in it. Maybe you could do that if it really doesn't matter if you don't need it right at that moment.
Dr. Jim Dahle:
But there are some things that are very illiquid, that you wouldn't want to use, obviously. You wouldn't want to invest them in real estate down the street. That's terribly illiquid. You want it in something that you can get your money to right away. Now, stocks and bonds and mutual funds all qualify as being liquid enough for this purpose but in that case, it's more about the amount of risk you're taking.
Dr. Jim Dahle:
The second thing is that risk issue. The risk of loss, how big of a deal is it going to be if you lose some of this money between now and 12 to 18 months from now. If it's not that big of a deal, then maybe you can take more risk with it. Maybe a short-term bond fund or a balanced fund would be fine with you. If it doesn't bother you, if you lose 5% or 10% of that money over the course of the next year, then you can probably go ahead and take a little bit more risk there.
Dr. Jim Dahle:
But to put it all in stocks, that's probably not very wise. The annualized return over the last century is basically about 10% on the stock market, but that ranged anywhere in any given year from 54% to minus 43%. That's a lot of risk for money that you're going to need in a year. You wouldn't want to take that because in this case, the return of your principal matters a whole lot more than the return on your principle.
Dr. Jim Dahle:
And so, as you look at other types of investments outside of stocks or real estate, you'll see that you can get a whole lot less volatility, a whole lot less risk of loss in the short term by dialing way back on the amount of money in stocks and dialing up the amount in bonds or cash.
Dr. Jim Dahle:
And then of course the final thing to consider is the consequences of loss. How big of a deal is it if the money's not there in a year. If you need the money very liquid, you can't lose any of it because you can't deal with the consequences or you can't risk that, then you're stuck. You're stuck in your savings account for the next 18 months and that's okay. That's where I put my short-term savings.
Dr. Jim Dahle:
So, it's not a big deal, but keep that in mind. A lot of people just can't stand only making 1% of their money. And so, they put it into stocks and sometimes it pays off, sometimes it doesn't. Or you can take even more risk and you can gamble. You can put it down on the roulette table or you can put it in Bitcoin for the next year.
Dr. Jim Dahle:
But I tell you, Bitcoin in a year, no matter how you feel about Bitcoin long-term, Bitcoin for one year is a huge risk. You could easily lose a big chunk of that money. And most people aren't willing to do that with something they need for a short-term savings goal, like buying a house in a year. So, I hope that's helpful.
Dr. Jim Dahle:
All right, let's take our next question. This one's about the new tax bill.
Eric:
Hey Dr. Dahle. My name is Eric from Arizona. Thanks for everything you do. I recently finished your podcast number 230 about the tax bill for high income earners. You briefly mentioned that you have already written to your representative to oppose this bill.
Eric:
And I wanted to know what your thoughts would be in sharing this email through your blog post so we can all have access to it. And then with quick editing, make it our own and then we can each one send it to our representative and hopefully have an impact on some of these tax bill changes. Thanks for everything you do. I appreciate your time. Have a great day. Bye.
Dr. Jim Dahle:
I've seen lots of people do that when trying to influence legislators et cetera, or other public events, for example, trying to decide whether to build a gondola in my backyard these days. And so, everybody in the neighborhood's up in arms about it.
Dr. Jim Dahle:
But in my experience, the ones that really work, the emails that really work, the letters that really work, and I think letters do work better than emails by the way, are the ones that are personalized that talk about the things you actually care about in the tax bill.
Dr. Jim Dahle:
I think a really strong argument can be made if the goal of the tax bill is to only raise taxes on people that make more than $400,000. I think you can make a really strong argument against changes to the backdoor Roth IRA, because lots of people that only make $200,000 use the backdoor Roth IRA. And the mega backdoor Roth IRA is used by people who might only make $50,000 or $60,000 a year.
Dr. Jim Dahle:
And so, I think you can make a pretty good argument to your legislator to not include those changes. But I was against most of the changes in that tax bill. So, when I emailed my legislator, I basically just told them, “Hey, I don't see anything in here that I consider to be good policy”. And told them, “I know you're probably already completely against this and my legislator is, but I just want to support you in that decision”. And a few days later I got an email back probably written by a staff member.
Dr. Jim Dahle:
I don't know that a form letter is the best way to go about it. I would keep it brief. I would say, “I oppose the tax bill” and include one or two specific reasons why you do and send it off. It's a pretty quick process.
Dr. Jim Dahle:
How much does it influence legislators? I think it depends on the legislator. Some people are going to be for this, no matter how much mail they get about it. And some people are going to be against it, no matter how much mail they get about it. But there are probably a few people in the middle that can be swayed. Especially if you think your legislator is one of those, I would really prioritize communicating with them about this tax bill.
Dr. Jim Dahle:
Our quote of the day today comes from Seth Godin. He said, “Instead of wondering when your next vacation is, maybe you should set up a life you don't need to escape from”. Isn't that the truth? I love that quote.
Dr. Jim Dahle:
Our next question is about HarbourVest from Vanguard. We'll take a listen to that.
Speaker 2:
Jim, I just got a letter from Vanguard announcing their association with a private equity fund called HarbourVest. Do you know anything about this? Thanks.
Dr. Jim Dahle:
You must have gotten that email from Vanguard because you're doing very well. It sounds like this is a partnership between Vanguard and HarbourVest. HarbourVest does private equity investments.
Dr. Jim Dahle:
I'm not a huge fan of private equity investments. I find the space pretty opaque. When I'm looking at small companies or new up and coming companies, I like it to be a company I can actually influence and in a space that I know more about than the vast majority of other people. And I don't know that's necessarily the case when you're just investing broadly into private equity. So, I don't have any investments in private equity funds or et cetera, anything like that.
Dr. Jim Dahle:
But this one, I believe Vanguard’s requirement or whether it is a HarbourVest requirement is you have to be a qualified purchaser. Qualified purchaser is of a higher standard than an accredited investor. You have to have basically $5 million in investable assets. And so, that's who they're aiming it at is institutions and qualified purchasers.
Dr. Jim Dahle:
If you are interested in having that asset class in your portfolio, if you want a slice of your portfolio, 5% or 10% in private equity, this might be a decent way to do it. I don't have that asset class in my portfolio. I don't know that I need to add it. I haven't been super impressed by the data I've seen on it.
Dr. Jim Dahle:
But if you are convinced that private equity should be added to your portfolio, Vanguard's usually a lower cost option to add something like that. So, I'd take a look at it and see if you're interested. I don't know anything particularly bad about this particular option, but I don't know anything particularly good about it either. I just don't have a lot of exposure to HarbourVest, but that is what's going on at Vanguard with that.
Dr. Jim Dahle:
At some point in our financial lives, it will be time to buy a home. A physician mortgage can be a good vehicle for a young doctor who’s just out of school and has a more effective place to use their money than on a big down payment. These loans allow doctors to secure a mortgage with fewer restrictions and a lower down payment than a conventional mortgage. But if you’re further advanced in your career or deeper into your journey to financial freedom, buying a home with a conventional mortgage and then, later on, potentially refinancing that loan to a better rate with a shorter time frame could be a great move. Wherever you are in your financial journey, make sure you use the mortgage that will be most financially beneficial for you. Hop over to our recommended tab to learn more about all of your mortgage and refinancing options at whitecoatinvestor.com/mortgage. You can do this and The White Coat Investor can help.Dr. Jim Dahle:
Don't forget about our champions program. This is our biggest outreach program of the year. We are trying to give away 20,000 or 30,000 books of White Coat Investor’s Guide for Students.
Dr. Jim Dahle:
If you will help us do it, sign up at whitecoatinvestor.com/champions. You got to be a first year medical or dental student. And if so, we'll send you the books and a t-shirt and a Tumblr for your efforts.
Dr. Jim Dahle:
Don't forget about WCI Con 22. You can sign up at whitecoatinvestor.com/wcicon22. Last day to get the swag bag is December 1st. So, make sure you sign up before then.
Dr. Jim Dahle:
Thank you to those of you who are leaving us a five-star review and telling your friends about the podcast. Our most recent one comes from Billy, who said, “Life change starts with education. Doc does a wonderful job explaining challenging financial concepts, topics and individual questions. Even though I am not a physician, as an airline pilot with a relatively consistent good salary for many years, I can benefit from the Doc’s Podcast and advice.
Dr. Jim Dahle:
I love the concept of goal based financial planning and knowing that life is NOT all about money and you take nothing with you. The better you save in the young years, the more you can give in your later years. As Morgan Housel (a WCI podcast guest) says, Save like a pessimist, invest like an optimist, and stay the course!” I agree with that. That's good advice.
Dr. Jim Dahle:
Keep your head up, shoulders back. You've got this and we can help. We'll see you next week on the White Coat Investor podcast.
Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.
