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The Truth About Real Estate Ownership – Episode 60


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Real estate can be an excellent investment. But many dentists delay their retirement by doing the wrong deal at the wrong time. What are the biggest mistakes that dentists make with real estate? In this episode of Dentist Money™, Reese & Ryan give five examples of dentist real estate deals that often turn good investments into massive setbacks. They also provide a list of questions to ask before purchasing your next home, practice space, or investment property.

 

Transcription:

Reese: Welcome, to the Dentist Money Show, where we help dentists make smart financial decisions. I am your host, Reese harper, here with my trusty old co-host, sir Ryan Isaac.

Ryan: Good morning, Reese. How are you today?

Reese: How are you doing? Fresh off off a red eye from Yankee-ville.

Ryan: I feel great, I feel energized after meeting some fans.

Reese: We were able to get some pictures with the fans, no autographs this year, I am kind of hoping that by next year people start asking for autographs.

Ryan: Do we supply the sharpie? How does that work? Do you assume too much by bringing your own sharpie or do you hope that the fans have their own sharpie?

Reese: Just so you know, it’s Ryan’s hope and dream to sign autographs. That is all he wants to do in life. He tried to go on tour with his band, early in life…

Ryan: I signed autographs in the band. I met some lifelong friends signing autographs in the band.

Reese: Between band members. So the bass player signed the autograph for the drummer…

Ryan: Ya, I didn’t say who. Bass players man, they are the weirdest.

Reese: No, we both had an illustrious career trying to get our bands going. I never made it out of the dorms. At least you made it on the road.

Ryan: Oh, we hit the road man. We actually purchased a van. This is way off topic, but we actually had this van where we built a shelf where all of the equipment was underneath and we would sleep on the top of it.

Reese: It is the perfect segue because vans are considered a home for most people, and today we will be talking about what to do with real estate. The five distractions of real estate.

Ryan: Ya, the five distractions of real estate. Now, I always feel like when we talk about the distractions people make the assumption that we are real estate haters, right?

Reese: Let it be known. I own a home, until recently I owned a rental property, and I do own the building that we work in. I am not a hater. I have engaged in a love for real estate.

Ryan: I think what you are saying, Reese, is when you are a decade into school and you are between student loans and practice loans like a million dollars in debt for a business we hate seeing when someone gets distracted from the dental practice and all of the stuff that has gone into it: time, money, blood, sweat, tears, and then get distracted with some outside activities. There are a lot of distractions out there. Today we are concentrating on real estate. This all started when you sent me a little book in my email. It was a PDF, I wondered if you had the book and photocopied it? It was an old, yellow looking book from the 1800’s with a bunch of short stories in there, one of them caught your eye and you said, “you have to read this story it’s the best story on real estate I’ve ever read.”

Reese: I have to give credit where credit is due. I got this story from my dad who is currently living in a small Yurt in Mongolia. So he forwarded me the story because he loves short stories and poems. He has got like every poem and short story in the history of man in his bookshelves, ya know? He travels with them.

Ryan: Cowboy poetry??

Reese: Ya, cowboy poetry was definitely a thing that happened at family reunions all the time. It was so vintage, I loved it. It was like, “Uncle Clint, it is time for you cowboy poetry moment.” Then Uncle Kenny had to do his cowboy poetry and Grandpa Bill. Everyone is one upping each other on cowboy poetry. I love that stuff.

Ryan: Oh man, Ok.

Reese: I could start getting into some cowboy poetry every now and then.

Ryan: Next episode we’ll give an entry.

Reese: But no, it has nothing to do with cowboy poetry. It is like from 1820 or 1860, I can’t remember. The story is called, The Little French Man and his Water Lots. It is by George Morris, let’s give him some credit. It was 1839 it looks like.

Ryan: Ok, George Morris, 1839. It is like a five or six page story and it follows the story of Monsieur PooPoo, I don’t think that name was meant to be funny.

Reese: That is just a common french name.

Ryan: Ya, we would know. Anyway, it starts by talking about his background. This is timely. He was an immigrant to the United States from France. He set up shop as a toy maker in New York. He sets up shop and it starts out by saying something to the affect of, you know Monsieur Poopoo, he is the guy that’s been on the corner for decades and he is a mainstay of the community. He is described as the most polite and accommodating person in the community. He is beloved, well known, and has been making toys for generations. It is likely that you used to buy toys from him when you were little. Everyone loves him. The other thing about this guy is over this long period of time he built this business and put everything he had into it. He was a hard worker, it said he saved up what?

Reese: $5,000 for the future. That is his retirement!

Ryan: He had saved, he was ready for the future, he was beloved in the community and above all though he was happy. It said he might have been the happiest guy in all the land. BUT, one day he gets wind of sudden riches by speculating in real estate. All of his friends are speculating in real estate so he decides that he is going to try his hand and he gets the idea like a lot of us do. He began thinking that he could make so much more money in a lot quicker way than why should he be making these toys for all of these little boys and girls here in the city. So he goes to an auction block, or an auction house, it’s an auction place, where they are auctioning off different real estate lots. Maybe you want to take the story from here, but basically he just cashes in everything and sells his store, takes all of his money, and goes to the real estate auction. Then something happens.

Reese: This is where it gets good.

Ryan: This is where it gets great.

Reese: He decides to start bidding on a beautiful piece of property that he doesn’t know about. He has never seen it, but he is told that it is an excellent location, several people are interested in it. The bottom line is he ends up buying this awesome property sight unseen because the auctioneer tells him that he will be able to triple his money very quickly.

Ryan: And it has full water rights.

Reese: So he goes and checks out his water lots. He goes out to this beautiful new spot on Long Island, but it is essentially a swamp land. All of his property is covered in, ya know, a few inches of water. He didn’t know that. The real estate was just below the surface and he bought a ton of water lots.

Ryan: Ya, he shows up and he is confused and he asks this farmer and shows him his map of what he just bought and the farmer says you are looking at your lots. And he’s like, “what do you mean?” The farmer says, “your land is right over there, it is just covered in water.” There are your water lots man.

Reese: He lost everything, his toy company, I mean, we don’t really know, it doesn’t tell us.

Ryan: Well, he went back and complained and they said hey you bought it and then at the end of the story it says he went back to France just like he arrived: penniless and downtrodden.

Reese: I am just saying maybe 100 years later his grandkids developed the property and got rid of the water.

Ryan: No Reese, global warming, water has been rising!

Reese: No way, it’s dry land. They sell coney dogs there now. Here’s the thing, there are a few quotes in this story that we really liked. One of the main takeaways of the story, and we won’t read the quotes because it is written in like middle English feeling, it is hard to understand through the radio waves.

Ryan: Like Lord of The Rings, Middle Earth?

Reese: Yes, but basically, in summary, it says, how happy would everyone be if they would just be content with the situation which they are in. And how much trouble would be avoided if people would only let well alone.

Ryan: Those three words, that’s a short quote, “Let well alone.”

Reese: I think that is one thing that we see a lot. When you have a really good thing going, don’t jeopardize that really good thing in pursuit of something way better. When what you have is providing you a lot of comfort, satisfaction and joy , and you are in a good situation.

Ryan: Well, I would say also not only that it is a good situation, but you’ve already put so much into it. In the case of our clients, there is so much dedication and sacrifice going through school and paying for everything and then coming out and getting the loans and starting the practice and going through all of the learning curves, there is just so much put into that. You know in the case of most people, it is also working really well. It is going to be just fine to get you to where you want to be in the end, and provide a life that makes you happy along the way. Now, it might not be the home run, we would all like a home run. In other words, if you are tempted to leave behind all of the stuff you’ve already done to chase a bigger dream, you are not unique. We all feel that in some way or another.

Reese: Yes, I like how this story takes a toy maker and contrasts him to real estate. We are going to talk about that a little bit and about how real estate can be this potential distraction for some people and you can make a living if you want to focus on it, but it can be a distraction for people who moonlight in it.

Ryan: Totally, we have good friends who make their careers out of real estate ownership and investing and they do very well. It is absolutely a very viable and can be lucrative career. That is the distinction we are making, we have talked about this before in another episode. The dabbling, the moonlighting, the dipping of the toe…that kind of sounds like a Seinfeld line. “The Dabbling, The moonlighting, The dipping of the Toe!!”

Reese: Let’s go through some of the most common project distractions that we see in real estate.

Ryan: Sure, I’ll list them off here. There are so many examples of all of these different kinds, but the first one let’s talk about is the big ground up construction or existing building. The multi tenant, really large building where there is the office that you put yourself into, and then there might be three, four, or ten other offices in there. Supposedly you will have tenants and it is going to be full and not only is going to pay for itself because of all the tenants but it is going to make you a lot of money along the way. Tell me about the nature of this project, let’s start with why does someone do that in the first place? Is it because there is no other place to put the practice other than a huge building with five other tenants in there? Is it the allure of having enough tenants to pay for the building and make a profit? How does this begin and what is the nature of this big multi tenant building?

Reese: It seems like, first of all, building something or owning…Owning a high rise in Manhattan is one of the most sought after real estate deals in the world. There is something about owning a multi tenant building that just feels substantial and it feels like a big accomplishment. It feels like a big achievement. It really is, it is hard to put something together like that.

Ryan: Oh, if you own enough high rises you can become president one day!

Reese: Exactly, that’s all it takes! I think number one, it feels like a big achievement and people want to do cool things. The second thing is that I do believe people think it is practical. If you are going to do new construction and are going to go through the effort of putting together a building than why not bring over tenants into the building to help lower my personal cost, right? There is a lot of truth to that. If you have 16,000 square feet split among four people it is probably going to lower the cost of the land, it will be split in four, same with construction. You know, building a little bit larger building doesn’t necessarily cost four times as much as building one that is four times.

Ryan: Logically, it seems more efficient.

Reese: I guess the thing we see happening here though is while it does happen successfully for some people, in most cases that we have seen, it has been a struggle for people to consistently fill their building with good tenants. This is particularly the case when they don’t have a good property manager and a dedicated building manager or a highly incentivized realtor that is constantly trying to keep that space full or it will be in a location that wasn’t ideal to being with. It is difficult to keep full that way. It will also be something where you have a law suit come up. There are people who get frustrated. We have seen construction problems happen that extend the duration of time that you thought it was going to be built in by almost a year and it creates a problem for your practice because the timing of you exiting your lease and getting into that building was more difficult than you thought. We have seen people have to re locate long distances which is also disadvantageous but they will do it because the thought is that it will make more money and you will build equity. I think long term one of the lesser acknowledged problems with doing this is the amount of time that it takes. The amount of emotional energy that it takes for someone to properly be involved in the construction of a building and manage it effectively to get the right tenants in there and to have the construction timeline done well and have it come in under budget. If you are going to do something like this, one, be aware that in many cases it will not be your greatest investment. You probably won’t look back at this and as the building depreciates over time and as you put little bits of money into every year not realizing how much you are burying beneath the bricks of cash and repairs and maintenance and updates and changes and change orders. There are just a lot of things that you will spend money on in this building that you will discount what it really cost you. Over time if you are honest about it and look back and say what did it really cost me, it is usually a little bit more than what you would like to admit.

Ryan: Ya, and I think the biggest cost that we have seen people struggle with, and no one plans on this being the case, but we have seen…I can think of a very large building where a dentist had like eight air conditioning units that were stolen one night right off of the side of the building. We have had clients who never thought that they would have an empty building because it is such a great location and beautiful new building and they had to float $20,000 of payment for a year and half until they discounted the rent enough to get a new tenant in there. You mention the time and the headache that it takes, I think you just have to be conscious of, and we will wrap up the podcast with a few questions to ask yourself before getting into one of these deals, you have to be conscious of the downsides of this. You have to really consider the fact that someone can come in the middle of the night and steal all of your AC units. Why do people do that anyway? Is it the copper?

Reese: It is just fun, it is just a high school prank. A bunch of buddies are like, “I bet you can’t steal all eight of those A/C units in your small civic!”

Ryan: That is probably how it went down. Anything else you want to add?

Reese: General advice around this is if it was in the right location, if you had the right partners, if you had a project manager and a construction manager and if both of those people were very experienced and if you had a good designer, a great architect, if all of those things were taken care of and you didn’t deal with it and it was in a better location and it was cheaper than leasing? Than obviously, all of that combined, will make for a better long term investment for you.

Ryan: I would say, add in there to assume that you will have to float payments of someone else’s space for some period of time and if a couple months worth of floating other people’s payments puts you under water or puts your own business in jeopardy than please don’t do it.

Reese: Ok, so you and I are talking about two different people here. One is the guy that should not even be considering this. You have just had that conversation with someone, probably in the last week.

Ryan: The wound is fresh.

Reese: I am talking about someone who has tons of liquidity, low debt to income, they are in their final house, they are totally settled and not going to be moving again in the next ten years, and the practice is at it’s peak performance. It is profitable and you have got all of the investments being made into marketing, you have an associate who is either fully functional or you don’t want an associate and you are at your peak practice collections target. If all of that is working, than of course it is a better investment than leasing. The problem is very, very people who are in that situation are doing it. It is everyone that Ryan is talking about, you have got to be able to float everyone’s rent for a few months.

Ryan: Do you have $100,000 sitting around?

Reese: If you don’t, then don’t even THINK about this!! There are so many other fish to fry and it won’t cost you your retirement.

Ryan: By missing out on it, is what you mean.

Reese: Let’s go to the next deal.

Ryan: This probably isn’t as prevalent in the New York City that we referenced before, but we have come across a lot of people that want to buy raw land. You can relate to this being a little farmer yourself.

Reese: I basically am a farm. I want that quote to be remembered in the office.

Ryan: I am a farm. Reese will write that with a sharpie.

Reese: My farming buddies will be like, “whatever, you city slicker.”

Ryan: There are people who like the idea of buying, to quote Monty Python, “Huge tracts of land”. Sometimes they want to farm, sometimes they want to plop a house in the middle and not be hassled by neighbors.

Reese: Here is the big allure that most people fall into and that is that the most lucrative part of real estate development. It is taking a piece of raw land that does not have anything on it, and hasn’t been through any sort of entitlement process through a city. It might be zoned, but it isn’t ready to be sold off to anyone.

Ryan: It is just dirt.

Reese: The most lucrative part is taking that, if it is commercial, you take that and you take it though the city and you submit plans and a site map and you potentially bring in some of the utilities and you make the sidewalks look nice and get it all ready to sell to a builder or to another dentist or some consumer that wants to build a project on that land. That is the most lucrative part of development and what we have seen three or four cases of, when dentists try to take raw land through the entitlement process through a city and they have found out halfway through the project there was a major reason why it hadn’t been developed yet. That is very common in today’s world. Most of the easy development has been done. The difficult development is less common and the most seasoned developers and the people with the deepest pockets are the people who will have to tackle those projects because there will be surprises on some raw land development that will or could eat up all of your profits. I have seen a dentist try to take as simple as an acre piece of property next to a free way that they thought was a golden piece of construction, and find out halfway through the entitlement process that there were multiple easements through that property that would stop them from being able to construct the building they wanted to. It would have been another $50,000 to $100,000 of cash to get the engineering done and get approvals on how to remove those easements. Anyway, it is difficult man. It is not something that people should take lightly. I have also seen dentists lose almost a million dollars worth of net worth and cash and opportunity cost. One person lost almost a million dollars trying to develop a residential neighborhood with a buddy who was in construction. It is just a speculative part of the process because there is a lot of unknowns with raw land. There is less risk once someone gets it entitled and you can just buy lots and build. I just say, for the most part, I don’t think dentists are wealthy enough and they don’t have deep enough pockets or liquidity or experience to be involved in raw land development. It is very lucrative, but I haven’t seen it be successful for anyone yet. We will take a quick break, then cover the next three Ryan.

Ryan: Ok, let’s talk about number three. That would be residential speck home building, flips, income property, etc. When I hear that I just think of the clients that we have and a lot of the people I know that have second and third homes and rental properties. A lot of our clients have family members in the properties and they are floating some payment or they are going backwards three or four hundred bucks, which doesn’t bother them to much. I can think of more people that are going backwards $400 a month than are making $400 a month with their rentals.

Reese: Yes, I think there is a big difference from having a rental property, or flipping a home, and building a speck. There is not a lot of money in rehabbing homes and flipping them. There is more money in your dental practice. You have a really good ROI on your time. If you pay yourself 25%-35% of your collections, like normal dentist should get paid in most healthy practices, you still have a 15% return on that operation. So you are making good money in your business. I don’t think you can make as good of money doing rehabbing and specking. There is just not enough margin there. Plus if the market turns on you, you can get crushed. I don’t like to see people build a home and sell it with a builder hoping to make money at the end of it. The amount of profit that you can make isn’t enough. Builders are successful because they spread their risk among lots of different properties. A lot of the ones that can survive crisis are the ones that own the dirt and pay cash for dirt. They sit on lots for a long time and they have margin and investment returns that come from buying the dirt at the right price and selling the house at a profit because they are efficient with their building costs. It just doesn’t seem like a worthwhile thing. I would respect the dentists who was trying to do raw land development more because at least there is some upside in that. But specking and rehab is just kind of a distraction to me unless you are going to do multiple homes and spread your risk.

Ryan: Full time!

Reese: Over a lot of projects, that isn’t bad, but you are right. How many people who have got into residential real estate have a rental property right now because they want one? It is rare. They have it because they have to have it because they couldn’t sell it at a profit and there family and friends are living in it or tenants that are getting a deal.

Ryan: They are just happy to have someone there so they take a haircut every month.

Reese: It is a mess. If you are going to do it be committed to it and make sure you have fairly large amount of wealth to tackle multiple properties at one time. Hire a property manager on a per property basis so that you are not wasting full time money on somebody. Then slowly build a portfolio of at least ten or fifteen homes. I just don’t like the idea of someone having one or two. That usually means the average dentist if he had one, two, or three, at some point down the road, you will have shifted quite a bit of your net worth into those properties and the income that you are generating from them won’t be enough liquidity for you to retire comfortably. You will still be used to the lifestyle of living expenses that is going to be higher than the fixed income of those properties.

Ryan: You need the equity inside of it.

Reese: Right.

Ryan: Let’s go to number four, private REIT meaning real estate investment trusts. A lot of people own REITs. You can buy publicly traded REITs and put them in your portfolio and you can have the benefit of owning real estate in a portfolio that is liquid, that is low cost, that is a lot lower risk than doing it privately. Or you can own these funds of dozens or you know, maybe thousands of properties privately. Let’s talk about REITs for a minute. We are dealing with some of the after effects of clients having owned some really expensive private REITs before meeting us and we are trying to unwind some of these right now.

Reese: From my perspective, they are akin to how I feel about residential flips and speck homes. However, slightly more diversified so you don’t have as much direct risk in each project. The thing that is good about a private REIT is that it is diversified it allows you to spread your risk among a lot of properties. It is professionally managed. If it is transparent and managed well it can be a really good return, it could be a competitive return. The challenge becomes when too much of your assets are concentrated in those types of investments. You are very illiquid. We have seen people with most of their net worth concentrated in investments like these. For those of you who haven’t invested in one before, usually there is a minimum of $50,000-$100,000 for the good ones some of them are more like $250,000 and you will place money into a project like this and you receive units of ownership in the overall REIT. You receive income from the rental or properties and you also get to participate in the price appreciation if there is some of the property over time. Sometimes they are sold and closed out and then you get all of your money back and sometimes they are just held for a long period of time or converted to a public REIT, kind of like taking a stock public. You have this private REIT that only trades hands between you and the owners to the RET or you can wait until it goes public through a Vanguard REIT or something. The private REIT market is quite expensive. There are pretty substantial fees to get into one of these. Most people during 2007-2014 lost significant amounts of money in these projects and some of them, people lost all of their principle in private REITS. They were not well managed. There is not as much transparency. It is kind of like if you were to invest in a private company you get some financial statements from those companies, but it depends on how good they are at accounting and disclosing all of their withholdings. As a general rule, we don’t think it is a bad thing but it is kind of like raw land development. It can be done well, but most people don’t do it well, and most people who get involved in raw land development are under capitalized and don’t have enough resources to see it through. Some thing with private REITs, most people who get involved don’t have enough liquidity in an emergency fund, normal mutual fund, bond, they are not ready for retirement and they are trying to squeeze extra return out of a private REIT. An average REIT depending on the cycle, if you look at Vanguard’s public REIT that kind of gives you an idea of where REITs are at nationally. You can see high single digit returns to low double digit returns but if they are private the difference is that your price is moving less frequently and you can’t get out of it as fast as you can a public REIT. I also don’t like private REITs because the tax consequences of a private REIT are not super advantageous for most investors. If you are starting from scratch and just put money into a private REIT, it is taxed like ordinary income. You are paying a pretty high tax rate on that 7-8% return. It is difficult to put private REITs inside a tax shelter like a 401 k or defined benefit plan so that income is not taxable. It is not as tax efficient as a municipal bond or holding a set of small cap stock inside of a 401 k where your dividends and your growth are shielded from that tax shelter. There are some advantages to it, and it is a way to access certain types of investments that you can’t access any other way, but it is probably not for most people. If you are not worth more than 3 million dollars, I would be really, really hesitant. 3,4,5 million dollars of net worth is kind of a range where a lot of people will need to be to be financially independent. If you are not at that point, I don’t know that I would consider private REITS.

Reese: Let’s talk about the last one which is a hot topic for me right now: over building. This can be personally or over building in the practice. I think that happens a lot, I mean don’t you see that regularly, Ryan?

Ryan: It does happen a lot. If you just relate it to what it is like building a house or getting a house there is a lot of emotion that goes into it. It is your practice, your baby. You want people to feel welcome and you want the nicest stuff. It is easy when you are looking at really big numbers. If it is a million dollar project and they say we can add this for twenty grand or this for ten grand, it is easy to say yes to those because they feel small for the overall size of the project. But you can go over budget hundreds of thousands of dollars so quickly.

Reese: The person who is thoughtful about the size of space that they occupy, both to live in and to practice in, is wise. If you can just go through good planning, good design, self restraint, and if you can cut the size of the space that you need by 25%-30%, that is probably good design and that will save you. Anecdotally, I have just seen that be a huge factor in peoples retirement planning. If I take two 35 year old individuals, one who has too big of a house and too big of a practice and one that has a house that fits the size of the way that they are going to live and the practice that fits the number of operatories that they feel like are optimal, it doesn’t have unnecessarily large wasteful space, ya know? It doesn’t waste space in areas that don’t count. It is like a house on the main level footprint of a home. If you have got a 400 sq. ft. home theatre, enclosed room, right next to a great room that has a large television and couches and it is on the main level footprint of your home, you just expanded your concrete and roofing needs. You expanded your upper level you expanded your main level and you expanded a basement if you have one. Making decisions to put space that you don’t need in the wrong places. Now if you had a hole in your basement that was vacant and you can throw a theatre in the basement because you knew you needed so many feet on your main level and you wanted to put that there and it didn’t cost you a lot more maybe that wouldn’t be as consequential. The reality is if you put a waiting room, and a spacious private office for the door, and a spacious private office for an associate, and a large break room, and an oversized sterilization room and you have an oversized walkways and hallways and an oversized office for the front desk, you could be wasting 700 sq. feet or 800-900 sq. ft. That is the equivalent of hundreds of thousands of dollars of waste over a ten year period, up to a million dollars of waste! Those kinds of decisions, the house you live in and the practice you practice in, you shouldn’t have too small of a place because you shouldn’t have to move. I don’t want you to go get an 1100 sq. ft. office with four operatories when 2000 sq. feet with five operatories would have done it and you cut short and struggle with 4 at 1500 sq. ft. Whatever it is for the area you live in and what is efficient. Whatever is normal for where you are at try to cut it by 25%-30%. If you do that you will not regret the house you built or the house you buy or the house you remodel or the practice that you operate in. If you don’t do those two things, I really do believe that that will be a million dollar decision. It is a million dollar decision in opportunity cost that you have spent on real estate instead of marketing and better staff, better patient retention, better events. You are going to lose money on interest expense that you could have spent on investing by lowering your taxes and maximizing your defined benefit plan and profit sharing plan, 401 K, it is just a million dollar decision to have the right space at the right size at the right time. I think good design, and good architecture, and good planning, use your professional network, that will help you make that right call. That is my two cents.

Ryan: The worst of these situations is the unfortunate times where we have seen people soar into the deal that they can’t back out of. Maybe you have already bought the building and had some numbers in your head, closed on it, and then after you bought the building you went to architecture, design, and planning and realized that this was going to cost $500,000 more than you can even afford right now. But you’ve already got the building! Then you’re kind of already stuck in it.

Reese: Do your planning before hand. This should all be fixed before you go under contract. You should know what kind of layout you want and it will be non traditional because all of the architects and designers you are working with are going to be used to you having the space before you talk to them because they are used to procrastinators. But if you can take some time and not allow yourself to get caught up in trying to find space before, you can have a design and you can find an architect or designer to start walking you through. Then you can give them optimal layouts and space plans. This is about the square footage I would like, now let’s go look for space. No, that’s not how it works. It’s like let’s go look for space and let the size of that space dictate that in my mind. If you already had a design you can go to your real estate agent and say, “I am looking between 1700-1800 sq ft. That fits what I am looking for.” You already know that you want a two partner location, or a three associate location, or it is just you. Whatever optimal space you think you are going to need you go to your real estate broker with that in mind and they go find the space that fits your parameters. I think that is a smarter way to go about doing it. The same thing with housing.

Ryan: Well, the housing thing, what happens is you kind of pick an area and you go get the land, and then you have to build the house to fit the land, right? That can be a problem because you go end up with a big piece of dirt and you don’t need 7000 sq. feet, but now you got to build it.

Reese: Or for people who aren’t building, they go and pick the neighborhood and find the house that is available. Which is also, I know it is tempting sometimes, but if you give yourself a long enough time then you won’t be forced into buying a house that doesn’t fit your needs. It could be nice, ya know? We aren’t saying we don’t like a nice office, or nice stuff. It is just the more you spend on size the less you can afford to spend on comfort, design, and features. The bigger it gets the worse off your budget is going to be. You will be constrained.

Ryan: You can’t put a gym in the basement any more. You can’t do your squats and deadlifts and your olympic lifting.

Reese: You will have to mix the gym with the master bath. That might be the same room.

Ryan: Do what you got to do. Let’s wrap this up with a few questions that someone could ask themselves or an advisor before jumping into a real estate deal. I will start with one you would want to ask yourself, “how does this affect my net worth and my cash flow?”. It seems logical, seems like everyone is asking that question, but they are not. You know to figure that out you have to have a pretty good grasp on what your whole situation and picture looks like. Those are two areas that you want to know what it is going to look like before and after this deal.

Reese: I think that is great. Think about what your net worth will look like at 55 and 65 because you are making this decisions. Will it be 35% in real estate or will it be 40% in real estate. If it is 50% or more in real estate by the time you are ready to retire that is probably too heavy. You shouldn’t have that much real estate exposure that late in your life. Early on that could be the biggest part of your retirement. You took your down payment and put it towards your house. You need to look out and say, “I want to have this much of my net worth in real estate when I am ready to retire so I am not too illiquid and am not having too much of an opportunity cost tied with that profit.” What’s next?

Ryan: I was going to say with what you are saying, is there is a difference between a million dollars depending where the million dollars are sitting? Is it in a savings account, equity in a practice, or sitting in equity in a building? I think a lot of people look at this and think well, this should appreciate and make me x amount of money. The second question you should be asking is what is my plan to access that money and live on it in the future. If I have too much tied up in a building, how long can I live before I have got to go liquidate that whole building. It is not just about that this will grow to a dollar amount, but how am going to get at it in the future and how does that coincide with the other buckets of money that I have got that I will be pulling from? Number three, what are the potential risks and costs? Again, that seems like a logical thing for everyone to be asking, but a lot of people get into stuff without knowing these things. What things are going to cost and what the risk can be. I think we touched on that a lot.

Reese: We hit that a lot today, one I know you wanted to hit on was, “is this a good decision for my practice?”. Will this increase my collections, visibility, signage, flow? Can I produce more because of it? Is this a better thing for the practice? Don’t do it just because it is a supposed investment. If it is not better for the practice for either visibility, flow, design, location, than it is not worth doing as an investment.

Ryan: Yup.

Reese: I think these are great man. We have pounded everybody with a lot of stuff today. How should we wrap up?

Ryan: I think we should just re-cap with the proverb, “Let well alone.” Think about all that you have had to sacrifice and do to pay for the loans and start the practice. Consider where you are at in relation to all of those things and what you’ve put in and where that will put you in the future before you get distracted by something else. We would love to hear and read your feedback in comments on these episodes. Love to answer any questions that you may have. Just click on the episode link from our website dentistadvisors.com, or you can go to dentistmoneyshow.com, and find the episode, leave your comments on the website. We would love to see those. If you would like to talk to us we have our phone number at the top of our page on the website. You can also click the link at the top and schedule an appointment on our calendar. You will see our calendar and your can pick a convenient appointment, we would love to chat with you any time.

Reese: Thanks everybody, carry on!

Investing, Real Estate
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