Investing for a Lifestyle of Freedom
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Christopher H. Loo, MD-PhD: So welcome, everybody to this week's podcast episode for the Financial Freedom for Physicians podcast. I'm your host, Dr. Christopher Loo. And as you know, we talk about four types of freedom: financial time, location, and emotional freedom. And our cohort started out with physician guests and speakers. And now it's branched out into investors, real estate, business owners and entrepreneurs.
So today, our discussion is going to be about real estate especially with multifamily syndications. It's gonna be a fantastic discussion. And to that, no, we have Bronson Hill, whose mission is investing for a lifestyle of freedom. So he's from the California area. And he's going to be talking all about real estate investing. So Bronson, welcome.
Bronson Hill: Awesome. Hey, Chris, really excited to be here. I love talking with physicians. I did work in the medical field, not as a clinician, but in medical sales or medical surgical sales for about 10 years. So I'm very familiar with a lot of physicians of all different specialties and have a lot of respect for the field. And also, I know that a lot of physicians don't get educated a lot about investing. And so I love talking about investing and what can make people successful in that area.
Christopher H. Loo, MD-PhD: Yeah, real estate is especially popular among physicians. And we'll get into why that is. But tell us more about who you are, how you started Bronson Equity, and we’ll go from there.
Bronson Hill: Sure, thanks. Yeah, so I had a good job. I was working, doing medical device sales. My last job, we had a job working with cardiologists, doing special surgical surgery, it's called a thoracotomy. So basically, sanding calcium out of the arteries in the heart or the legs. And so, I was doing that, it was good. I was working honestly, not super hard, kind of toward the end, but I was getting paid really well, it was making over 200,000 a year. Which, as a physician, I'm sure that maybe is kind of low for some, many physicians make a lot more money. But for me, I didn't like that I didn't have freedom over my time. I was making good money, but it wasn't intellectually challenging. And so to me, I just really wanted to learn, I wanted to grow. And I had been doing some real estate investing. And I heard that doing real estate and becoming financially free is a way to do it, is to buy real estate.
So I thought what 95% of people do is buy some rental houses. So I bought some rental houses, and I had four or five rental houses. And I realized even though I had a property manager, even though it was out of my area that wasn't really managing it, I was still having a lot of headaches, and I was having to do a lot of stuff in the business and there wasn't really much cash flow. I may have been getting a few hundred bucks, or 100 bucks per house, it really wasn't much. And so I realized that there's gotta be a better way.
And there's a saying that when the student is ready, the teacher appears. And that was really my story. I had a relative, a cousin that I hadn't seen in years. And he had been doing multifamily apartment investing for a long time. And so I told him, I plan to get 30 houses, and to quote-unquote, retire with passive income. And he said that sounds like a lot of work. He's like, why don't you do multifamily? And I said, Well, I'd love to, but I don't have the money. And so he said, you can raise the money. And so he taught me about syndication. He said, go to this event, read this book, listen to this podcast and just different ones more specialized around how you actually can do it yourself. But I basically started a meet up in Southern California and found my first investor there. And then I found a partner. And basically, in the first couple years, I spoke with about 1200 investors one on one over the phone, just by partnering with somebody who is more experienced in that space.
But I think a lot of physicians will say something similar, like, I don't want to do rental houses, I don't want to manage tenants, but I want to scale and I want to grow. And I think that's the amazing magic of syndication. I know you guys talk about this a lot on the show, that you can grow your wealth without taking up more of your time. And when you can replace your expenses, I think that's really when you become financially free. So I was able to leave my job about a year ago. It was hard to walk away from but I've really had no regrets. I've been so happy I left. I think I've had five international trips this year. Some for service trips, I’m involved in a cause with fighting human trafficking, and then I just love going on vacation, not being tied to a location, which I think is awesome. So I think for a lot of physicians that can be really attractive. How do I get out of being tied to a location or tied to a time for money trade?
Christopher H. Loo, MD-PhD: Yeah, that's a very inspiring story. And I know a lot of physicians themselves, they'd be envious to be in your position. They make a good income, but they're tied to the fact that they have to go to the hospital every day and if they stop working they don't have money.
So what's interesting is, in this episode we're going to talk about the unfair advantages of multifamily investing, how to use inflation, and why it's actually good. And actually reducing taxes, legally.
So in that light, we'll talk about the first thing: Why is multifamily investing an unfair advantage?
Bronson Hill: Yeah. So I think that syndication or multifamily is kind of the bread and butter of investing. And I completely believe that. Before you understand other sorts of exotic - we do an ATM machine Fund, which has really high cash flow. And there's other types of self storage, mobile home parks, and then private placements and all different kinds. Just understanding how multifamily investment works.
Now a lot of people can understand real estate, you own an asset, it produces money, and it's very understandable, right? It's a very understandable model. It's like, okay, with the rents, this is what we do. But the amazing thing about multifamily is it generally keeps pace with inflation. If I could share a chart here, there's a chart that I could show, that as rents have risen over the last 50 years, inflation is almost exactly in line with it. It lags a little bit so they don't rise quickly, as, or sorry, rent inflation goes a little ahead of rents, but it generally follows a trendline. So that's the case. Everybody today is wondering, how do I hedge against inflation, right? Inflation is 9.1%. Officially, I would say it's more like 15 to 17%. There's a website out there called shadowstats.com.
A lot of people don't realize this, that the official number, or the CPI or the Consumer Price Index, in my opinion, is actually somewhat of a fudged or controlled number. And the reason I say that is because they changed the metrics a couple of times, they changed it in the 1980s, when inflation got to unbearable, they started to change, they all let's do this, whatever they changed to get to 1990. And now they just can substitute items in, they'll say, Oh, the prices for oranges doubled, but so you would switch to apples, right? They just do that for you and say there's been no change in the CPI. Or your rent is $1,000 for a two bedroom apartment, but now it went up to 1200. But you would downgrade and go to a one bedroom just so the cost is the same. So we're not even matching apples to apples. And things like energy and housing costs really aren't figured out.
So when you actually look at what inflation really is, and this is what we're finding a lot of people now, they're just sitting on the sidelines thinking I'm gonna wait until things crash or things go down. And if inflation is 15 to 17% you could be losing 30 to 40% of your wealth, just by sitting in cash. I know a lot of people are doing that. So when you buy an asset, like multifamily, that you get to use debt to buy it, so we're getting debt, even still four and a half to five and a half percent, inflation is nine to 17%, whatever you believe it is, so it's below what inflation is, we get to pay it off in future dollars that are worth less, and we know the asset price will appreciate because rents are gonna go up. So it's like a totally unfair advantage, right.
And it's frustrating, if somebody doesn't own assets and they don't own property, they're gonna get destroyed by inflation. That's why the poor middle class, they just don't understand how to handle it, but you actually can use inflation as an advantage and to your advantage and make it your friend. And really, again, you get paid, you get leverage at lower rates, then what inflation actually is, and then get to hold it and cash flow from it. It's like all of the best things you can have in an asset, is what you get in a multifamily.
Christopher H. Loo, MD-PhD: Yeah. And what's really interesting is, especially for real estate. Explain to people on the podcast why is real estate so attractive to high income earners? Doctors, dentists, lawyers, engineers, over the traditional equity market. If you talk to physicians, almost 90-95% of them own some sort of real estate in their portfolio.
Bronson Hill: Yeah, real estate is amazing, because it also is unfair, in that the returns are typically higher. If you compare it to the stock market, the stock market typically has around 7-9%, depending how you calculate return per year. That's before fees, that's before other sorts of taxes, other things that go on, and even if it's a retirement account, you're gonna have volatility. And so people don't like counting the “down” years, right? So you have a lot of volatility. And so it ends up being, even though we've done really well in the stock market, you’ve invested the last few years, you've done very well, but you have to count the down years too, which is the downside.
But in general, when we have a multifamily deal, particularly we only really do value add deals, and I invest passively in other deals as well outside of ones that I syndicate or operate, we have about 200 million in multifamily assets. But one amazing thing, for example, in Jacksonville, Florida, we have most of our units there. So we're getting ready to close on a 227 unit property there. And the current rents in the property are $922 a month. And basically by buying this property and doing about a $6,500 renovation, the going rate for apartments in Jacksonville that are renovated that are of the type that we have is $1,460. Now this isn't speculation, because we've got over 1200 units already in Jacksonville. We're seeing that in those current properties that are right around the corner. So we know that It's legit.
So when we have a 50 to 60%, upside in rents, multifamily is not valued on cop properties, which is the way single families value, right? If my house sells, it just depends on what the house across the street or across the block or across town sells for. But the multifamily is all income, how much income is this property producing? There's also a cap rate and other sort of valuation metrics, but it puts a great margin of safety. That's a term that Warren Buffett uses. If you haven't studied Warren Buffett, as an investor, he's just he's got so many phrases, so many things that he's done to generate wealth for a long time. Having a margin of safety, if things don't go well, it will mean that it will still turn out okay.
Meaning the difference, I'm kind of going a little tangent here. But if I were to buy a brand new apartment, or a Class A nice new sparkling apartment, I wouldn't get that margin of safety, right? I would only get the rents, and if rents go down, then I could be in trouble, right? Because I'm expecting rents to continue to go up and up and up. But with this value add approach, it takes projected returns from seven to 10%, maybe to like 14-16% conservatively, right, so it gives me a little more safety in that type of a deal as well. So that's the big thing.
Christopher H. Loo, MD-PhD: Talking about it from an investment standpoint, you can hedge your risk and hedge your downside. Real estate is a hard asset, it’s cash flowing. Huge tax advantages.
You mentioned real estate being a huge hedge against taxes. So tell us how that happens.
Bronson Hill: So there's that saying you can't avoid everything but death and taxes, right, those are the two givens. But I would say, you can potentially get to where you can pay zero taxes, or almost no taxes, or you can significantly reduce legally. So not like by avoiding or going to jail, and nobody wants that. But, there's a way. The last several years, while working my full time job, I was able to reduce my taxable basis to about 1%. And I was in a higher tax bracket, making over 200k per year and paying a lot in taxes. Physicians and a lot of professionals such as CPAs or attorneys, pay a lot in taxes. And I think it's kind of unfair. So what does the government do? People call these loopholes, I call them incentives. The incentives are ways that you partner with the government to provide housing or energy or other things like that.
So, in general, I kind of look at it like this: You have two buckets, right? You got this bucket over here, which is your passive investment bucket, right. So when I invest in a multifamily deal, as a physician, if you're a physician, then whatever is over here, you've already been taxed on whatever. And as you grow your income, you can defer or you can potentially write off any sort of gains that you get due to the depreciation. So you can write that off over time, there's a lot of it now you can bring it forward. So you just keep kicking the can further and further down the road. And the goal was to pay no taxes in that bucket.
Well, what do you do about the bucket over here that is the active income? Well I'm paying 40-50 or more percent in taxes, what do you do with that? Well, there is a way I'm gonna talk just briefly about how you can get that to zero. So there's two major ways. One is, there's a term called the real estate professional, which is an IRS designation that basically says that as a real estate professional, you have to do 51% of your time. So it's got to be the majority of your time, it's got to be documented. And it's got to be at least 750 hours a year. So some people do this, where they are the physician, maybe somebody could work 25 hours a week, and do 26 hours a week in real estate. It could be things like looking at investments, it could be syndicating, it could be doing what I do, it could be handling all their passive investments and going to conferences, and educating or reading and those kinds of things are all active. They have to have a business or an LLC that does that.
When you do that, it allows you to bring all this depreciation or extra depreciation that you have, you can bring that against ordinary income. So that's an overview of how that works. A lot of physicians will say, Well, I don't want to do that because I make too much money at my job, I can't deal with my situation. A second way you can do it is if your spouse is a real estate professional, so maybe your spouse stays at home or maybe your spouse is a part timer. If they could just become a real estate agent or they become someone who manages the investments on the side or has enough hours with education in some sort of business activities around real estate, then they can qualify. Then, it allows you if you have all these passive losses, which are actually not that hard to generate, if you just keep investing more money into deals, you get more and more and more depreciation. And it allows you to basically effectively reduce your taxes to zero.
So those are the main ways there are also some unique investment opportunities. We don't offer them currently personally. But in the energy space, where they actually give tax credits against ordinary income. So in oil drilling, there's something called carbon capture. There's a couple of different types of investments that actually allow you to reduce W2 income, not as a real estate professional. And let me just give us disclaimer before just about like, I am not a tax professional. So I'm not a CPA, I'm not giving you specific advice. I'm sharing my experience. I gotta have a disclaimer.
Christopher H. Loo, MD-PhD: Yeah, for all the listeners, this is educational, informational, not financial advice. But this is really, I think, a good overview for people just interested in getting in.
What was interesting is, earlier on, you were talking about books, conferences, podcasts, and some of the resources that helped you get started when you were still in your job. What are some of those resources?
Bronson Hill: Yeah, there's a lot of good books out there, a lot of good conferences. There's a group called The Real Estate Guys, they have a course on syndication. I've actually recently joined a group called Kingdom REI, which is a faith based group. A lot of highly ambitious people are trying to do big deals. So I'm the money raising coach there. So that's like a paid-for mastermind, where we walk you through every step on how to. If you're interested in starting to raise money, or you still want to do your own deals. And a lot of physicians have actually started doing this because they have a pretty good network. And as a physician, you get pitched stuff all the time. But if it comes from a peer, it kind of comes from a different, different place.
There's some great books out there, Joe Fairless has a book. It's called The Best Ever Syndication Book. Michael Blanc, former partner of mine, has a book called Financial Freedom Through Real Estate Investing.
Christopher H. Loo, MD-PhD: Yeah, for all the listeners out there, all of Bronson's resources will be included in the show notes. You know, you've actually spoken with over 500 high net worth investors. What are some of the underlying themes or patterns that you’ve learned from people that have been successful in this area?
Bronson Hill: I think it's really interesting in the world, particularly with physicians, because obviously, I've had a lot of time to think about working with physicians. But if somebody hasn't read the book, Rich Dad, Poor Dad, that's like the one book to read, because it just gets you out of the idea that I have to go get a job that's a secure job, that pays well with a pension and benefits. But as physicians, that's what you're taught, you're taught safety and security. And really, I've watched a lot of physicians that, a lot of times, physicians are great at being a clinician, they're highly technical, they're world experts at this one sphere, and this is it, and they're so good at it.
But then I look at their investing life, and it's just not that great. And the challenge is sometimes the very thing that makes you great in one area is a disadvantage in another area. Because in a way, like if you're going to recommend as a physician, a certain treatment or a drug or medication or something you want to know, where's the double blind study? Where's this information? What's the data? And when you look at something like syndication, there's too many variables. There's too like, well, I know I should do real estate, but I don't know how to do it. What would that look like?
Out of all these calls, this one call sticks to my mind. This was a guy who had an orthopedic background, somewhere in the Midwest, had his own clinic, in his 60s, and he had $5 million in assets. So I ask, what's your net worth? And of course, it's confidential. But he had this net worth, he’d only done stocks and bonds, which has come in common with a lot of physicians. But he had never invested in real estate. So a lot of times, the first step for a lot of physicians is to go look at, to join an investment club. We have an investment club, we have investors, we share deals, there are a lot of great groups out there.
Join a few investment clubs, have a call with someone like me or someone else and ask questions and just try to learn. And then within a few months, or maybe even 30 days, try to find a deal that you can invest in. And out of a five million net worth or two million net worth, 75k, or 50k, or 100k is not a substantial amount. It's a lot of money. But compared to the total net worth, it's not a lot. But what it will give you, hopefully, when you're done - you'll learn a lot, whether it goes well it doesn't go well - it probably goes just fine. But what you walk out with, you will learn a lot.
And just like for me, I pay attention when I'm invested. And so if you invest a small amount with one or two different groups, you're going to feel like, hopefully - and this is what I love seeing in people, Christopher - something shifts where it's like, oh my gosh, I learned a new skill. I know now I can invest in this type of asset and it's actually possible. I can double my money every five years. Generally it's obvious some deals are much faster, some deals take longer, the worst that we've had is probably 8 to 10% per year, we've had some that were 100% IRR in a year. So there's a variance here. But if I can get comfortable with being involved in something like this, then I actually can find ways to replace my income outside of the volatility of the stock market, and truly have cash flow. I can replace my living expenses, whatever they are, whatever that number is, that's your rat race number; if you can replace that, then you're financially free. And I did that. And right now, my living expenses aren't a ton. It was like 60k a year. But I found a way to replace my living expenses through residual passive income. And that's how I was able to leave my job.
Christopher H. Loo, MD-PhD: Yeah, it's all about cash flow. It's actually passive cash flow that you don't have to work for. It’s residual. And that's how you free up your time. But most people are just thinking, oh, I need a job to make money. And that's why the perpetual rat race.
I really enjoyed this conversation. And a lot of physicians may be interested in your work or website or visiting you and learning more about you. How can they do that?
Bronson Hill: So we do have our investor club where we do invite investors to join us on deals. We have to make sure obviously, it’s a fit. But a good first step is, we have this guide, which is basically a 50 page eBook I wrote. It's How to Use Inflation to Your Advantage. So some of the things we talked about, basically using debts, that is wise debt, not bad debt, and also buying cash flowing assets that pay you to hold them, and also looking at some alternative assets, such as precious metals or crypto and how that fits in as well. So I'd love to share that with you, that’s on my website, BronsonEquity.com. And then if you want to join our investment club. But it's been a lot of fun, I love talking about this stuff. I'd love to be a resource to any of your listeners that I can.
Christopher H. Loo, MD-PhD: Yeah, and for all the listeners again, all Bronson's links will be in the show notes. So thanks so much. It's been a wonderful conversation and we look forward to hearing about your future success.
Bronson Hill: Thanks, Christopher.
Christopher H. Loo, MD-PhD: Many thanks again for being here. If you’re new, you can find me online at Christopher H. Loo, MD-PhD, where I have links to other episodes or links to online resources that will support you on your financial literacy journey. I’ll see you there in on next week’s show. While I bring you thoroughly vetted information on this show regarding a variety of financial topics, I cannot promise you a one size fits all solution. This is why I caution you to continue to learn. Educate yourself and seek professional advice unique to your situation. If you want to talk to me, I welcome it. Please reach out via my website or email at Chris@drchrisloomdphd.com. I read and personally respond to all of my emails. Talk soon!
Editor's note: This transcript has been edited for brevity and clarity.