Today’s guest is an anonymous online blogger and a radiologist. He’s here today to tell us about how he was able to bounce back from a nasty divorce that cost him a lot of money and a lot of mental pain, to being financially stable once again. This was done in large part thanks to passive investing, which we will dive into today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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“The money that you put into these investment is a long term play and it will not be liquid” – XRVSN
- Radiologist, passive real estate investor, and anonymous real estate blogger
- Lost 7 figures in a divorce, used passive real estate investing to get to financial independence in his 40’s
- Based in Southeast, U.S.
- Say hi to him at https://xrayvsn.com/
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Theo Hicks: Best Ever listeners, welcome to the best real estate investing advice ever show. I am your host today, Theo Hicks, and today we are speaking with Xray. Xray, how are you doing today?
Xray: I’m doing fine, Theo. Thank you for having me on.
Theo Hicks: Absolutely. I’m looking forward to our conversation. Best Ever listeners, it’s Sunday, so you know what time it is – it is Skillset Sunday, where we talk about a specific skillset that our guest has acquired, that hopefully you can use to expand and grow your real estate investing business. The skill we’re gonna talk about today is passive investing, and how you can use that to become financially independent.
Before we get into that skill, a little bit more about Xray’s background – he is a radiologist, hence the Xray moniker, passive investor and anonymous real estate blogger. He lost seven figures in a divorce, and was able to use passive real estate investing to get to financial independence in his forties. So he’s a great source of information on how to actually use passive income to not only become financially independent, but to pull yourself out of any financial hole you’ve gotten yourself in.
He’s based in the South-East, and you can say hi to him at his blog, which is XRAYVSN.com.
Xray, before we get into the skill, do you mind providing us a little bit more about your background and what you’re focused on now?
Xray: Sure. As you mentioned, I am a radiologist, so I’ve been a physician for about 15 years now; I’ve been practicing in the South-East U.S. And as you also mentioned, I had a financial low in my life; I went through probably one of the worst divorce stories that most people have heard of when I tell it. It was very contentious; it was just not a fun time in my life. That was starting in 2010, and it lasted for 13 months. During that time I just saw money draining out of my account. It was like I was hemorrhaging money. The only people that benefitted from it apparently were the lawyers.
Just to give you an idea, just my legal counsel fee during this time was about $300,000, I sort of tallied it up… And it was just a shocking amount of drain going through my life. I really hit financial rock bottom and emotional rock bottom right around the time that the divorce was finally finalized. I was looking at a negative net worth probably close to $800,000 negative, and I was just about to turn 40. I was really was reeling. Like I said, financially and emotionally I was devastated; it was a grueling time. There was just a lot of times I just wanted to throw it all in and give it all up… And it was at this lowest point that I started saying “I can still build myself up. I am a physician, which fortunately does carry with it a high income.”
I didn’t really know how to deploy that money in the past. Basically, money coming in – I would spend it, and never really built any financial traction in my life. But when I was starting at rock bottom, I said to myself “I need to do something, otherwise I’ll never be able to retire. I just got my legs cut out from under me at age 40, and if I ever want to retire early, much less retire at all, I’d better get my financial ducks in a row.”
So I started doing research online, and one of the biggest topics that really struck a chord with me was passive income generation. Basically, I thought that this would be an ideal way that I could actually turbo-charge my net worth, bringing money as a physician while I was creating some side-streams that brought additional money into my household. Those two incomes combined could really set me back up to where I needed to be.
That’s how I sort of first got into passive income real estate investing and other passive income sources – it was just a desperate need to find out “How can I call myself back from this huge hole that I was in right after a really bad divorce?”
Theo Hicks: Thank you for sharing that. I know you mentioned you did some research online… Do you have more specifics on how you’ve found passively investing in real estate specifically? Was it just you were reading some blog posts, did you come across a forum, did you talk to someone online? How specifically did you find this investment strategy?
Xray: I was almost going through Google searches at one point, just to see — how to recover from a divorce was one of the topics I would search… And I started seeing some forums that I took part in. One of the first that was really helpful was the Bogleheads forum. They were basically a group of like-minded individuals that kind of followed this principle of the late Jack Bogle, who founded Vanguard. For those familiar with index investing, Bogle was the first person to really push that out… But this was a group of individuals that really were helpful. Basically, my first post was “Help.” And I gave my spiel of what happened to me, how essentially I lost pretty most close to a million dollars throughout the whole divorce. I said “This is my age, this is what I have. Can I be helped?” And it was just an outpouring of support there. I had a lot of responses saying “It’s not the end of the world. Don’t give up.” And again, they cited that I was a physician, and they said “You can dig your way out of this. You’re having a high enough income that you should start looking into these topics that you might not have been aware of.” Through that, I started looking at other blogs.
One of the biggest blogs that inspired me in the physician finance realm was from The White Coat Investor. He had been giving advice to physicians… First of all, physicians are very well-known for not being very financially savvy. We are usually easy prey for a lot of financial advisors… And mainly, we go through all these years of education – I think I’ve been through the educational system for 25 years, and not one single hour was dedicated to finance. So you’re basically a perfect sheep for all these wolves of Wall Street. You basically come out of med school with no financial knowledge. You go through residency – no financial knowledge… And now you’re pulling in these good-sized checks, and these financial advisors know “Wow, this is easy prey for us.”
Dr. Dahle, who runs The White Coat Investor, he basically got taken advantage of by a financial advisor, and it basically inspired him to start a blog. Tons of posts on that site, and then from that on, it sort of blossomed into looking at other blogs. One of the ones that really got me into passive income investing was another physician and anesthesiologist who blogs at Passive Income MD. He was solely writing on that topic, and that really spoke to me. Once I got into that, it just took off from there.
Theo Hicks: That’s amazing. You went from googling “how to recover from a divorce” to finding that Passive MD website that’s allowed you to obviously reach financial independence within a year. So let’s actually talk about the strategy. Before we go into specifics, can you explain the overall strategy that you would recommend to someone who may be in a similar situation and wants to achieve financial independence strictly through passively investing in real estate?
Xray: Sure. I guess first define what I think is financial independence… It’s basically at a point where you could stop working, not receive another W-2 dollar for the rest of your life, and you’d still be able to take care of your basic needs. There’s certain levels of financial independence. The community that I’m part of is called the FIRE community (Financial Independence Retire Early). You don’t necessarily have to retire early when you receive financial independence or when you get to it, but some people like to say they are fired, which means that they’ve reached financial independence and then they can retire early, or they could just basically design a work life that they want. There’s also different levels of financial independence.
There’s the basic needs, where you can’t do anything luxurious; they call that Lean FIRE, where you’re just basically covering your expenses for having a roof over your head, utilities and food. And then you could go all the way up to Fat FIRE, which means that you’re so beyond financial independence you could splurge on anything off the menu, take luxurious trips, and stuff like that.
Where I’m at right now is probably in between the two in terms of my financial independence. I could certainly stop working and support myself with the life I have now, and take a nice vacation every now and then. But I am still continuing to work, because I do wanna pad my net worth a little bit before I pull the plug.
When I wanted to get into these income streams, I had to decide whether I wanted to be an active participant or a passive one. Being a physician, that really took a lot of my time. I didn’t wanna have a second job… And that’s why real estate passively was ideally suited for me.
I’ve owned a couple of condos which I actually lost during the divorce, and I was not unhappy about that, because they were a pain to manage, and the money received from that was not really worth my time… So I didn’t wanna be a landlord, so I kind of wanted to have something where I could invest in real estate, take advantage of all the tax benefits. The IRS and the tax law right now favors a lot of people who are into real estate. There are so many more benefits than you can get from just normal working… So I really wanted to get into real estate, but I didn’t wanna be a landlord.
I started looking into passive things. One of the easiest ones to do is actually what’s called a REIT. That’s a real estate investment trust. It’s almost like a stock – you basically can buy it off the market; there’s indexes for it as well… And you could be part of this real estate investment plan with them, and every quarter they send you distributions, so it’s almost like you own the real estate, but it’s treated like a stock. That’s probably the easiest way to get into it.
Unfortunately, REITs can behave like stocks. So if the market crashes, you could certainly lose a lot of value in your REIT shares. But if you’re not gonna sell it – I don’t plan on selling my shares – the volatility doesn’t bother me as much.
The next level when I got to it was the crowdfunding platforms. The JOBS Act basically allowed normal individuals to start investing in these real estate properties that were at one point only available to the ultra-wealthy. There were platforms that came up, like RealtyShares and a whole bunch of others.
I actually went into RealtyShares and did three deals with them, had no problems, and later on RealtyShares actually closed its doors, but others have taken its place. But that was an easier step for me to go into real estate, was through these crowdfunding platforms.
The minimums were a lot lower than what I’m currently in. They usually could be anywhere from 3k, to 5k, to 10k to invest in. You basically pool your sources with other investors and you could buy these commercial properties like apartments. Then, if you’re fortunate enough – which I achieved fairly quickly in my early stages of this project – you become an accredited investor, if you have a net worth of over a million dollars, not including your primary home, or if your salary is (if you’re single) $250,000 a year. Or actually I think it’s $200,000 if you’re single and $300,000 if you’re a couple, a year. So if you can achieve that and you become an accredited investor, that opens up a whole bunch of more opportunities for you to invest in, and that’s where I was at fairly soon, and that’s where I concentrated my efforts on.
Theo Hicks: Can you walk us through an example deal that you do right now? Let’s talk about it at the highest level, so not the REIT, not the crowdfunding platform, but what you’re doing now as an accredited investor.
Xray: Yeah. As an accredited investor – it basically gives you opportunities to invest in these private syndicators. These private syndicators – there’s a lot of them, and that’s probably the most daunting thing out of all this; there’s so many choices, you have no idea where you wanna go to… So you actually have to do a lot of research. But when you become an accredited investor, basically these private syndicators will offer you opportunities. Basically, you will contact them through their website, or if you have an email contact, and then do an interview, make sure that you’re a good fit with them; they’ll check your financials, you have to fill out some forms that basically agrees that you are indeed an accredited investor.
What happens when you join these companies is whenever they have a potential offering, about a month or two before they close on a property — say they have a 20 million dollar apartment complex that they wanna purchase… They’ve done their due diligence, they think this is in a good area, there’s a good projection for growth – they will send out a mass email, or some will do a demonstration, a webinar over the internet, and they will present it to their group of investors. So I’ll usually get a phone call, because I’m pretty active in a few of them, and I will get a heads up by one of the investor relations people. They say “Hey, we have an interesting opportunity coming up; I just wanna give you a heads up. If you need some funds to start mobilizing, we want you to be ready for this.”
These private syndications are a little bit more of a bigger step to get into. Like I said, crowdfunding – you get in as low as $1,000. Typically, these private syndicators that I’ve been dealing with – the minimums are usually around $50,000, and I’ve seen some that the minimum investment is in the quarter of a million plus range. So it does take a little bit more dry powder to get into it… And obviously, you have to have other assets that allow you to put your money in here… And the money that you put into these investments — it’s typically a long-term play. Once you’re in it, it’s not very liquid; it’s an illiquid investment, so it’s hard to get it out.
In case you’re relying on this money for short-term things, this is not the avenue you wanna go into. But they’ll basically give you a notice after you see the webinar or the emails that they send you and you feel like you’re comfortable with it; you make a pledge, you fill out a form, and you put your investment amount. Typically, they’ll withdraw your funds from your bank, and then you’re automatically invested in it.
The ones that I’m a part of – they usually have each property in an LLC… So all the other investors are all in this one LLC, and then whatever the positive cashflow that that one property does, they do quarterly distributions.
Theo Hicks: Okay, perfect. For all that are listening, if you want more details [unintelligible [00:15:54].04] make sure you check out Syndication School, where we do an hour a week of just strictly talking about how these syndications work.
So you mentioned that with these private syndicators – there’s a lot of them. And I get this question all the time, which is “How do you know who to invest with? How do you pick?” There’s literally hundreds, probably thousands of private syndicators out there, so… I know you’ve probably got your go-to syndicators, but for someone who’s wanting to enter this field – they’re an accredited investor and they wanna know how to get started, what would you tell them are some important characteristics of a good syndicator, but also talk about some red flags as well.
Xray: Sure. That really is the biggest question, and it is one of the hardest ones to answer fully, because you basically wanna do your own due diligence and feel comfortable with it, because you are writing a substantial amount of money (a check) to some people that you might not have ever even met in person… And it feels like a leap of faith. The first time I did it, it was just like “What am I doing…? Am I ever gonna see this money again?” And it felt like I’m just handing this stranger 50k, 100k of my hard-earned money. “What am I thinking…?” And you definitely get a comfort level with it. I guarantee you, the first syndication that you become involved with, you’re gonna have a little bit of self-doubt.
The things that made me feel a lot more comfortable were to actually do research on that particular company. As I said, I did a lot of research on other blogs, and if I saw another blogger who I trusted mention “Hey, I am an investor in this particular company. This is my experience with them. This is great” and they recommended it, that obviously raised the bar for me in terms of “Yeah, this is a good quality company that I should trust.”
Some of the other things is most of these companies will require a phone interview. They’re interviewing you, but at the same time you need to be interviewing them. You need to have the same philosophy. Some companies specialize in a certain sector of real estate. Some do self-storage, and concentrate on that. Some people do apartments, some people just do retail, some do all of them. So if you feel like you’re comfortable with a certain sector of real estate, obviously the best match for you would be a sponsor that is in that particular field. For me, I thought that my comfort zone was multifamily commercial apartments, and I wanted to go into that sector primarily, just because of my own personal beliefs. I wasn’t as high on retail as some people might be… So I’ve found companies that were concentrated solely on apartments.
Then after that I did more research on the particular company itself – again, reading about it on blogs, doing online searches… They also should provide you – and you should ask for it if they don’t – a list of other investors that are currently in their base, that you could call and talk freely with them. That’s another great source of information. Talk to another individual who’s already been through a few cycles with them; ask them “Are the returns on par with what they projected?” And even if they’re not exactly on there, these are all projections; some people get all spun up, “Oh, it came in 0.1% less than they said they would…” That’s rational, to have a little bit of a wiggle room.
They’re not gonna be exactly spot on in these projections; so when you’re reading the paperwork, don’t get hooked up so much on the details, but you just wanna make sure that they’re not being overly optimistic. They’re not telling you “This is gonna be a home run.” And anytime you see one property that has expected returns that are way, way beyond what normally would be for that property, that’s a red flag for me.
As somebody who’s a syndicator, who wants to get investors, they sometimes can inflate the numbers, and they try to make it look enticing, so you have to be cautious as well. I’ve seen five properties that have a return of this, property number six is double that; why is that? And they’d better have a good reason why, otherwise you might not want to put your hard-earned money into something that’s more speculative.
Theo Hicks: You mentioned the FIRE – Lean FIRE, Fat FIRE… How do someone who wants to achieve financial independence through passive investing, how do they go about setting their goals? Are they saying that “I need to invest this amount of money”, or “I need to invest in this many deals, if I wanna become financially free”? What’s the process I should go through to determine exactly what I need to do?
Xray: The best thing to do is to figure out what your current (what I call) “burn rate” is. If you could find out what your basic living expenses are, if you have a mortgage… And it also depends on if you wanna retire early or retire a certain age, if you plan on having that mortgage at that time, or will it be paid on… But for me, what I did was I figured out “Every year, this is sort of where I was trending in terms of expenses”, and you wanna make it where there’s a basic level, where “This is the absolute minimum I need to make sure I don’t have to sell my house, or get kicked out, or get foreclosed on, that I could actually eat the way I want to eat, that I have utilities the way I want it.” That should be your basic line. And once you figure out that that’s your annual burn rate or your spend rate, you could sort of work your way backwards and try to get a passive income stream to at least match that.
Obviously, it’s a long-term play. Don’t be discouraged that “Man, I’m not gonna be able to do that year one.” This is not something that you can do in one year. It takes several years. And obviously, the higher the income you have, the quicker that path could be. But the first goal is to get to that “Yeah, I am financially independent where I don’t need to rely on any working dollar to come in to maintain what I currently have, the way I wanna live my life.”
Once I did that and I once I achieved that, then I started envisioning what I wanted to do when I am retired. Do I wanna travel the world? Well, that’s gonna add a lot more expenses, so I need to plan accordingly. And how much do I wanna spend? All this is obviously guesstimates. You’re not gonna be completely accurate there, but you could give yourself a little bit of wiggle room and say “Yeah, I like to spend $10,000/year on vacations”, or 20k, or whatever, and then add that into your budget.
One of the studies that a lot of these FIRE blogs use is the Trinity study. Basically, it tells you that whatever your goal spending is per year in retirement, you divide it by 25, and that’s what you need to have each year to draw off of.
Say you have a million dollars in your nest egg. Basically, 4% of that is $40,000/year. So that one million dollars — and don’t include your primary home in this number, unless you plan on selling it and using it as money that would work for you. But whatever your money that is actually going out there and acting as capital and bringing in passive income – whatever that amount is, divide it by 25, and that is a relatively comfortable estimate of how much you can take each year.
If you have a $100,000/year lifestyle, multiply it by 25 – so you need to have a 2.5 million dollar nest egg to support that life. That’s sort of how you wanna do it. You’ve gotta figure out where you wanna be, and then how much you think that costs a year to support that, multiply that by 25 and that’s your nest egg gold.
Theo Hicks: Is that factor saying that you can make a 4% return on that money, or is that saying that after retirement you’re gonna be alive for 25 more years?
Xray: The Trinity study took it out for 30 years, so there’s a little bit of caveat to there… And there’s some people now that are a little bit more conservative; they think that 4% is a little bit too high, given where they think the market is going… But the Trinity study was done, I believe, 10-15 years ago. They basically did it on a mix of bond and stock — I believe it was like a 60 and a 40. So that’s how the 25 rule came, it was off this Trinity study.
I personally am really conservative. When I leave medicine, it’s gonna be really hard for me to ever go back into it, so I wanna make damn sure that when I leave it, I don’t have to ever go back… So I am ultra, ultra-conservative compared to that. My goal was actually to be 3% to 3.5% instead of the 4%. So the smaller the number is, the more of a buffer you have.
A lot of people are saying that the Trinity study is an okay guideline, and depending on how conservative you are, you could vary that number. But most of the time, if you did follow that Trinity study when it first came out, at the end of 30 years, when they worked it out, most people actually had more in their portfolio than they started out with. So it’s sort of like a doomsday scenario, that it kind of survived so many drops and all that, and that’s why they came up with 4%. There’s probably a 90% or 95% chance that you’ll survive okay, but if you don’t wanna have that 5% to 10% chance that you have a bad retirement, you could be more conservative with that number. But at least that’s a good starting point for me.
Theo Hicks: Is there anything else that we haven’t talked about as it relates to achieving financial independence through passive investing that we haven’t talked about, that you wanna talk about before we wrap it up?
Xray: Yeah, sure. I actually wrote a post about this… This is my favorite type of money; I think passive income is by far my favorite type of income. Even though I make a lot more money through my active work, I get much bigger smiles when I see what I’m getting through my passive income, even though it’s like a fraction of my physician job.
So with my passive income dollars – they get taxed a lot differently than my active dollars. As a physician, I’m in the highest tax margin, so essentially every dollar I make, the government automatically takes 37% off of that, so I lose 37 cents for every dollar I make, for my last dollar (that’s at my marginal rate).
Whereas with passive income, the top tax rate comes in at 20%, and then you add in a 3.8% Affordable Care Act on top of that for some higher individuals; the most you’ll be paying on passive income tax is 23.8%. So there is a big tax arbitrage between those two.
My passive dollar that comes in gets taxed far better than my active dollar that comes in, and that’s one of the reasons why passive income is such a beautiful concept. First of all, your money is working for you. It works 24 hours a day, seven days a week, and basically your capital is bringing you more money that you could put back into the pot, and it just compounds itself that way. It’s just a beautiful concept.
I’ve written about this one relationship that I think is always important to let people know… There is a financial relationship – there’s a borrower and a lender in every financial equation. You wanna be on the lender side, because that’s where the money is made. If you’re on the borrower side of debt, you’re basically paying somebody else interest. You’re making money for them. Once you become a capitalist, once you have money working for you, you actually flip the script and you become the lender. And in our society, it pays to be the lender.
Theo Hicks: Yeah, it pays to be the lender. That’s a good bit to end on. Xray, I really appreciate you coming on the show. Just to summarize – lots of amazing advice; I’m looking forward to relistening to this episode. You started out by walking us through how you got to the point where you needed help; that was your forum post, “Help me increase my net worth.” You talked about how you essentially through online research came across passive investing in real estate, we talked about financial independence, we talked about the different tiers, so your Basic/Lean FIRE needs, all the way up to Fat FIRE, which is splurging on whatever you want.
We talked about the different levels of passive investing. You could start with the easiest, which are REITs; the next level would be crowdfunding, and the top level would be you being an accredited investor and investing with private syndicators. You walked us through how that process works from a passive investor’s perspective. Then we talked about how you actually qualify a syndicator, because there’s a lot of them out there, and it really comes down to being comfortable with them, their business plan, the types of properties they’re buying, making sure they don’t have unrealistically high or inflated terms, make sure you’re able to actually talk to some of their investors to make sure that they are doing what they say they’re doing, as well as doing some online research and trying to find some people you respect and see who they are actually recommending. But at the end of the day, it’s gonna feel a little weird at first, because it is a leap of faith… And you mentioned how you had your doubts in the first deal, but once you’ve had success, that will at least be reduced.
We talked about how to go about determining what you’ve gotta do to become financially free; it starts off with that burn rate, and determining how much money you need to bring in in order to cover your basic needs. Then either setting that as your passive income goal, or envisioning what you want to do when you retire, and then adding that to your burn rate. And we also talked about that Trinity study, which is whatever your nest egg is, divide that by 25, and assume that’s how much money you’ll be able to spend per year. Or if you say “I wanna make X amount of dollars per year”, then multiply that by 25 and that’s how big your nest egg has to be.
Then we’ve talked about the differences between taxes on a W-2 income and a passive income; you talked about how people should focus on figuring out how to become the lender, rather than the borrower.
As I mentioned, lots of powerful information in this episode. I’m glad I got to interview you today, Xray. Best Ever listeners, thanks for stopping by, and we will talk to you tomorrow.