Transcription – WCI – 361

INTRODUCTION

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
This is White Coat Investor podcast number 361 – The financial pathway for attorneys.

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All right, welcome back to the podcast. It's good to be with you. I love seeing you guys in person. I recently went out to Kentucky, and it was a little bit rough because we scheduled this talk, I don't know, six or nine months ago, and it ended up being the exact same time as the first round of the NCAA tournament when Kentucky was playing. The game started literally 10 minutes after my talk started there at the Lexington Medical Society, so a little bit tough to compete with there.

We still had a packed house. It was a great session. Unfortunately, Kentucky did not win the game, so I was a little worried the whole place was going to burn down that night before I left town, but it ended up being okay, and I got to meet a lot of really great people.

It was wonderful to meet all of you out there in Kentucky, and most importantly, I just like talking to White Coat Investors in person because it lets me know what you're worrying about, what you're thinking about, what's new in your lives, etc.

There are quite a few medical students there, and to reinforce something I've been noticing over the last few years, and that is this unexpected consequences of relatively generous federal student loan policies. There's a lot of students out there taking out loans that they don't actually need. They're not paying back loans that they could pay back, and it really is affecting the way people are managing their student loans.

It's no surprise, I guess. People respond to incentives. That's the first law of economics, and when you make PSLF available to such a high percentage of doctors out there, they start managing their student loans in a different way just in case they end up going for PSLF. So, I don't know how long that gravy train is going to stay available, but I would certainly take advantage of it while you can.

QUOTE OF THE DAY

All right, our quote of the day today comes from Suze Orman who said, “Money itself is not the end goal. It's the freedom and options that money provides that you're so enriching.” That's the truth. It's important to keep that in mind, that as much as those of us who are hobbyists and personal finance enthusiasts love to talk about this stuff, it really isn't the end goal, and you certainly can't take it with you when you go. That's why it's so important to focus your life on the other stuff that matters, and for many of you, a big part of your life is your practice and what you're doing for other people, and it's not always something you get a lot of thank yous for or appreciation for. So, if no one said that to you today, thank you so much for what you do.

All right, sometimes we get asked about bulk book discounts. We do sell our books in bulk for a discount, 25 plus. That's the number where we give you a bulk discount. If you order 100 plus, we'll give you an even bigger discount, but 25 is the number you got to get to. You can email that order to [email protected].

All four of the books, whatever combination you want, we'll figure it out and let you know what the discounted price is. Obviously, the Amazon price varies by the day. Amazon's constantly changing the price on the book, but the bulk discounts are always lower than anything Amazon ever sells them for. So, if you're going to buy a number of WCI books to pass out to friends or med students that rotate with you or your residency class or whatever, that's definitely the way to go.

All right. I've been talking to a lot of attorneys the last few months who want us to do more for attorneys. They're like, “We got to get this message to attorneys”, which is true. We do. A lot of what attorneys do in their financial lives isn't that different from doctors. 95% of personal finance is probably the same for everyone.

But today, I wanted to get a little bit more into the stuff that's different for attorneys. It's unique for attorneys. Whether that's educating the rest of the audience about what the lives of attorneys are like, which I think is good general knowledge, or talking specifically to attorneys, I thought it'd be a good chance to get somebody on here.

We're bringing on Chris Avery, who is a personal finance enthusiast, been a White Coat Investor for a long time. He's also an attorney. So, let's get him on the podcast. I think it's a great episode, and I hope you find it as valuable of a discussion as I did.

My guest today on the White Coat Investor podcast is Chris Avery. Chris, welcome to the podcast.

Chris Avery:
Good morning. Thanks for having me.

Dr. Jim Dahle:
Chris is not a doctor, unlike many of our guests. Chris is an attorney. And so we're going to be talking about all things attorney finance today. A lot of you had parents who told you that you could do whatever you want when you grow up, as long as it was a doctor or a lawyer. And what we realized is we've been talking about trying to reach out to more lawyers out there, and trying to grow the WCI audience, is we've never actually done an episode of the podcast aimed at attorneys.

So, today we're going to talk about the personal finance of attorneys, and what things are the same as doctors, which is an awful lot of it, as well as a few things that are kind of unique. I think it'll be interesting for those of you who are not attorneys, because you probably never had a chance to really look at it from this angle. And I think there's a lot to learn. But hopefully it will also be very interesting to those of you who are attorneys.

Let's get started. The audience doesn't really know you well, Chris. So let's start by kind of letting them get to know you a bit. Tell us about your upbringing and what it taught you about money.

Chris Avery:
I had a fairly standard upbringing, grew up in the Midwest, two-parent household, working father, stay-at-home mother. And we didn't talk much about money. My brother and I always had everything that we needed, but not necessarily everything that we wanted. So it was pretty typical. But money was not often a topic of conversation. And in some ways, maybe that was a blessing. We didn't know necessarily, we didn't see the parents fighting or discussing money or having money struggles. And it wasn't really until adulthood that I really had to start thinking about finances.

Dr. Jim Dahle:
What did your dad do for a living?

Chris Avery:
He worked for an investment management company. He was thinking about macro finance, finance on a global stage. Of all things, he started as an analyst covering pharmaceutical companies and worked his way up within that company until he was managing funds. It's interesting because even though he was professionally in the business of finance, we never really talked about personal finance. It was never a topic of conversation. Again, we knew that he saved and he invested, and education was a priority. But beyond that, it was never discussed.

Dr. Jim Dahle:
Did that change when you became an adult?

Chris Avery:
It changed more just because I was more proactive. I started him asking more questions like, what are you doing here? Why didn't you ever tell me about these things? What are you doing? What's your plan? Especially as he got older, how was his finances structured? What was he doing to take care of himself in older age? It only came up because I asked him. When I asked him, he was happy to share about it. It's just something that was never discussed.

Dr. Jim Dahle:
All right. Obviously, education was very important to your family. Tell us about your education, training, etc, and your career so far, what you're doing for a living these days.

Chris Avery:
I went to undergraduate business school, got a degree in business management, a minor in finance, thought I was going to be on a track to get a joint degree, JD, MBA, went to law school right after, it's a three-year program, and then went into practice. I have somewhat of an atypical career path. I started in an in-house role, which is not common for most early stage lawyers. I started in an in-house role, rose to a rank where I was focused on privacy data security issues, overseeing that on behalf of a Fortune 50 company.

And then I took a step back. I was recruited away from that job and went into a big law firm practice, recruited by a leader within that firm that was looking to grow that firm's practice in that area and did that for a number of years. Here's another atypical aspect of it is, again, because I'd started to develop some sense of financial awareness, and my wife and I had always been good savers, and good investors, I took a step back.

In 2015, we were expecting our twins. I was working in the big city, working long hours, working nights and weekends, and we didn't want that. I know there's a lot of working parents that would love the opportunity to stay home with their kids, but I made a decision then to say, I'm going to step back from a full-time practice of law. The law firm was supportive of that. I went to a part-time status where initially, staying at home, raising the twins, working maybe 5, 10 hours a week there when they were very young.

Again, I worked at that law firm for a little over eight years in a traditional big law firm practice. Then I decided recently, last couple of years, to step away from that and I've opened up my own boutique law firm. I specialize in a very specific area, working with typically large corporate clients on very discreet privacy and data security issues. That's been my practice to date.

Dr. Jim Dahle:
And is your spouse working or stay-at-home? What does your spouse do?

Chris Avery:
No, she works in a corporate marketing role. We were having that discussion about what should we do. We wanted to be in a position where at least one of the parents could stay at home. For her and where she was in that role and within her sector, she thought it would be a pretty big detriment to step away for a couple of years. I said, you got to practice what you preach. I knew it was important, so I was willing to do that. I didn't think it would be a detriment to my practice, and it really hasn't been.

Dr. Jim Dahle:
You've been interested in finance for a while. Maybe it's hereditary. Maybe you get it from your dad. You were studying finance even as an undergrad. This is not a new thing to you. I didn't develop an interest really until halfway through my residency. I had no interest in college or medical school in business or finance or investing, but this is something that you've been interested in for a while. How and why did you get interested?

Chris Avery:
That's a good question. Looking back, when I was in first grade, so I was about six, the thing I asked for my birthday was a checking account. You're right. There may be some kind of genetic defect that led me down that path, but it was just a casual interest at that point. More likely than not is because I saw my dad sitting at the kitchen table, working on bills, writing out checks when people still used to do that. “I want to do what dad's doing. I'm interested in that.”

Then there was a big break there, even through college. It almost seems like malpractice now, but I went to undergraduate business school. Not only was it not required a class on personal finance, it wasn't even an option. There wasn't a class to take. We were learning about finance in the corporate markets of how to evaluate the price of a security, what's the Black-Scholes option pricing model, things like that, that again, I don't use in my personal life and haven't really even much thought about in the last 20 years.

It wasn't really until I was in practice, I had met my wife and we were planning to get married. I was like, ‘You know what? This is a big shift for me. I'm no longer just thinking about myself. I'm partnering with someone. I've got two people that I'm responsible for, I'm not just planning for my life, but for our lives together.”

Then children only compounded that, where I said, “You know what? This practice of law is a great thing, but I'm limited by how many hours there are in the day. It's how much I can make as a function of how much time I can spend working.” That's not very sustainable necessarily. What are the levers outside of that that I can use to put ourselves in a better position?

That's really where I took the interest, where I said, “You know what? I need a plan.” And that's how I found you. I was like, I need a written financial plan. I found this White Coat Investor on a Boglehead forum. My initial thought was, “I don't know who this guy is the White Coat Investor. It's going to be some niche content that's hyper-specific to the healthcare field. That's not going to be particularly relevant to me.”

Then I set aside my own personal biases. I said, “Okay, let me look at this.” I was like, “Wow, this is amazing. This is what I needed to know to get started on that journey.” It's been a journey ever since, where I guess I would call myself a personal finance enthusiast, where it's a hobby. It's great to learn about it, even things that aren't necessarily particularly relevant to me, of that progression overall, of where are we going? What's our course here?

Dr. Jim Dahle:
Now, you're a planner, it sounds like. I suspect you're better at saving than you are at spending.

Chris Avery:
We are.

Dr. Jim Dahle:
If you're like most personal finance enthusiasts, it's not necessarily difficult for you to carve some money out to invest. You get excited to invest money. You ended up being successful enough that in 2015, you're able to cut back work already, relatively early in your career. I suspect you're going to be, if not already, early to hit financial independence and have lots of options in your life. That pretty much sum up your personal finances?

Chris Avery:
That's a good summation. Yeah, we've always been good savers. We've always lived below our means. We've always paid ourselves first, knowing what is the long-term plan, that it put us in a really great position to be able to even consider that choice back in 2015, 10 years into practice. Most people don't even have that option.

Again, you just had to recognize the blessing. Because my parents valued education, they saved significantly for us. Back in the day, we can still get pretty good scholarships for undergraduate and law school that a big chunk of that was paid for. Unlike many of my peers, I was not saddled with a large amount of educational debt coming out of school. Really, we were already ahead of the game. No thanks to anything that we've done.

Dr. Jim Dahle:
Well, it's always great to get a little bit of help. I appreciate your gratitude for it. A large part of our audience is saving a lot of money for their kids' educations. They're more than willing to do it, but I know they like to hear thank you every now and then.

Chris Avery:
Every time I look at that 529 calculator on Vanguard, it makes me cry a little bit. Each year, the cost of education goes up and up and up. It just doesn't seem to be sustainable. I’m not sure what undergraduate degree could justify paying that much, but we save nonetheless.

Dr. Jim Dahle:
All right. Let's talk about attorneys. Can you just sketch a broad overview of the career paths of attorneys? What does it usually look like as far as education goes, as far as business ownership goes, partnership goes, earnings goes? Give us a broad overview of what the field of law looks like from a personal finance perspective.

Chris Avery:
It's fairly diverse. The typical attorney will have, again, a four-year undergraduate, three-year law school. Typically, during that law school period, they'll do some kind of internship or clerk for a judge or work within a law firm. The vast majority of lawyers coming out of law school, at least those that practice law, will go to a law firm. It's not necessarily the big mega law firms that most people think of when they think attorneys. 50% of new lawyers work in relatively small law firms, less than 10 to 20 practicing attorneys.

That's the typical path. It's bifurcated. Right when you're out of law school, you don't have that residency. You need that experience because you haven't really learned how to practice law yet. You learn that in those first three to five years on the job. It splits between attorneys that go to law firms and then attorneys that go into some kind of other either government practice or working for a non-profit or doing some other entry-level aspect of entering into law.

Most lawyers will proceed on that path. Typically, that progression, if you're within a law firm, within six to eight years, you'll know whether you're on some kind of partner track or non-partner track.

Dr. Jim Dahle:
Six to eight years. That seems like forever.

Chris Avery:
It is forever. And most people don't find out until they're at the tail end of that. Most people, actually, at least within the big law space, don't make it that long. It tends to be very grueling. There seems to be not a very good work-life balance. And most people learn very early on, “This is not for me.” It bifurcates. There are a select few, maybe 20% who continue on that path. Others will opt out. They will look to a smaller firm, different types of practice. We'll do non-typically lawyer fields. We'll go into business. We'll go into lobbying. We'll do some other aspect that takes advantage of their education, but not as the traditional practice of law. Others will go in a corporate path. Those are the two or three big domains within the practice.

Dr. Jim Dahle:
Now your lawyer pay is different from the way doctors get paid. Doctors have a fairly, I don't want to call it guaranteed pathway, but you get in the pipeline, you come out the pipeline, and you know more or less what you're going to be making, at least if you're going to be an employee. You can look at the salary surveys, and you can usually get pretty darn close to the average salary for your field if you complete residency.

It's different when you come out of law school. Lawyer pay is often described as bimodal. The internet tells me the average attorney here in Utah in their first year makes about $90,000. If I look at ZipRecruiter, it says the 25th percentile nationwide is about $79,000. The 75th percentile is about $128,000. Yet, if you end up in big law, the first year big law folks are making $245,000. And in their eighth year, if they make it that long, they're making about $550,000. Can you talk about that bimodal aspect of attorney incomes, as well as what determines whether someone goes into big law or not?

Chris Avery:
Yeah, sure. I’m happy to. You're right. It is bimodal. On the right hand of the graph, there's a large, very thin peak. Those are what you describe as the big law, where in that first year, they're earning $200,000 plus with bonus. On the right hand of that graph is a much chunkier second node of the distribution, which is where most lawyers land. Again, those are the half of lawyers that out of law school go and practice for a small firm, where a more typical range is between $60,000 and $85,000 a year. Certainly, if you're in government practice, that certainly is closer to that range than what you see in big law.

What that means, because of the bimodal distribution, it means no one really earns the average. No one earns the median pay. That falls somewhere there in the middle. And that's what I think surprises a lot of people when they're thinking about law school or even in law school. Being a lawyer is guaranteed to the riches. It's not. Most lawyers, including myself coming out of law school was on the lower end of that distribution, because the selection criteria for big law is fairly narrow. It's less than 10% of all law school graduates that are even considered for those paths.

What's the type of person that typically goes into big law? Typically, it's based on your network. Because who's doing the hiring? It's folks that went to those schools. They often will show a preference towards other law school graduates that went to those same schools, some of the best schools in the country, or those folks that got a key clerkship after law school.

Again, those are the folks that typically are on the high end of their law school class, but also within that top tier of law schools, which is not the majority of law students or lawyers. It's having that good school, having that good network, and quite frankly, being in a position in life early on where maybe you don't have a lot of ties. You're willing to move to New York or Chicago or LA and sit in an office for 60, 70, 80 hours a week billing those hours. There's some self-selection there.

Dr. Jim Dahle:
It sounds like where you go to school matters more for attorneys, at least attorneys interested in big law, than it does in medicine. In medicine, for the most part, people go to a U.S. MD school, and barring really particularly competitive positions in particularly competitive specialties, it doesn't matter. That's not the case for attorneys, is it?

Chris Avery:
It's not the case, but it really only matters for that first job. It's that first job where it makes the biggest difference of where you went to law school. In fact, I think it's really only on that first interview where they even ask you where you went to law school. After that, it's very much your performance on the job, the quality of your practice, and the nature of the type of law that you practice in, and where you're willing to practice. There's a big difference whether you're willing to live in a high cost of living city and practice that kind of law versus living somewhere else.

The other thing that's somewhat different between lawyers and doctors is that lawyers don't have that much say in their area of practice. They may have had a particular interest when they went to law school. They may have even completed a certificate program on a specific area while in law school, or clerked in a particular thing.

Often, what lawyers find out is they get that first job and they say, “You know what? Chris, you look like you like to negotiate oil and gas leases. Congratulations. That's what we want you to do.” That informs much of your practice. I didn't have a particular interest in privacy and data security when I came out of law school. It wasn't really even a topic of study within law school when I went through it. But that first job, that's what the particular need was and that's how I grew my niche.

Dr. Jim Dahle:
One thing I've noticed among the attorneys in my family, and I've got a number of attorneys in my extended family, one went to big law and ended up working in a big law firm for five or six years, I think, and decided he wanted to do something else. But I had another one that went to law school and came out and spent a number of years, but couldn't get a job at all. It was back when law schools were really packing their classes full of anybody that wanted to go to law school. It almost felt like it was a diploma mill. Is that still going on? Do you feel like there's a lot of people coming out of law school that aren't getting jobs right now?

Chris Avery:
It tends to be tied to the overall economic cycle. You're right. I think last fall, the number of graduates was 116,000 people that came out of law school all at once. Most of those, I think it's upwards of 90%, will have jobs within that first year, but the reporting is pretty poor. Law schools are not incentivized to collect data about those folks that don't.

But it is tied. In 2008, a couple of years after I got out of law school, a number of folks were not able to get jobs. The other part of it is that typically, you won't know until after you pass the bar, the state bar, something that you study for after law school, where you're going to land. It can be very lumpy, where a lot of folks will take intermediate jobs, take contract jobs, take other jobs, whatever job that they can get before they find a full-time position. It is pretty common.

Dr. Jim Dahle:
What are your options if you borrow six figures for law school and then can't get a job? What do those people do?

Chris Avery:
Yeah, they do anything they can. They take whatever job is out there. I think, candidly, it's good experience. You don't always get the job that necessarily you want. There's often, after you've been in practice for a couple of years, opportunities to do that. If you don't find the first job, you look for the second, you look for the third. And there's increasing demand for what I'll call contract positions. Law firms, corporate positions that don't necessarily want to take on additional headcount, but they have to staff up because there's a big litigation, or there's M&A that needs a lot of diligence. Fresh lawyers will often take that track until they can land a more permanent role.

Dr. Jim Dahle:
Let's talk about student loans for lawyers. The averages, when I look for statistics, tell me that the average student loan burden coming out of law school is anywhere between $120,000 and $160,000 for three years of school. Obviously, half of attorneys have more than that. What's the most you've heard of as far as student loans go for lawyers?

Chris Avery:
I think the most that I've heard of is in the neighborhood of $300,000. That's just the law school piece of it. Law schools today, the very best law schools today, are charging upper $70,000s per year for three years. And then often, students are saddled with undergraduate debt. They'll have four years of private undergraduate school with another $250,000.

It's not uncommon for law students that come out of the very best schools to have a pretty significant debt level. Maybe not nearly as much as physicians, but they're still pretty significant.

Dr. Jim Dahle:
Presumably, most of that debt at those levels is going to be federal student loans.

Chris Avery:
Today it is.

Dr. Jim Dahle:
But let's talk about what's different managing student loans for an attorney versus a physician. Are there a lot of PSLF eligible jobs? Are employers likely to pay some of your student loans back for you? How long do you think most attorneys are carrying their loans into their careers, etc?

Chris Avery:
They're carrying them for a long time on average. I know just talking to some of my peers that graduated with me, there's probably a third of them that are still paying off their law school debt, now almost 20 years out of practice. A significant number carry it for that long. Many of them got those loans when they weren't federally covered. That's a little bit different now.

There's not as many PSLF positions. There's certainly government service that will qualify, working for non-profit hospitals, they're in-house counsel, often will qualify. But because of the timing requirements and the relatively low salary, most folks, even if they spend a couple of years being a prosecutor or public defender or working for a government agency or for a state, will switch to a higher paying role before they can actually get forgiveness. It's incredibly less common in the legal profession.

Dr. Jim Dahle:
And they don't get the freebie years. What I mean by that is the years in training. A doctor goes to residency for three years and then does three years of fellowship. They're basically making minimal, if any, student loan payments. But all those years count toward PSLF. They might come out of their training and have six years already toward PSLF. And the next year or two, they're making minimal payments as well because they're still based on their fellowship pay. Often, they'll get six or eight years of minimal payments and then only have to make really a couple of years of real payments before getting PSLF. It doesn't sound like that's nearly as good of an option.

Chris Avery:
It's not as good of an option. Even in those early years, they're being paid more similar to a resident. They're on the lower end of that scale where they're maybe making $40,000, $50,000 paying on their law school debt and their undergraduate debt along with doing all the other things that come up.

Dr. Jim Dahle:
That would certainly make the income-driven repayment plans attractive to them. At least their payments would be low, but they wouldn't necessarily be making much progress toward them. Do employers offer much as far as benefits of paying back loans, that sort of a thing? Or is that really the expectations? You just pay it off out of your salary?

Chris Avery:
That's right. That is the expectation. It's fairly uncommon for law firms or corporate employers to pay for that. Unless you're getting a degree in the context of you're going back and getting LLM, a specialized degree in a particular area of law, which happens in the area of tax and a couple other areas, it's pretty uncommon that employers will offer that as a benefit.

Dr. Jim Dahle:
What about scholarships? Were there a lot of scholarships around in law school or a lot of people on scholarship?

Chris Avery:
It's probably between 20%, 30% offer some kind of scholarship. I think it's changed more recently. Again, the size of law school classes have swelled that so many people are going to law school that there's less financial aid and less scholarships that are offered, although you can still find a couple, certainly that I did. Two-thirds, 75% of my law school was paid for through a merit-based scholarship, but that's not common. That's pretty rare.

Dr. Jim Dahle:
You talked about 116,000 lawyers or something like that coming out last year. That's dramatically more than doctors. For doctors, it's more around 30,000-ish, 35,000-ish maybe. That's a lot of attorneys.

Chris Avery:
Too many attorneys.

Dr. Jim Dahle:
I guess there's that many jobs. No wonder a lot of them end up not practicing law, doing something else their degree was useful for, though, because that really does seem like an awful lot coming out.

Chris Avery:
Yeah, it is, and there doesn't seem to be a great sensitivity because there's really no recourse against the law schools for pushing that many lawyers into practice. You're right, many of them are driven to alternative forms of practice, or maybe not even practicing within a law practice because there are so many.

And the demand is, it's relatively flat. We've started to see the number of law school graduates somewhat plateau. It certainly was a big increase through the 1990s and 2000s, and it's starting to slow just for that reason, that there's just not as much demand. And law firms, as they get bigger and as they consolidate, are being more and more conservative with the number of new associates they take on. If you hear enough of your peers or the classes above you that aren't getting those jobs, you start to worry, “Wait, did I make a mistake by going to law school?” It was maybe seen by some at one point as, “Oh, it's guaranteed to have a good job”, but that's no longer the case.

Dr. Jim Dahle:
A lot of those schools are for profit. Do you think they're really, I don't want to say scamming their students, but taking advantage a little bit of their students to make that tuition money, even though they know there's not that many jobs out there for them?

Chris Avery:
They're certainly acting out of their own self-interest. And it's in their own self-interest to act as gateways to the profession. You have to go to an ABA, accredited law school. You don't have to, but it's usually required in order to be qualified to sit for a bar exam. And so, they know their place. And yeah, I think they are less sensitive to the fact that there's a good number of their graduates that maybe aren't going to be in the range of getting a salary, at least in those early years, that makes sense to pay back that debt.

But there's a lot of self-interest in how they report. Like you see these surveys, the number of law school graduates that have a job within a year of graduating, and they're somewhat selective about who they ask. They ask those ones that they work through the career placement office, and they know they have a job, but tend not to keep a very good connection with those that are maybe struggling to find that first job.

Dr. Jim Dahle:
How hard is it to pass the bar?

Chris Avery:
I don't think it's very hard. The biggest challenge is that law school doesn't really teach you anything about the law that you need to know in order to pass the bar. Law school is largely a history class about if there was some magical state law that represented all the 50 states, what would that be? And that's not the way that the bar exams are administered. They're administered on a state-by-state basis. There's a multi-state component to it.

But typically, most law students will spend three years in law school, and then will pay a bar prep class more money to study between graduating in June and taking that test in July. Really, it's a test of endurance. It's typically two or three days, depending on the state. When I did it, it was all in person. You're all were locked into a hotel ballroom, just sitting with paper and pen, writing out essay questions or taking multiple choice questions.

It's not difficult, but there's a good number of folks that if you don't pass on that very first time, your chances of passing decrease for the second and third time. And typically, most people will not reattempt the bar after the second or third failed attempt. So, I don't think it's particularly onerous, but there are a number of folks that, again, if they're not good test takers or have some other challenge with the exam, the time constraints with it do have some difficulties.

Dr. Jim Dahle:
Okay. So let's say you want to change states. You want to go practice in a new state. Do you have to take the new state bar or just the state-specific component? What's the deal with that?

Chris Avery:
It depends. There's a series of reciprocity that certain states will recognize other state bars, especially if you've taken it within a certain amount of time. And they'll waive into the state bar in that new jurisdiction, but there are limiting factors. A lot of people will recognize California. California will recognize a lot of other states. The two pinnacle bars are California and New York. Those tend to be the most difficult, the highest failure rates, the most demanding. Those are both three-day tests unlike other states. And so, you have that option.

There are other ways of practicing. If you're in-house, often there will be a separate designation that you can get, that if you're licensed in another state and you meet other qualifications, you can have a limited admission to practice, so long as you're in-house with a client. But there's quite a bit. There's a separate ethics component to the bar exam.

And so, if you haven't taken that within five days, I was living in Missouri, moved to Connecticut, I had to retake that exam because I passed the first time, but it wasn't recent enough that I had to retake it. So, it kind of depends. Most people that will not want to sit through that bar exam more than once will look and structure their practice to find areas where they can actually waive in.

Dr. Jim Dahle:
One of the interesting things about medicine is that unlike most jobs, unlike most career fields, you don't actually get paid more to go to the big cities on the coast with high costs of living. A lot of times doctors get paid less in San Francisco or New York and can make more if they're willing to live in Indianapolis or even better, some medium sized town in Texas or Iowa or something like that might be where the pay is actually the highest. What's it like for attorneys? It sounds like the big law firms are in LA and New York and those sorts of places, but what is it in general for attorneys?

Chris Avery:
Yeah, there's certainly a premium paid for moving to one of the big cities, New York, DC, LA, Chicago. That's where often the largest law firms will have their offices and certainly what you described as the big law firms, they're all based there. Again, those big law firms are relatively few in size. There's maybe, I don't know, generously 75, 90 law firms in the country that are at that scale and are paying at that associate scale that you referenced earlier around $200,000, $225,000 first year associates, but that's by far the minority.

But there is a premium. If you want to work in big law, you're probably moving to a bigger city. Some of that has relaxed a little bit with COVID. Law firms have learned they were late adopters to remote working and the pandemic forced them to embrace technology because we're all walking around with our computers in our pockets and laptops that we can work really from anywhere for most of the professions.

That's certainly an exception for some, but yeah, you're paid by far a premium to live in a big city. And in small communities rules, there's not that same incentives to work. Most of what we do doesn't require physical proximity to the client. You go where those offices are located.

Dr. Jim Dahle:
Now, obviously, there's a pathway here for a very small percentage of attorneys to go into big law, bust their butt for six or eight years, make partner, and then make even more big bucks. Maybe they're making seven figures a year as a partner in a big law firm. Let's talk about how an attorney can do well financially not in big law. Can you describe the options there?

Chris Avery:
There's a lot of opportunity there. I described that some 50% of new graduates go into the smaller law firms. You can make a very good living even within a small law firm. The key tends to be having some kind of equity, having some ownership in the practice where you're not only benefiting from the amount of work that you're doing, but the junior associates that are under you or paralegals or paraprofessionals that are also doing billable work to your clients. That's a great option.

The other really good option to make a very good living is an in-house corporate practice, working for a hospital system or working for another company. Again, it doesn't tend to be until you get to those very senior levels. It doesn't tend to net you seven-figure salaries, but you can make a very good, attractive living in a senior in-house role. That's often where those folks that want to opt out of a law firm partnership track will go to find a better pace of life even though the pay maybe is not as generous.

Dr. Jim Dahle:
Is it practical these days to go out and hang your own shingle and start building a practice and end up with other associate attorneys underneath you and paralegals working under you? Is that practical or really isn't these days?

Chris Avery:
It's still practical, but for a select few. This is what I did. This is what other lawyers do is often you'll get that experience. I have to be in-house, but then also at a large law firm. And then you'll split out of that large law firm to get a little bit more independence, better economics, lower overhead, and start a boutique practice. That is pretty common. I don't want to work in one of these mega law firms that's got 1,000 lawyers and a lot of internal politics, a lot of overhead, a lot of other realities of practice that make it more complicated. Those kinds of lawyers can do it.

It's less common for a brand new lawyer to go and start their own practice. You just really don't have the same degree of training experience that you have to do. You don't have to. There are some that do it, but you really need three, five, six years of experience working with another experienced attorney before you're ready to go out on your own.

Then once you do, it is practical. It's pretty common that an attorney that goes out and hangs their own shingle will either do so in conjunction with another peer that is also a partner in the firm, or will bring a certain number of associates or paraprofessionals with them to maintain their practice.

Dr. Jim Dahle:
I find it really interesting to look at the various areas of law, the various areas of practice, specialties, if you will, is what I compare them to within medicine. I wonder, what are the high-paying ones and what are the low-paying ones? What's the orthopedics of law? What's the pediatrics of law?

I look at real estate and divorce and injury and bankruptcy and criminal law and immigration and intellectual property or state planning or whatever, and I wonder, “Well, which one of these are the good ones, which one of the bad ones?” I always think about bankruptcy, and I'm like, “Well, that can't be very good. There's a bunch of people without any money you're trying to get paid by.” What's the difference in remuneration from these various areas of law?

Chris Avery:
Yeah, it's interesting. Actually, bankruptcy can be pretty lucrative because the lawyers make sure that they get paid in any kind of bankruptcy resolution. It tends to be two ends of the scale. The most consistent highest-paying types of specialties tend to be corporate specialties, intellectual property, tax, corporate securities, high-stakes litigation, antitrust or consumer class action is on one end of the scale.

The other is, believe it or not, plaintiff's class action lawyers. The only people that make money off of class actions are the lawyers, either on the plaintiff's side or on the defense side. They tend to do very well, although it's much more inconsistent. You may work and have to finance these cases because they're on contingency. They may have to finance these cases, and it may take years and years and years for them to come to fruition and then get one really big payday, but it's much more speculative.

If you're looking for just the consistently well-paid, it's in that corporate domain of it, whether it's white-collar defense, corporate securities, tax, intellectual property. Those tend to be at the higher end of the range. The ones that you mentioned, real estate, divorce, personal injury, bankruptcy, not necessarily. Again, bankruptcy is very hit or miss because it's so tied to the economic cycle of when things are going really bad, the bankruptcy lawyers feast. When they're not, they find different areas where they can expand their practice so that they can stay busy all the time.

Dr. Jim Dahle:
What about estate planning? Does that typically pay well or not really?

Chris Avery:
It's somewhat in the middle. It's certainly one of the more high-risk areas of practice. There is some recognition of that in the pay, but it's certainly not on the higher end of the pay scale.

Dr. Jim Dahle:
The average person knows about criminal lawyers from movies, from TV shows. They don't know that most lawyers are in a cubicle working on tax issues. What about criminal law? These high-profile defense and prosecutors. Is that pretty well-paying or not really?

Chris Avery:
Certainly, on the prosecutor side, it's not. Those are government jobs. They make a fairly decent living, but it's typically at a government scale, whether you're at the state or the federal side. Where those folks make up for it, if you will, they spend those first 5, 10 years of practice refining their craft and then going to private practice where they can make more.

Even criminal defense, you have the same collection issue. Criminal defendants, especially once they've been convicted, don't necessarily have the financial means to pay for you. In that area of practice, you see very large retainers so that the lawyers can get paid upfront. There are some exceptions, these celebrity criminal defense attorneys that build a brand and can do very well for themselves, but certainly not typical.

Dr. Jim Dahle:
It sounds like they're pretty rare. They're the celebrities, as you mentioned. What about malpractice? Cheap? Expensive? What's it cost?

Chris Avery:
It's not too expensive for most lawyers. Most law firms spread that risk out. I think I pay in the neighborhood of $2,800 a year for fairly decent coverage, a million-dollar claim, $3 million in aggregate. Typically, what we see is you can get a pretty good insurance coverage at a pretty good rate for those first two years. Then they start to step up the rate in each year, especially as you're looking to any kind of lawyer malpractice typically is well in the past.

There's a large focus on looking and making sure you've got good coverage for any historical periods. They know that you need to have that continuity of coverage, and they know that if there's some disincentives from switching insurance companies in order to maintain that coverage, and they're able to escalate that rate up. But my impression, it's nowhere near what doctors face.

Dr. Jim Dahle:
Does it get used very often?

Chris Avery:
It's a mixed bag. Historically, it had not. For better or worse, lawyers and law firms have been hesitant to sue other lawyers. Where most lawyers face exposure was through their state grievance process. Lawyers that mishandled client funds or were not communicating or dealing with substance abuse issues and being negligent.

That started to change a little bit. Corporate clients don't care about suing their own lawyers. If there's mistakes in the big deal, or I mentioned the state attorneys, there's a lot of exposure there because you're making some very good educated bets about what will be defensible in the eyes of the tax court. That will change over time, and that there are very few guarantees, and it's generally high stakes.

When things go wrong there, clients are more inclined to sue their lawyers. I read a statistic recently that said something like 66% of malpractice cases are against solo and small firm clients. So, maybe not as much exposure on the big law side, but it's out there. When it's out there, it's typically pretty sizable. You don't have necessarily the same financial limits that you see in the area of medical malpractice. There are large companies going after large law firms for $30, $50, $100 million.

Dr. Jim Dahle:
Doctors worry about getting sued. A big point of my asset protection book was it's really unlikely to lose any personal assets in a lawsuit, but they lay awake at night worrying about it. They think about it as they practice during the day. Do attorneys worry about that?

Chris Avery:
I don't think they worry about it as much as doctors. I think that lawyers feel much more comfortable within the entities that they practice law and the protection that that can provide them and don't spend as much time worrying about asset protection. Maybe it goes the other way. Maybe they should be more concerned about it, but historically, they're not. They're not as concerned about it that typically if there is a claim, it's a relatively small dollar amount, less than $200,000.

Dr. Jim Dahle:
A lot of young doctors use a doctor mortgage to buy their first home. It allows them to put down less than 20% without having to pay private mortgage insurance. And a number of our doctor mortgage lenders that we have featured at the White Coat Investor also do these sorts of mortgages for attorneys.

Do you get a sense that attorneys use these, that this is a big piece of their financial life and financial plan, or do you think they all just save up a down payment and get a conventional or pay PMI? Do you get a sense for whether those get used very often?

Chris Avery:
Yeah, they don't get used. There's just not as much history for the use of them. The relatively recent advent where you see these lawyer-friendly loans. It's not as common. I think it's probably more and more common now, especially for recent law school graduates that have just an overwhelming amount of debt to use those kind of things. Because if you're going to buy property in one of these big, high cost of living cities, it's incredibly expensive. Traditionally, it's not. Most lawyers are getting traditional financing or either saving up some amount, usually not as much as they probably should, but saving up some amount to qualify for a traditional mortgage. But I think that's probably changing some.

Dr. Jim Dahle:
Doctors interact with lawyers for the most part in two ways. One is malpractice, obviously. The other one is estate planning. I'm curious if a typical attorney, not an attorney that's an estate planning specialist, but just a typical attorney, should they be doing their own estate planning or is this something they really need to go hire a specialist for?

Chris Avery:
They need to hire a specialist. It's somewhat cliché, but what's the standard line? A lawyer that represents himself has a fool for a client. It's like any other specialization. You shouldn't practice outside of your area of focus. It's too complicated. The rules are always changing. This is not something that you can do by form or template where you can download and do it yourself. You didn't learn this area of practice in law school, notwithstanding how many trusted estates courses that you took.

You really do need to hire a professional. Just like doctors. You wouldn't necessarily treat yourself because you're not always necessarily aware of your own shortcomings and limitations. You're more prone to make mistakes. It's the kind of thing that I've never done my own estate planning. Wouldn't even think about it. I go hire that out because I'll spend less time and less money hiring a professional than trying to do it myself, and I'm more inclined to make a mistake.

I'm more inclined to make a mistake if they're venturing into areas that they don't routinely practice at. Even for estate planning. Estate planning is one of those things that often is a companion practice for a solo or small law firm. I do corporate transactions. I do estate planning. I do everything under the sun. It's one of those areas that, especially at the higher end of estate planning, if you're using it to try to get some tax advantage, you really need to go to a professional that does that full time, all the time, that has the experience in that area because it's not something that you can just pick up on the side.

Dr. Jim Dahle:
I want to give you a chance to talk to the attorneys listening out there. What can you tell them about personal finance and investing? If you could sit them down for two minutes or five minutes and actually grind something into their head about personal finance and investing, what would you tell them?

Chris Avery:
I think it's many of the things that you talk about in this program. That's part of why I love the work that you and your team do. There's a disservice that was done. We should have been learning about these topics. Many lawyers run businesses or have P&L responsibilities. We didn't learn about it in undergrad. They don't teach it in law school.

You have to take the time, understand this discipline. It's all the maxims that you think about. You have to pay yourself first. You have to live below your means or it helps to live below your means. You have to pay your high interest debt as soon as possible, avoid revolving debt. Low cost index funds are amazing.

And to give yourself some grace, you're going to get it wrong. I think for a lot of type A attorneys and maybe type A doctors, “I need perfection. I want it to be right.” That's just not the nature of this. You're going to make mistakes along the way. Give yourself some grace to learn from others. Probably the most important thing is have a plan. No lawyer would go into a complex litigation matter without a plan. No lawyer would go into any kind of engagement without a plan.

So many lawyers go into their financial affairs with no plan. It makes so little sense that people don't spend a little bit of time to work on where they're headed so that they can know. If you have a sense of where you want to go, you have a much better chance of being able to get there along the way.

Dr. Jim Dahle:
Now, if you could design a three or four or five podcast series, three or four or five episodes for attorneys, what subjects would you cover in those?

Chris Avery:
It's a good question. Many of the things that are relevant to doctors and healthcare professionals are just as relevant to us. I'm a routine listener to the program, and there's maybe 5% of the things that don't necessarily have a tracking.

Much of what your material already covers is relevant. But if I was going to pick three to five different things, I would look at how to deal with your educational debt. Even your service studentloanadvice.com would be a wonderful service to many of the new lawyers out there that are looking to manage their educational debt in context with their other financial priorities.

A particular area that would be of interest would be, which is somewhat mysterious, about the path of partnership and how you buy in and that law firm economics behind how you become an equity partner in a law firm and what that means. That can be of interest, particularly to a lawyer. Beyond that, I think most of the other things that you cover are right on target and are as equally relevant to legal professionals as they are to healthcare professionals.

Dr. Jim Dahle:
Awesome. Well, Chris, our time is getting short. I think this has been super educational. I've learned some things, and I think most WCIs have learned some things, whether they're in law or not. And hopefully, it was also helpful to some lawyers out there to hear from somebody who's been financially successful as a lawyer and can help guide them along their way. Thank you so much for being willing to come on the White Coat Investor podcast.

Chris Avery:
Thank you.

Dr. Jim Dahle:
All right. That was fun. It's always good to get some more voices on here and hear a little bit more about other professions and broaden the WCI audience a little bit. As always, we'd like to hear comments from you. Shoot us comments, [email protected]. Let us know what you like, what you don't like about the podcast. If we have somebody on as friends of WCI episode or an interview and you'd like to hear more from that person or you thought they did a bang-up job, let us know.

Obviously, I'm not going to be doing this podcast until I'm 95, and so we want to make sure that it outlives me. Let us know what you like, what you don't like, and we'll try to incorporate that and get some bus insurance for this podcast, which, of course, is if I get run over by a bus, what are we going to do for the next episode. Let us know what you like. If you enjoyed this episode of hearing about attorneys, if you enjoyed hearing from Chris, let us know that as well as everybody else that we have on the podcast.

SPONSOR

All right. Our sponsor for this episode was Cerebral Tax Advisors, and now tax season is nearly over. That's usually when most doctors with 1099 income worry about having overpaid the IRS due to complex tax laws.

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All right. Don't forget that if you're interested in bulk book orders, email [email protected]. We give you discounts for 25 plus and an even bigger discount for 100 plus copies of any of our books.

Thanks for those of you leaving us five-star reviews or telling your friends about the podcast. We still grow in large part through word of mouth, you just telling your colleagues, your trainees, your attendings about the podcast.

This most recent review comes in from Blimm_C, who said, “Empowering physicians. The White Coat Investor podcast, hosted by Dr. Dahle, stands out as a beacon of financial education for physicians, offering invaluable insights that has been as influential to my life as my actual medical education.

With effortlessly delivered content and a lineup of knowledgeable guest speakers, the podcasts are not only informative but remarkably easy to listen to and enjoyable on my commute.

Since turning in as a fellow in 2019, I’ve witnessed a remarkable growth in our net worth, surpassing $2 million in less than 5 years, a feat I attribute to the wisdom gleaned from WCI.

Despite having delved into Dr. Dahle’s books, blog posts, and earlier podcasts, the newly released material continues to provide fresh prospectives and actionable advice, making it an indispensable resource for physicians navigating the world of personal finance.” Five stars.

Man, I couldn't have written a review that good. That was awesome. Thanks so much for and for how it will help others to find the podcast.

For the rest of you, keep your head up, shoulders back. You've got this. We're here to help. There's an entire WCI community out there to help you, whether it's in the Financially Empowered Women's group, whether it's on the subreddit, which now has something like 69,000 people on it, whether it's on the WCI forum hosted right on our website, whether it's in the WCI Facebook group, which is nearly to 100,000 members, there's a whole bunch of people out there that want you to be successful, and we'll walk alongside you on the pathway to financial, career, family, and personal success. We'll see you on the next podcast.

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.

Transcription – MtoM – 164

INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 164 – Orthopedist starts a real estate empire as a resident.

At some point in our financial lives, it will be time to buy a home. A physician mortgage can be a good vehicle for a young doctor who is just out of school and has a more effective place to use their money than on a big down payment. These loans allow doctors to secure a mortgage with fewer restrictions and a lower down payment than a conventional mortgage. But if you’re further advanced in your career or deeper into your journey to financial freedom, buying a home with a conventional mortgage and then, later on, potentially refinancing that loan to a better rate with a shorter time frame could be a great move.

Wherever you are in your financial journey, make sure you use the mortgage that will be most financially beneficial for you. Hop over to our recommended tab to learn more about all of your mortgage and refinancing options at whitecoatinvestor.com/mortgage. You can do this and The White Coat Investor can help.

Welcome to the Milestones to Millionaire podcast. This is a sub podcast of the White Coat Investor, where we bring you on and talk to you about what you're doing in your financial lives. We want to celebrate milestones with you, not only to congratulate you, but inspire other White Coat Investors to do the same. If you're interested in coming on the podcast, you can apply at whitecoatinvestor.com/milestones. We'd love to have you and we know that you're doing great things out there that can be used to inspire others.

One more thing I want you all to know about is that we have a financial educator award, and this is the application season. Well, really not applications, I should say nomination season. Between now and April 26th please nominate anybody you know who is passionate about improving financial literacy among their colleagues, trainees, and students. We give out an award each year. It's a cash award. It's $1,000 prize plus recognition, which I think is probably more valuable to most of these people because I think most of them are pretty financially successful, to be honest with you.

We're also giving the nominator, the person who nominates the best submission, a free WCI online course of their choice. We're incentivizing them to educate their peers. We're incentivizing you to nominate them. If you would like to do so, visit whitecoatinvestor.com/educator by April 26th.

We just believe that financial education piece should be accessible to everybody. We can't do it in person for everyone, so we try to encourage others to give presentations on various financial topics. In fact, I've put slides together for you that can help you to give these sorts of presentations to your peers. You can find those at whitecoatinvestor.com/educator. There's a set for students, for residents, for attendings. Feel free to modify as needed, but it'll get you started as you prepare your own presentations.

INTERVIEW

All right, we've got a great guest today who's really doing very well financially. We get this criticism sometimes on the podcast, and so we try to mix in people with lower milestones or that took longer to achieve them. That is not the case with this guest. This guest is killing it, and I think it's a wonderful example of what can be done when you really nail this financial stuff in your life and you combine it with a high income. So, let's get them on the line and you'll see what I mean. Stick around afterward, we're going to talk for a few minutes about real estate professional status.

My guest today on the Milestones podcast is Frankie. Frankie, welcome to the podcast.

Frankie:
Thank you. Thanks for having me.

Dr. Jim Dahle:
My usual first question is, what do you do for a living and how far are you out of training?

Frankie:
I'm a general orthopedic surgeon in the southeastern US. I've been out for about two and a half years. I've been in practice for two and a half years thus far.

Dr. Jim Dahle:
Very cool. And tell us what milestone we're celebrating with you today.

Frankie:
For today, we're celebrating my transition into practice and the building of a real estate portfolio over the last four years.

Dr. Jim Dahle:
Okay. And this is a multimillion dollar real estate portfolio, which is what's impressive about it.

Frankie:
It has developed into that. Yes sir. We've been able to grow it pretty rapidly, which has been exciting.

Dr. Jim Dahle:
Okay. How many doors under management now?

Frankie:
Yeah, now asset under management door number is above 100, but we have a 91 unit self-storage facility, so that skews that a little bit.

Dr. Jim Dahle:
Very cool. What made you interested in self-storage?

Frankie:
When we got started, we dabbled with small multifamily and then single family houses. I felt like we very quickly realized that our intellectual bandwidth and the amount of time we had to contribute to managing those assets really wasn't a whole lot different between the two. I felt like if we could grow with an economy of scale, have more units under one roof, more units per power bill, per insurance bill, we'd be able to spread those expenses out. And the storage facility was our first sort of endeavor into that.

We found that deal off market and we're able to get it for a very good price. I felt comfortable stepping into the space with minimal experience and we've been very happy with it over the last few years.

Dr. Jim Dahle:
Very cool. Now you got started actually during residency with your real estate investing.

Frankie:
We did.

Dr. Jim Dahle:
How did you manage to do that both time and finance wise? Both are limited.

Frankie:
Yeah, it was tough. It was tough. I talk a lot about the resources available to learn. White Coat Investor is one. I also utilized BiggerPockets podcasts and the forum to become as educated as possible. I would listen with a single air pot in as I walked around the wards rounding and taking call and I would dictate notes that I could then reference later.

When I was a second year resident began my interest. I spent the next eight months or so becoming as educated as I could and then just jumped on the phone. Goal number one was to find financing and I wanted to leverage my future earning potential with a lender so that they felt confident lending me money no or low money down financing. And we were able to achieve that in residency.

Dr. Jim Dahle:
Were you able to get properties that cash flowed despite not putting down much of a down payment?

Frankie:
We did initially. Now I think that is probably much more difficult now just because how inflated the prices have become, but we were able to do that. We stepped into our first duplex, which was an off market deal in that it was a pocket listing from a broker that I'd networked with. So, we had eliminated some of the competition. I believe we purchased that deal for around $205,000 and it cash flowed immediately. It was renting for about $2,100 a month. That was our first introduction into real estate investing.

Dr. Jim Dahle:
I'll bet a lot of the audience doesn't know what you mean by a pocket listing. Can you explain what that is?

Frankie:
I can. Basically brokers receive listings from sellers and they have the opportunity to list them among the multiple listing service, which basically distributes that listing to all other brokers allowing it to be on market for everybody to evaluate and then make offers on. But occasionally a broker will send that listing out to several investors that they have on their list before they distribute it to the mass market. And that's what happened to us on our first deal. He sent that to me before it was posted on the multiple listing service and we were able to make an offer before there was outside competition and that offer was accepted. I think that allowed us to buy it a little bit under market at the time.

Dr. Jim Dahle:
Two questions on that. The first one is how do you get on the list? To be on this little short list that gets those deals? The second one, is there an ethical concern there for the broker to not market it to the world on the MLS? Grated, they are salespeople, they don't necessarily have a fiduciary duty, but maybe they do to their clients. Is there an ethical concern there? Maybe not for you, but for them?

Frankie:
Yeah, I think they're definitely contractually obligated to try to get the best price that is palatable for the seller that has obviously created a contractual arrangement with them. I don't think distributing the offer to investors that they know have a higher likelihood of closing. Now whether or not I necessarily met that criteria in the beginning of my career, may or may not have been true. But then they have the opportunity to present said offer to the seller, and if it meets their satisfactory criteria, then I think it's an easy way for them to get a deal done. I do understand where you're coming from that.

Dr. Jim Dahle:
Clearly in the beginning you were using pretty significant leverage. How much leverage are you using now across your real estate portfolio? What would your loan to value be of the portfolio now?

Frankie:
We're at about a 40% equity position across our portfolio now. I think in the beginning that was the calculated risk component of me getting involved. We did that at a point where I felt like we did have a little bit of a bridge scenario for my income as a resident with my wife working full-time as well, where my funds coming in every month would escalate and allow me to cover if I had complete vacancy.

Because of its successful rental history for the previous three years, I felt like the likelihood of me being hit with a large expense was fairly low. My lender had also come to the table and said they would be willing to help me with a bridge line of credit if we had a large capital expenditure expense in the next two and a half years, which is how much I had left on my residency timeline. It was a little bit of a non-traditional financing arrangement, but it allowed me to get in the game earlier than I would've been otherwise.

Dr. Jim Dahle:
And now you're two and a half years out of training. Approximately, what are we talking about for a net worth at this point?

Frankie:
Our real estate holdings assets under management is around $4 million to $4.5 million now, and we have about a 40% equity position. We have some equity in my home as well. So I would say and have a pretty significant contribution to my SEP IRA in the last two years. I'd say we're probably $2 million to $2.5 million at this point.

Dr. Jim Dahle:
This is a comet, this is a rocket ship for physician wealth building. I was seven years out before I was a millionaire. You're barely out of residency really and you are a millionaire. What's your goal? Where are we going with this? Are you going to have a billion dollar real estate empire at some point or are you going to stop buying at some point? Have you even given a thought to what your goals are here?

Frankie:
I wax and wane my initial goal. The reason I got involved in the beginning is probably similar for a lot of physicians in training and early in practice is I had a lot of anxiety about the debt associated with medical training and the loss of time, value of money, retirement contribution. I was going to be 32 when I got out of residency, not a dime saved and I hadn't saved for my son or daughter's college fund or her wedding or anything. I had a lot of anxiety, which was the drive to get involved in the beginning. That initial goal was for me to just feel like I had escaped the hole and I was able to pad my retirement portfolio. That then grew to trying to buy 10 doors and then that grew from there. I don't really know that's a moving target.

I think I would like to get to the point where I can practice orthopedics a little bit more how I want to. And what I mean by that is limit my call burden, limit the time contribution that I have every week and month and day that pulls away from my family. Although I very much enjoy orthopedics and will probably continue to practice. I guess we'll just have to see.

Dr. Jim Dahle:
Yeah. How many years away do you think you are from being able to feel comfortable cutting back?

Frankie:
I think at this growth rate, I don't necessarily know that we'll be able to successfully grow at this rate moving forward. I think I could probably do that within the next five to seven years.

Dr. Jim Dahle:
And what are you using for property management? How much of this are you and your spouse managing yourselves versus have hired out?

Frankie:
In the beginning I did not want to get involved in real estate at all unless I could scale to a number that I wouldn't be able to manage myself. I wanted to implement that system from the front end. We betted and hired a property manager, and actually purchased all of our initial properties around four hours away from us. We weren't even in the exact vicinity. And we have since utilized them to grow our portfolio significantly. And our negotiated rate with that property manager is much better than it was in the beginning.

For our self-storage facility, we have a hybrid virtual management model. We have a little more active involvement, but we use a company for all of our cloud-based rentals, payment processing, lock management. We have a radio controlled lock system and gate code management and then they also offer a call answering service. It's offloaded a lot of the day-to-day responsibility but we do still have a little bit of active management.

My wife declares real estate professional status, so she does have some active involvement, particularly in a short term rental that we have. We were able to purchase a lake house that was our 15 year goal into practice and the real estate investment has allowed us to do that quite a bit sooner and we hedge our bets and share expenses by short term renting it. And that's been a really nice way for her to stay involved and also give us a place that we can go 50 minutes from our house and enjoy.

Dr. Jim Dahle:
Very cool. What do you invest in, if anything, besides real estate?

Frankie:
I definitely believe that the traditional pre-tax retirement opportunities are a very powerful tool and I think it should receive a large amount of your priority before deciding to get into real estate because it does have quite a bit higher risk profile. I have a SEP IRA set up for my S corp. I'm paid in a 1099 manner from my employer and my accountant. I have a fiduciary representative from Schwab, not to necessarily drop a particular investing platform. We use Schwab and they provide a fiduciary with that service. Between the two of them, they recommended I use a SEP IRA and I contribute a certain amount every month to that fund and invest in S&P 500 index at this point. So, index investing I think is very important to invest for the long game and I still think we contribute a good bit to that.

We tried to really delay our lifestyle escalation as much as possible from residency. Obviously when those checks get a little bigger, it feels good and you want to improve your lifestyle a little bit. But we've tried to pull the reins back on that to allow us to really recover from the hole we created in our 20s and early 30s.

Dr. Jim Dahle:
What does your spouse think about the rate at which you're accumulating wealth?

Frankie:
I think she meets it with sort of cautious happiness. I think we punch counter each other really well. I'm less risk averse as you could probably imagine than she is and that really helps me a lot. In the beginning she was a little bit skeptical, so I would have to pitch the deal to her in a way that I was trying to convince potential partner to come on board. And it was even more difficult probably to convince her than it was to convince sellers that the price was right or lenders that they should lend to me.

And as that's developed, her knowledge has really grown a lot. And so, now I feel like if I present a deal to her and it meets her checkboxes, that is probably a pretty solid deal that's worth pursuing, which has been a nice relationship that we've been able to develop over the last couple of years.

Dr. Jim Dahle:
What advice do you have for somebody that's in residency or maybe they're in their first few years out and they just got really excited listening to this podcast? They hear about you got 100 doors under management just a few years out of residency and they're like, “If he can do it, I can do it.” What advice do you have for that person?

Frankie:
I definitely agree that if I can do it, you can do it. There's nothing special about what I've done. The only thing that I would try to not let this do is to make it appear daunting and make it appear like you have to go from zero to hundred doors in order to get into the game.

In the beginning do the best you can to acquire as much knowledge as you can. You have to have a minimum knowledge base so that you can talk the talk with your team members. Things like an accountant, a real estate attorney, a property manager, a lender, and then brokers and buyers and sellers. You have to be able to talk the talk to have a minimum credentialing to be able to participate in the deal flow.

Once you feel like you've accrued that knowledge, then I would start to try to build your team. The same people that I just mentioned are very important. Number one is probably attempt to secure a financing relationship. Once you secure the financing relationship, try to put the things in order so that you can then manage the deals. And to me that was a property manager, that was a team member that I felt like I had to check the box very early. But also an accountant and an attorney, a real estate specific attorney because you want to manage your liability, you want to manage your entity structure as a physician because we obviously have a lot on the line. We have a lot of income potential. And you're able to provide for your family with being a physician and your earned income. So, there's a lot at stake if you potentially lost that.

I think once you've checked those boxes, then you have to start focusing on generating deal flow and find out if you're going to find deals on market. And that's fine. It's a little bit harder to find a deal that will cash flow or make sense from a financial perspective. But once you've done that, then you can start vetting properties and that'll allow you to generate the experience and the confidence you need to buy your first deal.

The analysis paralysis is in my opinion one of the most difficult hurdles to overcome. If you can figure out ways to narrow down the objective data about a property and minimize the amount of emotional involvement in that decision, then you'll be able to get involved in the game a little bit earlier.

Dr. Jim Dahle:
Very cool. Well, Frankie, congratulations to you. You've had a lot of success right out the door of your financial career, of your real estate career, of your orthopedic career. Congratulations to you and thank you so much for coming on the podcast to share that story with others and inspire them to do the same.

Frankie:
Thanks man. I appreciate the time.

Dr. Jim Dahle:
All right, how about that? As I mentioned at the beginning, he's killing it. Frank and his wife, they are absolutely smashing this financial game. Not only were they millionaires within a year or two coming out of residency, they've got 100 doors under management. They're actually now multi-millionaires two and a half years out of residency. The sky is the limit really.

At some point they're going to have to decide what they want out of life. He thinks it's five to seven years before he can cut back on his orthopedic practice. I'm skeptical. I think he's probably there already, if not within the next year or two at the rate they're going. They're going to turn around and look, “Wow, we're getting more from our real estate empire than we are from practicing orthopedics.” But that all depends on how much leverage you're using and how much cash flow you're getting. There's lots of variables there but you really just have to decide what you want out of your life.

The wonderful thing about being really financially successful though is that a certain point you realize you have enough and you go, “Well, I still love what I'm doing. I'm providing housing for all these people, or I'm providing storage facilities for all these people, or I'm fixing broken hips” or whatever you're doing in your practice and you realize “I still want to do that and it still pays me money, but I already have enough money for me.”

Then after a while, you have enough money for you and for your heirs and then you start going, “What else can I do in this world that's good with money?” And you start looking for your favorite charities, you start looking for scholarships you can endow. You start looking for random moments of incredible generosity and it becomes pretty darn fun.

I don't know that I would use the title “philanthropist” to describe myself, but maybe someday I could. And it certainly is a big part of my life and as you know we've been working for quite a few years since we became financially independent. And it is pretty fun to realize the difference you can make in the world when you've figured out the money game and you've already taken care of yourself and those you care about, you can really reach out to a lot of other people in the world.

FINANCE 101: REAL ESTATE PROFESSIONAL STATUS

All right, I told you at the top we're going to talk for a minute about real estate professional status, sometimes abbreviated REPS. Now what real estate professional status is, is probably not the most important thing about it. The most important thing about it is that when you combine it with a high income profession, typically medicine when we're talking about it around here, and it doesn't have to be you that has real estate professional status, it can be your spouse.

But when you combine it with a high income profession, you can take the depreciation from the properties that you are buying and use that tax deduction against your active earned income as a doc or whatever else you do. And that's a very powerful tax technique.

Most docs are in a pretty high tax bracket, maybe they're paying 32, 35, 37% with state tax. Maybe it's pushing 50%. A big huge deduction like you might get when you purchase a new property, typically you're doing it actively. You're buying new property and maybe you're getting a little extra bonus depreciation and you can use a lot of that against your earned income. It becomes very powerful. Now all of a sudden, all that money you were paying in taxes you can use to build wealth. So, it's pretty cool.

At any rate, to qualify for this, you have to spend 750 hours on real estate. And it's doing real estate. It's not just learning about real estate. You got to be developing, you got to be redeveloping, you got to be constructing or reconstructing, acquiring, converting, renting, operating, managing, leasing, functioning as a broker. It's not the stuff that you often think about when you think about what a real estate investor does. It's not education, it's not searching for new properties, it's not studying financial statements, it's not managing the finances of an activity in a non-managerial capacity. It's not commuting to your properties, it's actually doing real estate.

If you or your spouse is doing that for 750 hours at a minimum a year, you can qualify as a real estate professional and you can take that depreciation deduction, which is normally only able to be used against passive income and use it against your active income.

There's another rule though. It's got to be greater than half of your professional time. So, if you're doing 750 hours in real estate and you're doing 1,000 hours in medicine, no dice, you are not a real estate professional. You can do 500 hours in medicine and 750 hours in real estate and qualify, but not the opposite. And you also have to materially participate in the property. That's got all kinds of other regulations about it.

But if you're interested in direct real estate investing, and particularly if you have a spouse that is willing to dedicate a significant amount of time, because 750 hours is a significant amount of time. That averages out to 17 hours a week. This is a part-time job. If your spouse is interested in a part-time job in real estate, this can be really powerful when combined with your physician income.

There is a little bit lower barrier to get this, and that's what they call the short-term rental loophole. Instead of 750 hours, you may only have to put in 100 hours. And that's a lot easier to get. That only averages out to a couple of hours a week and it doesn't take very many short-term rentals to suck you in for a couple of hours a week if you're doing the management yourself.

And so, that's a little bit easier threshold to get over and you really only have to do that for the first year. If you don't want to have a short-term rental indefinitely, you don't have to, but you just have to for that first year to take advantage of that loophole. You can acquire properties building a long-term rental portfolio as long as you make them short-term rentals for the first year or so. Then it works out.

I hope that's helpful and can help some of you out there who are interested in a significant side gig of doing direct real estate investing. Obviously, as I think this interview with Frankie demonstrated, this can be very profitable. It certainly is a viable pathway to wealth. It takes a lot more work, effort and education than just carving out a big chunk of your income and plop it into a static asset allocation of broadly diversified low cost index funds. But there are some rewards there too, particularly if the risk you take like Frankie did with all that leverage pays off.

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Thanks for being with us on this episode of Milestones to Millionaire. We hope it's been inspiring for you. We hope this is helpful to you. If not, let us know how we can improve it. This podcast exists for you. We are here dedicated to you and your success.

Please keep your head up and your shoulders back. You've got this. See you next time on the Milestones to Millionaire podcast.

DISCLAIMER

The hosts of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.