Tune in to listen to Eric Tait, MD, MBA founder and senior fund manager at Vernonville Asset Management as he talks about alternative investments as well as:
- why he started his investment firm
- the reasons he likes investing in real estate
- where he feels physicians payment model is heading and why he feels creating passive income is crucial to stress levels and quality of life for doctors
- his formula to see if a property is a good investment
- the difference between price and value
- what the 1 percent rule is
- an equation to determine what you should pay for a property
Josh Mettle: Hello and welcome to the Physician Financial Success Podcast. My name is Josh Mettle, and this is the podcast dedicated to advising physicians how to avoid financial landmines. Today, we’ll be talking with Dr. Eric Tait, practicing internal medicine doc and alternative investment expert. In addition to earning his MD, Eric also earned his MBA in Entrepreneurship from Rice University. He is the founder and senior fund manager at Vernonville Asset Management. Beyond practicing medicine, Eric has analyzed, purchased managed, and developed numerous income-producing investment projects both domestically and now internationally.
Eric, I’m really excited for today’s show. Thanks for your time. How are you doing this morning?
Eric Tait: I’m doing great. Thank you for having me on.
Josh Mettle: Yeah. It’s my pleasure. Trust me. You know I mentioned in the pre-show that the more and more I read your articles, the more excited I was to interview you, and I have a lot of similarities in terms of kind of how I got started down investing in real estate. But let’s maybe take the listeners back for a minute and let’s talk a little bit about your background and history – I found it very interesting. I’d love the audience to know how you chose the dual path of MBA and MD and how that eventually led you down the path to investing in real estate and alternative investments.
Eric Tait: Okay, no problem. I’ll keep it succinct, so my family is a physician family. My great-grandfather was a physician. His son, then my uncle, so I’m kind of the fourth-generation physician, but I’ve always been business-minded and entrepreneurial-minded. Even as a young child, I had kind of local businesses, things around me and neighborhood. Even in college, people were shocked when they found out I was actually going to medical school because I even had businesses when I was in college out of my dorm room.
Josh Mettle: Wow!
Eric Tait: What?
Josh Mettle: I said wow! That’s quite the path.
Eric Tait: Yes. I was a hardcore biology major at Morehouse College in Atlanta, Georgia. I knew that going to medical school, I was looking at potentially an MBA program because I didn’t take any business classes in undergraduate, and so I assumed that the MBA program would give me a shortcut to be able to move into business endeavors while I was a physician. I was thinking about that when I was even in college. It just so happened that Baylor College of Medicine here in Houston Rice were creating their dual-degree program as I was a junior or senior in college. I was actually the second class to actually go through that program.
Josh Mettle: Wow.
Eric Tait: There was one right before us, so we were fairly early in the game on that side. Getting to business school, I kind of took my first financial accounting course. Enron was a big company here, a big company in the world. Doing their books, we found out about a year before they collapsed that they really weren’t making any money from operations. That kind of set me on the pathway of trying to find a different way to invest my own personal money.
I didn’t start out saying, “Hey, I was going to go out there and create an investment firm and have other investors.” It was really a quest to place my own dollars to begin with. Then it just so happened once we started doing it, we had other physicians who wanted to align with us. Getting to the real estate path when I was in business school and in residency, I just looked at many, many different ways to try to create income whether it be trading stocks to maybe kind of long-term buy hold person or looking at franchises, all of them required active, everyday management to really stay on top of it.
What I found with real estate was you could decide to do that if you wanted to or you could bring in professionals to do that for you. Then also in looking at it, I just asked the basic question: where do most of the world’s millionaires and billionaires even make or hold most of their wealth and it kept coming back to real estate. I’m not that bright a guy, so I just said I’ll just copy and follow instead of trying to create something out of whole cloth.
Josh Mettle: I think that’s the brightest kind of guy. Well, that’s a great story, and I mentioned it’s similar to mine just in terms of background and fourth-generation invested in real estate. I traveled a very similar path. Also on the White Coat Investor blog, you mentioned that you read early on Robert Kiyosaki’s Rich Dad, Poor Dad. That was a turning point in my life in terms of maybe not step-by-step execution, but in terms of envisioning a place where you could have passive cash flow that would take you out of the rat race, that would take you out of the day-to-day going to work for the mortgage payment and going to work for a car payment and actually have passive income that creates that. Great story.
Let’s move on to question number 2, about I’d like to just learn just a little bit more about VAM, so VAM is the acronym for Vernonville Asset Management and you specialize in alternative investments. I think maybe we should just start with defining that and telling us a little bit about what VAM does.
Eric Tait: Okay, actually I’m going to turn that on its head a little bit.
Josh Mettle: Please.
Eric Tait: If you’re an alternative, you must be an alternative to what? And so that must be on the investment side that’s usually what people considered to be or at least the financial services industry considers to be mainstream kind of investing, which most people think about as stocks, bonds, and mutual funds. But if we think about it, what people typically define as alternative investments are what I would consider to be real things that people can actually readily understand, so things like gold, things like silver, things like oil and other commodities. Things like artwork, and the biggest one of all, things like real estate.
What I find it to be is language is powerful, and to me, it’s a financial services sleight of hand to call what we do investing in real things to be alternative and investing in stocks and non-mutual things that are essentially paper to be mainstream, to be what’s commonplace. I’m think in a way that they try to de-risk what it is that they do and say that what alternative things is really, really risky, so you want to stay here in the mainstream, in the mainstream type of thing.
The way we define alternative investments are things that don’t trade on public markets, things that our investors can have a direct ownership through. They don’t have to go through brokers, there’s no middlemen. They can make and own it themselves or they can get it direct to the person who is managing it. There’s no broker. There’s no middlemen, no fee in between. It’s direct investment and we tend to focus right now on, at least, in passive income or income-generating investments.
I basically built Vernonville Asset Management to be a vehicle through which physicians and other high net worth individuals can turn a portion of their investment portfolio into passive streams of income. I knew being an entrepreneurship concentration and healthcare management concentration in business school, I know where healthcare is headed in terms of the payment model and what it’s going to look like. And so I understand that many of my specialist colleagues whose income is fairly high right now in the current model while they’re not going to get destitute in the future, they surely will not be making the same amount of money they currently are making.
And so it’s very hard for someone to swallow the fact that they’re going to be working harder and harder as they get older, they’re making less and less income in return. Without having to take a drastic lifestyle cut, they’re going to make some decisions. Are they going to go moonlight or are they going to add extra hours on, or could they turn some of the money that they’re already putting away in vehicles and turn those into income streams to lessen the burden of having to work that much harder in their medical practices?
Josh Mettle: Great explanation. Love that. Just a little bit of a sidetrack, but could you just give us a couple of examples of what current investments are that you’re putting together through Vernonville Asset Management?
Eric Tait: Absolutely. Thank you for that. Right now, we’re actually finishing up due diligence and negotiations on a 97-unit apartment project here in central Houston, and so I’ve been looking for two years to get into a larger apartment project. We’ve got some smaller ones that we’ve done. Also as you alluded to, we have an international fund. We’re actually building the largest resort in Belize on the island of Ambergris Caye, and so that’s been a great project for us and the country of Belize has decided to back us and has become partners with us in the past 2 weeks.
Josh Mettle: Wow.
Eric Tait: So it has been a great, great vote of confidence on their end and we’re so excited about that right now. I’m in the process now of looking at a coffee plantation project down in Panama. I like to diversify across geographic regions and product types within real estate, but I like to concentrate because wealth is made in concentration not diversification. We diversify across geographies and product types but concentrate our efforts within the same kind of hard assets, cash flow generation, real kind of asset process.
Josh Mettle: Got it. And so how many different investors might be invested in this 97-unit apartment complex? What might that look like if I was an investor that wanted to get on board or look at that?
Eric Tait: We’re raising about $1 million. I got about $650,000 to $700,000 on hard and semi-hard commitments. Because we’re still negotiating price, I haven’t gone on to some of my closer investors and said, “Hey, this is what we’re doing.” But we tend to put together individual investment units anywhere from $25,000 up to $100,000. A lot of it raised depends upon each individual project. The coffee plantation project we’re going to be doing is probably closer to $15,000 to get in. It is very much a project-by-project basis and what I’m in the process now of doing is creating a suite of offerings that will allow someone who is just is dipping their toe in the water will say, “Okay, I’ll go with it if it’s a lower investment. For lower investment, I’ll start out here because for many people, they’ve never done private investment before. They’ve only given money to a broker, put up 401(k) and IRA. They’ve never done direct investing and so many people just want baby steps. They want to see how it plays out, kind of get a sense of kind of where things are. And so right now, I’m just trying to broaden the mix.
The last one was we did down in Belize was a $100,000 minimum. For a lot of people, especially people who are under 50, who’ve got tons of med school debt, those types of things are just too much for them, and so I’m looking purposely now to break down smaller unit types to allow more investment. I’d like to create a larger pool of investors at this point.
Josh Mettle: That’s great, very interesting. Before we wrap up, I’ll make sure that we give people contact information for you so they can find out more. I want to switch gears now if we can and focus on some of the articles that I read that you had authored. In one of the articles, Single Family Homes as an Investment Vehicle was the name of it, you talked about the reasoning for buying single-family rental properties, and of course this is a total switch from direct investment through VAM. This is more kind of advice headed towards medical professionals or high net worth folks that are looking to just invest in real estate or create some sort of passive income.
Can you just walk us through that briefly, through that article, and what we need to know if a property we’re considering is a good deal? I think a lot of times with real estate when I talk to people, it almost feels like the trick, Eric, is just to get lucky. You just want to find the right house that’s going to appreciate and then that’s kind of akin to gambling on the roulette table. You take a very different look and analysis. Can you kind of walk just through that article a little bit?
Eric Tait: Yes, absolutely. I wrote that article to demystify the process of real estate investing. I didn’t write it to tell people to go out there and buy single-family homes. But for the average physician, most of us have experience of buying a single-family home for our personal residence. Some of us have done well with it, just buy price precision. We’re in a good market. Some bought during residency and bought in areas where the price went down, so they feel like real estate is bad.
What I wanted to do is demystify the process and put it into an investment context. I started with juxtaposing real estate as an asset class versus stocks, bonds, mutual funds, and other things, explaining that you can get all the same returns and return types in real estate that you can in any kind of public equity or public debt kind of structure. We then wanted to go down and explain to people that real estate, when done correctly, you can basically choose your return, which means that if you want to make a 10 percent return, with real estate you can do that.
You may not be able to do it in your backyard. You may have to go somewhere else, but you can say, “My money is worth 15 percent to me.” So then what you do you just figure out, you know what whatever the rental rate is in this market – I just used single-family home. You could use commercial properties, you could use apartments, you could use whatever, but single-family was just to get the context for people that they can easily understand.
Once you know the rental rate of a particular property, once you know what it’s going to cost you if you’re going to use any debt, if you know what record the interest rates are, and then you can get a plug number for management, what’s insurance is going to be, what maintenance is a plug number. The real variable is just what price you’re going to purchase it at to get your backend in investment number. If you want a 10 percent return, well then well, this is the rental rate multiply it by 12, you know what your monthly note is going to be like, what your monthly insurance is going to be, just put a vacancy factor in there.
Okay, now the variable is, “Okay, can I buy it at X or do I have to buy it a Y to get the return that I want?” If you can’t buy a specific asset at the price that you want, then you just don’t buy. There’s really not a lot of guesswork in it. Now granted there is some management variables here and there, but for the most part, there are tried and true management principles that if you follow them, you’re not going to kind of deviate from kind of the norm. And so it’s really not a crapshoot. You can make the decision to purchase or not purchase absolutely based upon what the rental rate is in a particular market.
Now what you do want to do is you have to do a little bit of forecasting and say, “Okay, this is a market that these rental rates in 5 years are going to be roughly higher or lower, but you can take a snapshot in time, too, and say, “You know what, this is what the market has been in the past few years. This is where it’s going. I’m confident that this rental rate will be in place at this point in time, so now I need to buy the asset X amount of dollars to get the return that I want on the backend.”
It’s not guesswork. It only becomes guesswork when you’re buying real estate on the premise that it has to go up in price for you to make money. If you buy it based upon the understanding that you will make money off the cash flow and any price appreciation is just gravy, and you’re happy with your entry price, and the entry returns you will get off your cash flow, then it’s really hard to lose money.
Josh Mettle: That in my opinion is the most important fundamental 101 level understanding that someone has to have before they invest in real estate.
Eric Tait: Absolutely!
Josh Mettle: Wealth in real estate is not based on the luck of appreciation. It’s based upon – I’ll use a real world example. I had accumulated about 50 or 60 units with my wife and my mom we invest together before the crash. From peak to trough, we probably lost about $2 million in valuation. But during that period of time, every month I was cash flowing. Our rents did pull back a little bit. We had a little bit more vacancy during that period, but each month there was more money coming into the account than going out of the account to cover mortgage, debt service, to cover management, to cover expenses.
If I’m not in the business of liquidating, which I wasn’t. I had no reason to sell, that $2 million swing in value had no effect on me because each month, my notes kept going down. The amount that I owe kept going down. I was reinvesting in upgrading my properties, and I was working on trying to increase rents, and my bank account kept going up. That critical piece of information that if you buy for cash flow, then you can weather any ups or downs or short-term variations, deviations in valuations because you’re investing for cash flow.
In that article, what I love what you did was you said, “It’s all just a metric or it’s all just a calculation based on exactly how you said – what are the rents, what’s my debt service, what’s my operating expenses, and then that tells me how much I have left, which dictates what I can pay for the property. If you follow the formula and you get in right and you have the right cash flow, it takes all of the roulette table-type guessing out of it, you just stay the course and ride the cash flow.
Eric Tait: Absolutely, absolutely. It’s interesting because we have the same thing during the down. I was buying during the downturn because I picked a good market. I think we’ll get to that in the next question. I picked a good market. As the world was crumbling around us, yes absolutely the prices of the properties dropped. But we had the opposite happen. In Houston, we had rents had gone through the roof. Our vacancies dropped, our cash flows went up. Then 2 or 3 years later, because technically in real estate, not so much in single family, but it does tend to work when your cash flows go up, the values go up.
Josh Mettle: Right.
Eric Tait: The big thing that I’d like to explain to investors particularly on the side is the difference between price and value. Price, the market dictates to you. What someone is willing to give you for whatever it is that you own irrespective of the asset. Value is determined by cash flow. And so if you focus on cash flow, you will eventually get your price up. But the market can take your prices way high and way low, but if your cash flow is still intact, that’s where your real value is. So, always buy based upon the cash flows. Don’t buy based upon what other people are going to offer you at any specific point in time.
Josh Mettle: That’s a great point. Said maybe another way, Mr. Market, the buyers and sellers out there that want to buy and set the prices for real estate every day, they could be happy. They could be sad, they could be a deranged lunatic one day, and those prices can deviate. But as you said, your cash flow, your value doesn’t deviate as much. Your mortgage service is X, your expenses is Y, and if your rents throw off a cash flow, then that’s real value regardless of what Mr. Market does one day or the other. Great, great stuff; I love where we’re headed.
Let’s maybe jump to the next question and you talked about three critical elements for analysis when looking at buying real estate. Can you explain those elements and give us a brief overview of how you analyze each of them?
Eric Tait: Yes, for me I have mentors who have taught me this and kind of the market, the team, and then ultimately last is the property. I would consider the market to be 1 and then the team to be 1A and the property is kind of the third thing. It’s kind of fungible you’re going to pick your property based upon what the market needs, kind of what the need thing. If it needs more corporate housing, you’ll do that. If it needs more vacation, you’ll do that, but to me the market is 1 and the team is 1A.
The market will save you, if you’re going into a market and a lot of it is based upon what is it you’re trying to accomplish. For your bread and butter residential housing, apartments, single-family homes, those kinds of things, that is driven by jobs and population growth, and jobs is really is the biggest thing. Being in Texas through the recession, it’s been kind of the dream market, and though living in this market has been great. All boats have been lifted, so even if you weren’t that great an operator, maybe the team you put in place wasn’t great, you were still getting cash flows and getting capital gains on your properties because the market is just lifting all boats. But that doesn’t discount the team, having a great team in place.
When I say your team, we’re talking about your property managers, your vendors, your A/C guys, your plumbers, electricians, guys and gals who can make your life easy. In a bad market, a good team can keep you afloat, and so it’s paramount to pick a good market and so if you’re going for bread and butter kind of residential housing, follow the jobs, follow the jobs, follow the jobs. If you’re going for, let’s just say hospitality, so you like hotels. Then you follow kind of where people are going. Are there places that have kind of scarcity in terms of their ability to build out? Are there islands or other places where no other hotels can come in, kind of juxtaposing our product in Belize. Cancun has 44,000 hotel rooms. The island we’re building has 2,000 hotel rooms, and it’s an island. You can’t build a whole lot more.
Knowing those kinds of kind of geographic barriers in your particular market on hospitality side is a big, big thing. Again my mentors have taught me you go for the best in class wherever you are because they don’t cost you money, they make you money. And so the best property manager is going to tell you exactly what they need and will then point you in the way to fill it. They’ll tell you, “Okay, I need four-bedroom houses here, here, and here. This is where I need you to look at to go and do.” And so they will be partners with you in your investing endeavor because they know you’re going to do more than one transaction with them.
Lastly, the property in of itself, again it’s a function of the market. Just go and don’t fall in love with a property. Don’t fall in love with the deal. It’s just numbers. They’re just assets. You don’t fall in love with a stock. You don’t fall in love with a bond. Don’t fall in love with a property. I don’t care how cute it is. I don’t care if it’s got gingerbread shingles, or whatever those kinds of things are, this is your money.
Now I’m not saying there’s not a place for lifestyle investing. Our Belize product is a lifestyle investment. There’s no question about it, but at the end of the day, it was evaluated based on the numbers and having that clear delineation in your mind whether you’re investing for lifestyles, you’re going to buy a vacation home that you’re going to use sometimes, and then there’s other time you’re going to rent it, well what’s driving you? Is your lifestyle driving you or is this the best place for you to get a vacation home, or is there a beach or a mountain somewhere else that you don’t necessarily like to go to but has much higher rental rates and much higher demand. Making that clear delineation in your mind is very, very important as an investor when it comes down to the property level. One is market; 1A is team, and then comes property.
Josh Mettle: Yeah, and they really go in that order, right? If you don’t have the market and kind of thought through on the team, then it’s really hard to make a good property decision, would you agree?
Eric Tait: Absolutely because they’re the one that going to lead you to it if you’re not buying in your own backyard.
Josh Mettle: Right.
Eric Tait: I always assume that most busy physicians aren’t going to be doing this themselves, so they’re going to bring a property manager if they’re going to buy a single-family home, let’s say. I wrote the article under the guise that you’re not going to do this all yourself. You need to know how it’s done, but you’re going to hire that stuff out. If you decide not to, hey great. But no one is trying to create another job for busy professionals.
Josh Mettle: Right. Just one comment in regards to we’ve used the term market interchangeably in the last two question, so just to clarify. Point number 1 of the three critical elements being the market. In this context, we’re talking about the area markets, so we’re talking about jobs that are available, unemployment levels, population expansion. Are we in a market that is so government regulated and such high taxes that there is an exodus of business and population? That’s a bad market. Are we in an area that there’s expansion because of natural resources or because of technology, or some sort of economy that has brought in people and businesses into the area? Then that’s a good market.
I just wanted to delineate when we’re talking about these three critical elements, that market is very different than in the previous question I was talking about Mr. Market. What I meant by that was that the buyers and sellers of real estate that may set the price of real estate, so just to make sure that we have good, clear understanding on that.
Eric Tait: Yes, absolutely, absolutely.
Josh Mettle: Okay, so let’s talk just a little bit about the type of single-family home that you prefer, what’s worked best for you, and let’s uncork the 1 percent rule and explain you have a beautiful equation to determine what we should pay for a property. If you could get through those things, I would love it.
Eric Tait: Okay, no problem. Essentially, my mentors, they call it the bread and butter home ‑ the three-bedroom, two-bath, two-car garage home in Anytown, USA. That’s kind of the Wal-Mart Principle. That’s where most of the people in the country live. On the coast, you may have condos and expensive enclaves. Condos are more economical for first-time homebuyers, but really it’s that three-bedroom two-bath two-car garage home, maybe four-bedroom – it’s where if you don’t want to go wrong, you don’t want to foul it up, you just want to sit and kind of go with the flow, that is pretty much every market what you’re looking for.
Now the prices will change invariably based upon the median income of the area and what you’re investing, but that’s kind of the bread and butter kind of sweet spot in terms. Then the 1 percent rule is a very, very rough approximation, I mean so rough like in a place like Texas where our property taxes are high because we don’t have any state income tax. The 1 percent rule will work but the returns aren’t great if you’re buying it as 1 percent. What it basically says is your rent should be roughly 1 percent of the purchase price of the property, so if it’s a $100,000 home, the rent should be roughly $1,000.
In evaluating properties, I’d like to look at the rent first and then buy the home, but it’s a rough correlation that tends to hold true in most parts, in most I would say major areas outside of very expensive cities.
Josh Mettle: Yeah.
Eric Tait: If you go an hour outside of any major city, the 1 percent rule is pretty much going to hold up. In that, maybe in any city you look at, maybe outside of maybe Honolulu.
Josh Mettle: Yeah, I use a rule similar, and it’s just a basis point. It’s just the starting point to do your analysis of the property. But for example if a home is selling for $100,000 and you go on Craigslist to find listings for rents, and you see that similar homes are renting for $500 a month, move on; no need to go see that home. You need to keep looking. It’s a great place if a realtor hands you 20 MLS sheets to look through and you’ve kind of got your ideas for rents. Anything that’s far below that, just chuck and then gives you to focus your energy a little bit.
Eric Tait: Yes, absolutely. It’s a quick way to do a cut-and-dry analysis to get things off your plate because ultimately great deals don’t last very long, so the speed with which you can make and evaluate and make a decision oftentime determines whether or not you will get the assets.
Josh Mettle: Great point, great point.
Eric Tait: And then you want me to talk about the equation. This is a very rough equation. Again we back into the price of the property. What I like to do is to take the market price of the property, so what it’s selling for. Back to your example on Craigslist, a $100,000 house in perfect condition if that’s what it costs. Well I like to buy properties that are not in perfect condition, so I can force some values, I can force some equity. Let’s say it costs $20,000 to renovate that property. Instead of paying $100,000 for the property, I would have to pay $80,000 for that property. Then, we’ll throw in closing costs. It’s going to cost you some money to acquire the asset, let’s just throw $5,000 into the equation. So now you have $75,000 that you can pay for this property. Then let’s just say you want to walk in with a little bit of buffer, a little bit of equity just in case something happens. You know what I want to have $10,000 in equity in this property. That means now you can only pay $65,000 for the property, adding all those things in.
Now it’s not a perfect science and in a very competitive market, you can’t always get it this just like this. But if you can keep that rough rubric, start with the best you could possibly be and subtract what it’s going to cost for you to get to that your all-in costs, then give yourself al little bit of a buffer for your capital gains, that ends up being your purchase price. It works pretty well. You may have to go through a lot of properties right now because at least my market it’s very, very competitive. But it still does work as a way to give yourself a buffer so you’re not overpaying for a property because that’s the one thing that’s very hard to come back from in real estate is overpaying for a property.
Josh Mettle: That’s right. I think that equation is beautiful and as you say, you kind of have to mess with it, play with it, and make it your own depending on what market you’re buying in, but the concept is powerful. For me, when I move to single-family homes into apartment buildings, we had used this exact same formula. We said what’s it’s going to be worth when it’s done, when it’s rented, and we can figure out evaluation based on let’s call it maybe 10 years of income. Then how much it’s going to cost to get there, what are the closing costs associated, how much buffer or profit do we want to build in, that’s what we can offer.
It was really helpful for single-family homes but I found as we move into apartment buildings, it was exponentially more helpful because you can kind of look at 30 homes and you kind of back of a napkin and you get a gut feel for it.
Apartment buildings are very different. I have a 36-unit here and an 18-unit here, but the 36 is all one-bedroom and the 18 is all three-bedroom. Your intuitional gauge is off, and so this formula was great for me. I said, “Okay, I can take the 18 three-bedrooms and those are all going to rent for $1,400 a month, so I can forecast what I think the valuation of that property is going to be when it’s going to be done. Now I’ve got to minus off $5,000 a unit for renovations. Now I’ve got to minus off X amount for holding costs, vacancies, and closing costs, and I want to have some upsides, so I got to put $50,000 or $100,000 in there for me to have some equity and I can offer X.
However, you make that yours, the concept of arriving at what you can offer is very important, so I appreciate you bringing that to light.
Eric Tait: Yeah, absolutely. That’s why I want to start with single-family homes because if I start with apartments on White Coat Investor‑
Josh Mettle: Yes.
Eric Tait: There’d have been no frame of reference for them.
Josh Mettle: Yes.
Eric Tait: So, no one, it just would have gone over everyone’s head, and so starting with something that people can focus on, and say, “Okay, I understand that.” And then say, “Okay, now multiply that by 100.”
Josh Mettle: Right.
Eric Tait: Then there’s some other factors that’s saying, “You know what, the market really doesn’t matter quite as much it’s now about the income because that’s the big leap, so from single-family homes to apartments now the income drives everything.
Josh Mettle: That’s right.
Eric Tait: Even two identical properties that are sitting next to each other, built by the same builder, built in the same year, if one is bringing in $100,000 less a year, that’s $1 million less in value.
Josh Mettle: Right, yeah. Great point.
Eric Tait: Let’s not lose the audience.
Josh Mettle: Yeah. No, no, no. Very good. I love how you’ve created steps here where we start with all the analysis of single-family, but it does parlay and become increasingly more valuable information as you go to larger and larger units. If someone were to invest with you alongside them or if they were to buy a single-family home, I would hope that they would be looking at it and running through the same kind of an equation to analyze their investment.
Eric Tait: Absolutely. I actually look at what I do with Vernonville Asset Management as an investor-training program in that when people invest with me, they understand the business rationale behind everything that we’re doing. Ultimately, I talk to my investors. We got out and we talk on the phone. They can call me pretty much anytime because the whole point is the more of us that can really invest in Main Street, the more the economy is ultimately going to move. The money distribution system is broken. It’s all being sucked up to Wall Street, but it doesn’t make it back down to Main Street. In my mind, we have to bypass the Wall Street and go straight to Main Street.
Refurbishing our own individual neighborhoods and creating the goods and services and jobs and enjoyment ourselves whether it’s domestically or internationally, we’re cutting out the middlemen and going straight in and then also learning through that process because we need financial education. I am a Kiyosaki disciple. Without financial education, that’s the reason why we are in the mess that we are in our country.
Josh Mettle: I’m feeling passion, I’m feeling legacy here. I love it. I think that you are spot-on and that leads me into my next two questions, so I want to talk just a little bit about legacy and why you’ve decided to invest this way. Specifically there were some comments on the White Coat blog that intrigued me. I’d love you to explain a little bit more about what you meant here ‑ and I’m paraphrasing – but you said, “I still practice medicine because I love it, especially because I can practice in a manner that is consistent with keeping the patient the focus of my time. I’m not beholden to medicine to generate an income to live the lifestyle that I want to live and can afford to give my patients the time they need.”
I found that powerful. Tell me just a little bit about what that means to you to be able to practice medicine on those terms.
Eric Tait: We all go into medicine I think because it’s a noble profession, with the intent to help people. You talk to anybody who is a little kid who wants to be a doctor, a PA, whatever, anything in the healthcare field you’re there to help people. But that can be lost through the training process, which is a brutal process, through having to pay back loans, having familial and societal expectations heaped upon you, years and years of delayed gratification.
My fear is that patients oftentimes become products in our society. They become profit centers in some ways they perform. I know it’s kind of heretical for me to say that as a physician, but I see it. Being a primary care physician, I do have somewhat have the luxury of being paid to think so I don’t have a dog in the fight when patients decide what they’re going to do and what it’s oftentimes decided for them, what’s going to be done to them. And so I purposely went the internal medicine route because of that, understanding that my remuneration and pay was not going to be – I mean compared to the average American, it’s pretty well but in terms of the amount of work that I have to do and the amount of pressure that we have in terms of what we do. But I also like the finer things in life; I’m not going to apologize for that, and so I was either going to burn myself out trying to moonlight, do all different types of things to get the material comforts. Really I care more about experiences than actual material things, but being able to travel, being able to have time with my family, those types of things.
Understanding that I could make income and make money outside of medicine allowed me to say, “You know what, these are the hours I’m going to work in medicine.” Having a very firm understanding of what I was willing to do in a medical practice and understanding that what I did to and for patients really was not going to affect my income a whole lot. Meaning I didn’t have to go out there, try to do a bunch of procedures on them and do these different types of things, that I could just sit and make the patient and what they needed at that point in time in front of me the focus.
What I would like to be able to do, in some small way, because I can’t get everybody is allow physicians to have that same comfort, to be able to say, “You know what, no I’m not going to burn the candle at both ends. I’ve got these private school payments. I’ve got this house. I’ve got this life I’ve created. My income is going down. How do I fill that gap? How do I do that?”
Medicare talks about this, call it kind of the intensity of medicine has increased as payments have gone down, so we’re doing more to patients, which if you look at the studies, the more we do to patients, the less their outcomes are favorable. That’s proven. That’s documented. I think if we can pull some of the financial pressures because we know the fee for service system creates bad incentives and bad alignment of incentives between patients and physicians. Medicare knows this; the insurers knows this, and they’re getting rid of fee for services as fast as possible, so that’s going by the wayside.
The question gets to be, “When you cannot do more to patients to increase your income, what do you do at that point in time? What happens? What does it look like?”
I’d like to be that safety valve for people to say, “You know what, this is the life of medicine that I want. I don’t want it to be all-consuming. I want to be able to practice the way that I can practice and not worry about and take a pay cut – to say, “You know what, okay, only pay me this because I’m good over here on this side. I can make it up on my investing side of things.”
And so I think if we can just ratchet it down kind of some of this, I think we’ll have healthier medical practitioners, we’ll definitely have healthier patients and I think we’ll have happier practitioners as well. Maybe that’s just me pie in the sky and naivete, but I know it’s been that way for me.
Josh Mettle: Well, the reason I asked and the reason I thought that was so interesting, Eric, was because I think that investing for cash flow – I’m going to say it – I’m going to turn alternative investments to investing in tangible assets for cash flow – is freeing and not only for physicians because I heard it through your perspective but I’ve felt it through my own profession‑
Eric Tait: Absolutely.
Josh Mettle: Where when you have cash flow coming in every month, and as that grows and as that builds, it’s almost like kind of letting the top off of the boiling water in the tea kettle. You don’t have to have all that pressure. You don’t have to work that hard because or maybe not just at that feverish pace because you have this relief of this cash flow coming in, and I believe it makes us make decisions different way. I believe it makes us operate and respond to our families and just be a more enjoyable lifestyle. I see that very differently than I see investing in the stock portfolio.
The game is you grow the stock portfolio as high as you can and then it has a lot of zeroes, and then at some point you start chipping away at that ice block and you start pulling that money out for retirement. That’s kind of like a zero sum game, right?
Eric Tait: Yeah.
Josh Mettle: You just build it up and then you’re going to chop it away until it’s gone and that almost turns up the heat in the teapot, and there’s just more steam. How big can I get the number so that I can and then how fast can I chip it away? Very different feeling than investing for cash flow, and so that leads me to my last question and then we’re over in time. I’m going to move quickly, but I wanted to maybe end with legacy.
You’ve spoken about how real estate allows you to make a generational shift of wealth, from your generation and your wife’s wealth to your children’s. May be kind of moving with that same thought process of stocks, grow it, and then you chip away as you go through retirement versus real estate, how you can grow it, live off the cash flow. Then what are the differences that you and your wife are now going to be afforded to be able to pass that on to your children.
Eric Tait: Absolutely. I love the segue. The dirty little secret in all of life is this: everybody eventually needs passive income because eventually all of our labor fails. The model that most people that you talk about is save up, get to zero, then chip it away, so you eventually have to turn that into passive income or they don’t know when they’re going to die versus when they are going to run out of money because none of us knows the time nor the hour. I think that model is a backwards model.
I argued to friends and colleagues just add $1,000 of income per month per year. You’re going to live 20 years, right? If you’ve gotten $20,000 of income a month coming in that you built when you were young until you were older, as opposed to trying to sock a bunch of money away, which you ultimately have no control over, which then creates that angst, that background angst of anytime the market goes up or down, you’ve got that background angst because you know that money you need later may or may not be there.
Josh Mettle: Right.
Eric Tait: That on a hedge to something that you know are tangibly getting a return on every quarter, every 6 months, once a year that you know is going to come in. It’s a very different model. And so getting into the wealth portion of it all, I measure – well I’m not the only one – but I measure wealth in time, not dollars. You can be wealthy and not rich, and there are lots of rich people who are not wealthy, and so I measure wealth by how long could you survive without having to work a 9:00 to 5:00 job and maintain or grow your current standard of living. The mean wealth is measured in time, not dollars. And so you’ve got some very rich people have very high burn rates that when they stop working, they have high incomes, but if the stop working for 6 months, they burn through everything that they have.
And so when I focus on wealth and passing wealth down, when you are passing income-producing assets to the next generation, (1) it’s very easy to put them into trusts. It’s very easy to get them out of your estate plan. It’s very easy to bring your heirs in to the companies that own these assets so that you’re not worrying about estate tax issues, you’re not worrying – there are easy ways to structure especially if you’ve already set these things up.
So the wealth is a transfer of cash flow and cash flow-producing assets. Wealth is a transfer of income production. And so the ability to bring my children in, the ability that when they are looking at colleges, if they decide to go to college or not, that they won’t have the pressure to say, “You know what, to maintain my lifestyle, I need to go out and get this job and do X, Y, and Z,” because I’ll be teaching my daughters how to generate and create passive income streams so that they can then go after their passions and what value they want to create for the world. It may not be in medicine. It may not be in law. It may not be in any of the “marquee professions,” but if they’re not worrying about trying to survive day-to-day, they can make very different decisions than some of us may have made about what we want to do with our lives.
Josh Mettle: That was fun. Man, you’re a good man. I appreciate you spending the time and really I appreciate you thinking differently because I think there’s so much mainstream that if we don’t have some of these insights from people like you, then I think we’re less successful, I think were less fulfilled. I appreciate your time. I think you’ve shared incredibly generously with us.
I’m certain there’s going to be some people that want to find out more about VAM, and if nothing else, they should go and they should get all of your articles, which are out there for free, print them out, and read them. Where can they contact you and where can they find out and get some of those articles?
Eric Tait: I appreciate, you’re a breath of fresh air. I’ve talked to people before. What you’re doing for your listeners and for your clients, I mean I wish we could clone you and send you around the world.
Josh Mettle: I don’t know man, you haven’t talked to my wife yet. She‑
Eric Tait: We’re in the same boat on that one. Absolutely. I appreciate that. They can contact me. It’s Vernonville, www.vernonville.com, and I’ll spell that. It’s V-E-R-N-O-N-V-I-L-L-E or they can email me at eric, E-R-I-C, @vernonville.com, email@example.com. Everything eventually makes it to me through that. I’m on LinkedIn as well, but I’ll be honest with you, if I don’t know who you are and try to connect with me on LinkedIn, I might not accept it because it’s just kind of how I am. You can send me a note or something like that. It’s probably best just to email me, though. I’m fairlyDr. responsive. Give me 24 to 48 hours. I will definitely get back to you.
Josh Mettle: Well, Eric, again thanks for your time. It was a pleasure and we look forward to connecting with you again in the future.
Eric Tait: Absolutely. Thank you so much for your time and thank you for allowing me this platform.