Tune in to hear as Josh talks to Dr. Thomas Black and Timothy Black about investing in real estate projects and learn:

    • the jaw dropping tax advantages of real estate investing
    • what depreciation, forced depreciation, appreciation and cap-rates are
    • why investing in real estate can be less reactive than other kinds of investing
    • how many different ways there are to make a profit with real estate
    • and so much more!

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 the financial landmines. Today, we’ll be talking with Dr. Thomas Black and his business partner and brother, Timothy Black. Together, they operate Napali Capital, a strategic asset management company focused on creating passive income streams via direct investment into carefully analyzed real estate projects. Thomas also authors a blog at freedomintheblack.com and has recently published his first book titled, The PassiveIncome Physician.

We’re going to dive deep into passive income and positive cash flow in today’s conversation. I’m very excited to welcome Tom and Tim to the show. How are you both doing today?

Timothy Black: Man, Josh, doing great.

Thomas Black: Hey, thanks for having us, Josh. We certainly appreciate it.

Josh Mettle: I am excited because this is a topic that is near and dear to my heart. Many of the listeners know I’m a fourth generation real estate investor, and so to me, the only investment or retirement plan that I’ve ever known since I was like 9 and pulling weeds on my grandpa’s apartment building was you pay down the mortgage and then you go live really comfortably on the free and clear property.

Imagine what a shock it was to me as I grew up and people said that wasn’t the way that normal retirement was done, that you invested in things like 401(k)s and IRAs. Today, we’re going to revisit that, and I hope to learn a lot from you, guys, and I’m sure that the listeners will.

Timothy Black: Great!

Thomas Black: Sounds great!

Josh Mettle: Let’s jump into that first question. I want to know just a little bit more about how you guys came to found Napali Capital and if you can just give us a brief overview and background.

Thomas Black: Sure! It goes back a couple of years, so I’m a residency trained emergency medicine physician. I had purchased a house when I came out of med school, kind of at the heights of the economy, graduated right on the 2009 mark, and of course at that time, I went to Indiana University emergency medicine residency and realized that I was trying to sell at top of the market when the economy had really gone south. I decided to rent it to another incoming resident, and luckily, I did for 3 years’ span, which is great.

Once those checks started coming in and I realized we were going to ride out the storm, which is kind of in a real estate downturn, I just got so hooked. I got to my first practice. I started buying single family homes, sometimes sight unseen in Houston area, which is buying like crazy on the HUD website, and rather than flipping where that was kind of the thought at the time and it was becoming the thing to do, I really wanted to create that tax benefit and the depreciation aspect.

We did that a number of years. We were very successful just using those rentals, and then decided, “Hey, if I can do that, why don’t I try my hand at a complete ground up development of an apartment complex?” I bought some land, learned a huge amount of lessons and educated myself during a very small development process and all the city issues and things like that, sold that successfully, and put that into some light commercial industrial.

Then, my wife and I looked at each other and said, “Why the heck am I practicing 60 hours a week, hit my head, traveling in a private democratic practice that I was with?” We upped and moved from east Texas area to Dallas and decided to really make a run at what I discovered was my burgeoning passion for real estate. I started doing some syndications and people that had known me for a number of years had seen how successful and my drive for this was in education. We started buying larger apartment complexes.

About a year ago, Tim saw that I had developed about $34 million, right around there, in assets and a portfolio with my investors and Tim jumped in and we decided to form Napali. Since that time, we’ve got about another 500 units or so under our belts and it’s been very successful, hitting our returns, and just having a heck of a fun time educating doctors and other income earners on how to really create true wealth and depreciation through tax benefits.

I’ll let Tim describe kind of where his background is.

Timothy Black: Yeah, thanks. My path is a little different in the sense that I spent my entire career in hospitality developing very large scale resorts around the United States, and over the past – I don’t know, Tom – since probably 2009, Tom has been banging on me that I needed to spend a little bit more time to educate myself outside my career on

There was this day, Josh, when he took me to this vacant piece of land and said, “I’m going to build it an apartment complex.”

I literally looked at him and said, “You need your head examined.”  Tom has been, I’ve said this several times, kind of the guy that runs towards fear where most people would run away and I was scratching my head, saying, “Why do you want to do this? I mean you work in the emergency room, tons of hours, and you’ve got 4 small kids.”  Just felt like there’s a ton a risk. But I tell you, that was probably the turning point for him in the sense of the increase in the significant growth in knowledge.

Over the years, we’ve been talking a lot, and I had the good fortune of retiring at a fairly early age with the prior company I was with and just decided I mean I’ve always loved real estate. I’ve invested in real estate, certainly did that in my prior career, and we decided that the time was right to really form the company and help physicians get to their goals with retirement.

Josh Mettle: I love it! At some point, Tom and Tim, I want to circle back to something that both of you hit on, which was I think one of the big inhibitors of going into active real estate investment is that somehow Tom got himself through – did you say 4 kids that was 4 small kids?

Timothy Black: Yeah.

Thomas Black: Yes. Two in residency and 2 in practice, and we’re just going with the flow, I guess. It just happened. It wasn’t planned by any means.

Josh Mettle: It was like an amusement park ride you just found yourself on, just hold on, right?

Thomas Black: Totally, we did. Totally, it was. I mean so many hours that first year in practice, and I was shocked. I mean it was like winning a lottery and everybody says, “Yeah. How do you-” with our fourth kid, “don’t you know how that happens?”

I said, “Well, actually that’s the precise reason it did happen.” I mean I was working so much there was one time that my wife and I even passed each other in the house. She was still breastfeeding our third child and on birth control and this and that, and I’m thinking, “What are the odds here?” Yeah, I always give a crap about that, we found out, and they’re only 13 months apart. It’s pretty funny, but we love the heck out of it. It has been such a ride that it’s just been fantastic, so.

Josh Mettle: I love it. Well, before we end this conversation, I want to circle back to how you made it through that period of working 60 hours a week in practice, 4 small kids, and had the bandwidth to buy and hold properties. I don’t want to get there yet. I want that to just kind of –

Thomas Black: Sure, all right.

Josh Mettle: Sit with you, but let’s close with that because I think that’s a big inhibitor on a lot of people’s minds, and I just want to make sure we hit it.

Thomas Black: Got you.

Josh Mettle: Where I want to start if it’s okay with you guys is that I find that most physicians we work with do not own passive income investments. They don’t own real estate. They don’t own mortgage notes. They don’t own much of anything except maybe some bonds in their portfolio that spins off passive income. It seems to me there is a huge bias towards mutual funds and index funds and more traditional investments that financial advisors sell.

My question to you, guys, is why do you think that is and what do you see as the advantages and potential disadvantages with that strategy?

Thomas Black: Sure. I think the reason is we spend so long dang in school, number one. In med schools, you’ve got your head down in the sand; undergrad, you’re just trying to get into med school. You’re looking for that next step. Pretty soon, you get into residency and again you’re working so much – 100 to 110 hours a week; you just don’t have time for anything. Then you get into your first practice, and all of a sudden, 1 year, 2 years in, you think, “Wow! This is what life is going to be.”

For probably a good 70 percent of the physician population, I think we don’t know what the end of that road is. I mean I think having the fortune of having a parent that maybe was a physician or a family member that is, you have some idea of what it truly means that daily life is going to be as a community or academic physician.

But I think we get to that place, and we’re so focused on our careers and that’s all we’ve done for a number of years, we think, “Well, is it just best to let somebody else decide?” That’s why so many people turn to financial advisors, wealth advisors, things like that’s, and whether knowing or not, they’re there to sell a product regardless. That’s their job. Their job is to make money; Of course, it’s to make money for you but you give any person 2 different options at potentially the same returns, are they going to take the higher yield for themselves and truly have their best intentions in mind is certainly a

I really started to turn the corner when I realized it’s really just very basic math and my issue is I didn’t have transparency with the companies – any stock that I look at, and you can talk about P/E ratios and things like that, but you truly know where that’s going. I mean I was a very good economic driver for that company and I did not have the time nor did I want to dive into a company.

For me, real estate when you start looking at it, even if you’re breaking even and you’re looking at single family homes with comprehensive sales and things like that, there is a proven formula. I mean if you rent the house, you’re going to buy that in a mortgage, you’re going to have appreciation of some sort usually and then you’re going to have a difference in cash flow from that, as well as depreciation through tax benefits.

For me, I think it’s just that the physicians and most people don’t realize the simplicity with what can be done. I think it involves a lot of trust if you’re going in and you’re on partnerships, but it’s a very, very, easy thing to do compared to just handing your money over and expecting somebody else to manage it.

Josh Mettle: Tim, anything to add there?

Timothy Black: Yeah, I mean I think Tom did a great job kind of laying out those points. I would say also that let’s face it, after you come out of school in residency, I mean you’re working a ton of hours, and I don’t know if most people have the time. I mean we kind of laughed about Tom having all these kids, but most physicians probably when they get home don’t have the time and they’re not seeing their kids. Let’s face it: financial planners have their place for everybody, but the one thing I do know is that they buy lists as well as anybody, and physicians make relatively high net income. They’re going to spend their time probably looking or in fact, I know they’re looking at physicians to try to bring them into their financial planning practice to sell them a product.

Again, that is a place for everybody but we think that we have a better way, a better model and we have I mean handfuls of physicians that we’ve made a lot of money for and they really have seen the lights and the way of investing into multifamily real estate to create those we kind of laugh a little bit those mailbox checks.

Josh Mettle: Yeah, when I thought about this question, what are the advantages of investing traditionally into index funds and mutual funds, and the no brainer is simplicity, right?

Timothy Black: Right.

Josh Mettle: I can get on my phone and I can go to someplace, an app on my phone like Wealthfront, which is phenomenal, and I can allocate money every month, and it’s spread across asset class based on my risk tolerance and it literally takes me 60 seconds a month to check in to make sure everything comes back.

Timothy Black: That’s right, that’s right.

Josh Mettle: But the downside, the disadvantages I think have a lot to do with fear. In the last couple of decades, we’ve seen a few peaks and valleys, and I’ve seen a lot of people liquidate at wrong times. I’ve seen a lot of people wait to get back in until the wrong times, and I’ve seen one of the downsides with these apps, with these online investing and even through advisors, is there is a bias towards doing something. There is a bias towards reacting.

Timothy Black: Right.

Josh Mettle: One of Warren Buffett’s quotes is, “He moves like a sloth to make decisions.” I find that that’s what I do with my real estate. I move extremely slowly; in other words, I buy but then before I think about selling or doing anything else, I just move like a sloth that just sits there‑

Timothy Black: Right.

Josh Mettle: and pays itself down and gives itself a time to compound. Those are a few of my thoughts.

Timothy Black: Yeah, I think you are being – yeah, you’re absolutely right. You’re being proactive versus being reactive, and that’s the absolute worst thing you can do in the stock market is react to what’s going on. I mean that’s how the fear, let’s say fear runs that whole industry. It really does. It’s great to be an app owner or a company owner but when you’re on the other side using that, the way I look and the smaller portion I have in the market is straight index funds just like you said. I do not look at it.

I don’t buy individual companies because time will tell the only way to do it is really tried and true is to put your money and let it go, don’t ever take it out. You can’t because you’re never going to be able to time it right. The best analysts in the world cannot time just a well-placed index fund. It’s just that the only thing you’re going to get is you’re going to take out all those percentages, I mean up to 3.5 percent in some mutual funds and things like that, you have no idea that there’s hidden fees in there, that just eat away at your long-term wealth, so.

Josh Mettle: I think another thing that drives this kind of fear that I feel out there in the market is you’ve got CNN and all these different financial analysts –

Timothy Black: Absolutely!

Josh Mettle: I mean you flip it on at any time like I’m at the gym workout, I look up at the TV and I’m like, “Oh, my gosh! The stock market is crashing.” You don’t –

Timothy Black: Right.

Josh Mettle: I never feel that angst with my real estate, ever. I drive by it, and I’m like, “Paint looks good. Tenants are keeping up the yard. Sweet! On with my year!”

Timothy Black: Yeah, it doesn’t change. It’s very static. Even if you have a crash in the real estate market, the commercial, everybody needs a place to live. It’s going to be relatively stable and a hard asset, just like you said. It’s never going to go to zero. Cramer is never going to be screaming on Mad Money about your real estate portfolio.

Josh Mettle: Right, right exactly. All right, so let’s talk about who might be an ideal investor with Napali. Also I’d love you to tell us a little bit about of a story. Tell us about a recent opportunity that may be your physician clients invested in and how that worked out for them.

Thomas Black: All right, actually that’s great timing. Let me preface it just by who’s an investor. First of all, if anybody who’s ever contacted me, email, call, anything else regardless of their status, I always put them on the phone, have a conversation because our number 1 goal is number 1 to educate. I mean that’s why our website, everything else that we preach is educate partner and invest. Even if people don’t invest with us, I love just kind of preaching that mantra of real estate and depreciation, the tax code is set up for business owners, it truly is.

What I would say on our most recent, we actually had a webinar last night on one of the first complexes or communities we bought that after I had moved to Dallas and decided, “Hey, I’m going to really make a run at this and spend the majority of my time doing it,” we purchased 305 units in Dallas-Fort Worth area for just under $13 million, raised about $3.2 million in capital to do that. Through that time, when we purchased our monthly collections, were at about $170,000 a month, we’ve increased that almost $230,000 now in 18 months, so it’s driven our NOI significantly up in the air.

When you look to take in account what’s going on in the multifamily space especially in DFW, we bought that at a 7-cap, and for those people who don’t know cap rate is, it’s a general kind of looking at market comps. It’s just a way to look at and level the playing field with commercial assets. Well that cap rate is compressed down in the low 6’s, so that we’re sitting on a value that building of just under $23 million.

The webinar last night was saying, “Guys, and the way we set things up is through an LLC and so everybody is a direct partner with us.” We went out on the webinar and we had everybody vote, so we’ve got a vote due out in the next 10 days, and majority rules.”

Timothy Black: Time to sell, time to sell! Time to sell.

Thomas Black: Time to sell. We’re sitting on $10 million of equity in 18 months, which is a return of about 180 percent, so everybody will almost triple their money if everything goes through and does okay, assuming you sell.

Now let me put an asterisk by that, that that is a very successful endeavor, and we look for assets that we get singles. We don’t look for home runs, so that was not expected. It’s great that it happened, but our normal investment criteria is a double digit cash-on-cash return every year, which is usually north of that plus a doubling of the equity within 5 years. Our business plan was still set up the same way. It’s just that we’ve hit those marks much, much sooner and if looking at the amount of equity where we don’t have a capital event if everybody chooses to do that, so it’s not the norm but it does happen.

Josh Mettle: Great, great project. Let me clear a couple of terms.

Thomas Black: Yeah.

Josh Mettle: NOI, net operating income, and will you just give a brief explanation of that? I believe it’s important that people understand that in the context of what we are talking about.

Thomas Black: Right, so basically, it’s the amount that the property brings in or the total revenue minus the expenses. That’s all it is, so it’s just a slang term that is able to show how much any given property is bringing in essentially.

Josh Mettle: What Tom said was that they created this $10 million in value from the $13 million acquisition to the $23 million current valuation through 2 metrics, 2 different vehicles. The first one was they increased the net operating income, which means they increased rents. They probably did some improvements in the units.

Thomas Black: Yeah.

Josh Mettle: They actually created value because they brought better management in, they now have a lower vacancy rate, the units are fetching more per unit, the net operating income had gone up, and they also mentioned the 7-cap turning into this 6-cap and basically

Thomas Black: Yeah.

Josh Mettle:  You got a little bit of benefit there because other investors are willing to pay more for that asset, which pushed the cap rate down. I think it’s important and what I love about real estate is that you actually create value. You can go in and find an underserved asset like this apartment building. You can say, “Hey, I can raise the rents if we do A, B, and C. We can put a better management place in, and it’s not a guess on whether the value is going to go up or down.”

Thomas Black: Right.

Josh Mettle: You can say, “I bring in more net operating income, these things work more. There are no ifs, ands or buts.”

Thomas Black: Exactly. I mean you can force depreciation and that’s the cool thing. It’s not like buying a single family home where you’re depending on all the homes in the neighborhoods and things like that selling, it’s completely objective. One of the other things you mentioned was great management and the two phases on increasing value that way is obviously increasing revenue by collections and then decreasing vacancy and increasing rents is expense reduction. Going in and implementing water programs where low-flow toilets, low-flow shower heads, and then doing RUBS program, which are resident utility bill back, so we have a significant amount of billing back. Instead of the apartment paying for it, billing back to the tenant water say at $25 per unit, and that makes a huge difference in how you can do a business model.

Timothy Black: The NOI.

Thomas Black: For the NOI.

Timothy Black: Yeah, that’s right.

Josh Mettle: Well, it’s amazing. As a tenant if you’re paying for it or even if you’re paying for a part of it, you start to think about it completely different, right?

Thomas Black: Yeah, absolutely.

Timothy Black: Yeah.

Thomas Black: For sure.

Timothy Black: Certainly, those long showers for your teenage daughter much shorter.

Josh Mettle: Yeah. There’s a 10 minute rule.

Thomas Black: Yeah.

Josh Mettle: Tell me about the strategy. I mean I’m just curious. You’ve had great appreciation but why sell? Why not just hold this thing in perpetuity and pay off the note and just have the long-term cashflow?

Thomas Black: Well, I think it depends on the investors and that’s one of the reasons we put out for a vote. As asset managers, we look at the conditions of the time. Is it the right time to sell? Can we do a supplemental? We’d looked at that and basically a supplemental is just a refinance on the property, and then pulling cash out and giving everybody back their original investments and then just continuing the cash flow and give everybody checks.

I think for this particular property, the reason is, is sitting on a large amount of equity such as this, I mean $10 million in 18 months is a significant amount of equity, and if cap rates change and we know that interest rates are historic lows and that’s what’s driving these cap rates to be lower because the cost of money is much cheaper, therefore, investors will go out and try to leverage that.

Well, looking at interest rates, we know that they’re going to go up at some point. We don’t have a crystal ball. Who knows what’s going to happen, but to see a 6-cap on a C-asset right now, that is historical lows all time. It’s unprecedented in multifamily, and so you look at it and say, “We have a bird in the hand. What happens if we decide in 2 years to continue down this road? Yes, it will still be creating a lot of cashflow for people, but if the cap rate rises, even at the given NOI, we will have reduced the equity in that property and it may take years to make that up just because of the mortgage buydown.”

One of the things that makes this property unique is that we had 4 years of interest only, so we still got 2 years left on this note. It’s a 12 year note of just interest only payment, so we’re not creating any net equity through mortgage buydown in the property yet for another 2 years. That’s one of the big reasons it’s favorable for somebody else to come in and continue a business plan, and there is some meat left on that bone and very attractive to another investor set.

I think it depends on the time and the market and what’s going on that if you have a really great opportunity, you might as well seize that and give everybody their money to repeat maybe in a different market.

Josh Mettle: Yeah, I think that’s fair. I think that makes sense. Let’s say that this sale is approved by the partner. By the way, just ballpark, how many partners are there?

Thomas Black: About 35, maybe 36 something like that.

Josh Mettle: Okay, and just based on the amount of capital they put in, they have a certain number of shares, and that’s so much voting rights they have, is that how that works?

Thomas Black: Actually, because the majority of our owners and our partners put anywhere some $50,000 to $150,000, somewhere around that, it really is just one vote. It’s not pro rata. Their ownership is pro rata based on their investment amount, as is their tax benefit because all we do is just pass it down through the LLC, but the voting rights, no. If you’re an investor, it’s just a straight single vote.

Timothy Black: Straight vote.

Thomas Black: Yeah.

Josh Mettle: Okay. let’s say this thing sells. What happens to the capital? Do you return all of that to the investors? Do you do 1031 and 1032, and 1031 is the tax-free like-kind exchange into another real estate property.

Thomas Black: Right.

Josh Mettle: What do you do with the money?

Thomas Black: Well, we return the capital. The issue with the 1031 is everyone in the entire LLC would then have to all agree to go into the next asset. As you know, the majority of our owners are physicians and you get 5 physicians in a room, you’re going to come out with 5 different opinions, and so trying to get a 1031 arranged as you know you need to do it for tenants-in-common or TIC but that is a legally blunderous difficult thing. Again trying to get 35 people to agree on the next thing may not be an easy thing. We do some 1031s but it’s usually if there’s 2 to 5 people involved in the project. It’s all smaller at this point, so.

Josh Mettle: Well, you know the point that I want to make and this is what I absolutely love about real estate is there are so many different plays and ways to make a profit. Because you’ve got other investors that complicate things, but if you took this and let’s just say you two were partners.

Thomas Black: Right.

Josh Mettle: You could say, “Okay, do we want to now just refinance this and put this on a 15-year loan and pay it off and keep it in perpetuity because we think the area is growing and the cashflow is going to continue to grow for the next 15 years or do we want to do a cash-out refinance, and pull our equity back out, take that money which is tax free by the way?” It’s so important. If a property goes from $13 million to $23 million and you pull out a loan for $18 million, you just put $5 million into your pocket tax-free.

Thomas Black: Right.

Josh Mettle: That is not a taxable event.

Thomas Black: Exactly.

Josh Mettle: I can now go, use that $5 million to buy another property or whatever the heck you wanted to do with that.

Thomas Black: Yeah. You could go buy a brand-new Porsche if that’s the kind of person you are, although I would go buy another property. Then of course you still got your original property that’s cash flowing.

Josh Mettle: That’s right.

Thomas Black: It’s a win-win situation, yeah. When I sold that apartment complex that I developed, I owned with a one-on-one partner, we 1031’d with 3 different commercial assets, and so we still own to this day, but net tripled at least. I mean they’re like slot machines, so, so it’s great. Yeah, we didn’t pay any tax on that, so we started the company with about $4,000 apiece and have grown that well over 7 figures.

Josh Mettle: Wow, it’s incredible! Triple-net property just so everybody knows means that the tenant pays everything and you just take a check every month and you’re good to go.

Thomas Black: That’s right. It’s a beautiful thing.

Josh Mettle: It’s a beautiful thing. That’s right. All right, so we alluded to some very important terms earlier, Tom. I think you mentioned amortization, depreciation. You’ve talked about appreciation, so let’s maybe those break those down for people and explain how those work in tandem together to help you really create and grow true wealth.

Thomas Black: Sure. I look at it in 4 phases.

Everybody that’s in real estate will tell you cash flow obviously very, very important, so that’s the first phase and that’s just the difference of what you’re creating in the property. The debt minus the income, that’s your cashflow.

The second would be appreciation, so market conditions changing, with single family homes. Is your neighborhood on the rise? Are people moving into the area and you’re increasing the value of your home that way?

Then you have depreciation, which essentially is the government loves to give you tax value. If it’s not your home, if it’s an actual business, 80 percent of the value of that asset can be depreciated and allocated, so the shingles, the toilets, the bricks, everything has a depreciation to it. The only thing that does not, is land and we typically see that at 20 percent because land doesn’t change. You’re actually able to over a 27-1/2-year scale, take the full value of that property and depreciate it off your taxes.

Now you can rapidly accelerate that into 5 or 7 years, so let’s say for instance you had a $1 million asset, 20 percent of that is allocated to land, so you have $800,000 worth of depreciation and you do it over a 5 year scale, you’re taking $40,000 off your taxes essentially that you passed down if done correctly and $40,000 say you’re making $200,000 a year, you just reduce your AGR, your adjusted gross to $160,000. You can say that $40,000 at your given income bracket, if you’re in a 40 percent bracket, that’s a significant amount of money at $16,000 if my math works out. Somebody can tell me if that’s the case. That’s the beauty of depreciation, which is one of the huge, huge factors personally and that’s why I got into real estate because of depreciation and cash flow.

Then the fourth of course is your mortgage buydown. I mean you’re also creating wealth by somebody else is paying your notes, so if you had that $800,000 to $1 million property, and you got a $10,000 note, over 1 year, you’ve put in $120,000 down on the property, which is also creating value. Hopefully in a nutshell, I don’t know if anybody checked my math.

Timothy Black: Yeah, and Josh, at this point, I’m sure your listeners are saying, “Why on earth did he ever go to medical school?”

Thomas Black: Right. You can read the book that I recently wrote and they’ll figure out why.

Timothy Black: That’s right, yes, that’s right.

Thomas Black: Yeah.

Josh Mettle: Yeah, and I recommend our listeners do that. One thing I just wanted to mention about the tax bracket, not only are you saving that percentage of tax bracket that you’re in. Let’s say you had $40,000 in depreciation at whatever tax brackets you’re at, but what I’ve found in my career is that on multiple years, that depreciation and the expenses that I’ve been able to write off by managing our units have not only saved me in the tax bracket I’m in, but it actually brought me down a tax bracket.

Timothy Black: Yeah.

Thomas Black: Absolutely.

Josh Mettle: My entire income, instead of being at 39.6, I’m at 27 or something like that.

Thomas Black: Yeah, exactly.

Josh Mettle: When you look at being able to be dropped down a tax bracket plus the depreciation, there’s years where you can come out $100,000 ahead in taxes, not a problem.

Thomas Black: Just because you didn’t pay them in. The year we sold the apartment complex, I was in the 17 percent bracket. It just blew my mind and that’s why I said, “Hey, we just made a significant amount of money.” You’re always looking at your shoulder and I had a couple of different CPA friends, and I said, “Is this really real? Come on! This can’t be!”

They’re like, “No, this is legitimate. This is why the government gives you these incentives, so.” Then not to mention any cash flow that you’re especially with multifamily, even if you’re not able to take 100 percent of tax benefits, your cashflow at least is not subject then to taxes. If you’ve made X number of dollars off an investment, at least it’s offset and we know that’s a large discussion based on who qualifies and things like that, but we can save that for another podcast on who qualifies for IRS benefits and things like that.

Josh Mettle: Cool! I love it. Well that was great. I love that – cash flow, appreciation of the property value, depreciation of the asset which turns into tax benefits, and the amortization of the note. Four incredibly powerful tools to grow true wealth. All right, let’s talk a little bit about your website, napalicapital.com. What I find really interesting is it indicates that you invest alongside potential investors. Is that always the case? Tell us a little bit more about how that works.

Thomas Black: Yeah, Tim, you might take this one.

Timothy Black: Yeah, yeah, no problem. We do. Our cash is working right alongside our investors’. I mean we just feel like if we put a project after we have a deal, Tom and I and then we have a junior partner who’s our CPA, we all put cash in. It’s really important for us to partner alongside our investors in every deal no matter what we do. That is an important part.

Thomas Black: Yeah, we would never bring an asset to let’s face it. When we started this, a lot of these are colleagues and relationships, and sometimes even family members.

Timothy Black: Yeah.

Thomas Black: If we’re going to put something out there, we’re going to do it and we’re going to believe enough in that project that I’m going to pony up say $100,000, too. There’s no way that I would go into this saying, “Well, tough luck, guy! I know you put all that money in there.”

Timothy Black: Yeah, right.

Thomas Black: No, we want to be vested and we also ask each of our partners whether that’s our management and things like that to invest with us because if they feel like they’re underwriting and our underwriting and everything still work out, then we want to say, “Okay, you need to come to the table with the minimum investment, too, so that we’re all aligned and working for the investors.”

I will say one thing, Josh. The website is actually napalicap.com, N-A-P-A-L-I-C-A-P dot com, napalicap.com.

Josh Mettle: Thank you. I appreciate that. Yeah, I was just thinking. Imagine, listeners, if your financial advisors ponied up an equal percentage to your investments in each of the stocks that you invested in.

Thomas Black: Right. How the different would the world be, right?

Josh Mettle: The world would be different. Maybe that’s –

Thomas Black: The world would be.

Josh Mettle: Maybe that’s not practical, but really if you said, “Hey, here’s where I’m investing and here’s where I think you should be investing.” That is just such a farfetched idea from what’s happening.

Thomas Black: Yeah, right? You go from the 3.5 percent loaded mutual fund down to the 0.5 percent pretty quickly, I’m sure.

Josh Mettle: I love it. All right, that’s great. Okay, so guys what have I forgot to ask you about? What is important for our audience to know and understand, assuming most of our listeners are heavily invested in stocks, bonds, and more traditional?

Thomas Black: Sure. I would say just motivation to try, try and get into a different asset class, than stocks, bonds, mutual funds even if it’s just you’re dipping your toe in the water and that doesn’t mean it’s necessarily with us. They are termed alternative investments but I don’t like that because the interesting thing I like is I like investing on Main Street rather than Wall Street because I have transparency in what I’m doing. It’s you look at the apartment complex, you look at the underwriting. It is very easy to correlate and to know where that’s going versus a business on Wall Street or any number of things.

You don’t truly have transparency in those companies. you can look at their financials but my god, how can you possibly tell what decisions they’re making unless you’re doing some insider trading, which is illegal. I say just have the motivation, get out there and try. Try something new and even if it’s small, educate yourself. There’s lots of websites out there that do crowd funding now, that you can put a small amount of money in, just a few thousand dollars and see how that works, and that will automatically force you to start educating yourself on some of the terms. I think most people find it gets pretty addictive.

Timothy Black: I would say jump in as far as I look back in my career, I would say that probably I should have jumped in earlier. The time is now to jump in, to learn, to educate yourself to what Tom said. I mean there’s so many resources out there today with the Internet that you can just learn and soak it up, and the cool thing, Josh, you mentioned this earlier, is you own an asset. Who doesn’t like owning something that you can drive by, look at the paint, look at the building, and say, “I own a piece of that.” That’s never going to go away unlike a stock; it’s a piece of paper. You get, if you’re lucky, a dividend check every quarter. I just think you have to jump in. You just got to go for it and do it, and by jumping in, you’re going to learn a ton just by doing that.

Josh Mettle: Yeah. I mean you can read books and I think that’s a great place to start, but you can never get that education like Tom talked about when he developed that first piece of property. I’m sure you stubbed your toe 27 times and –

Thomas Black: God! I lost about 10 years off my life, Josh.

Timothy Black: He has no toes, right?

Josh Mettle: Yeah.

Thomas Black: Yeah. I look at it and thought at the time, I’m like, “What the heck am I doing?” Like I used to, true story, I used to leave the ED depending on what time I ended up, and I was working 9 hour to 10 hour shifts at a level 2 trauma center. We were seeing about 96,000 people a year. I used to leave the ED and go and actually sit as we were building this thing. I would walk through it every day and I would it on the curb and just look at and wonder and go, “Wow! This is freaking awesome!” I got this big building and I was a complete nerd out there. I mean every day, I was out there doing something.

Josh Mettle: Now some people that’s going to resonate with and others are going to be like, “Okay, that’s the last thing in the world that I want to do.”

Thomas Black: No, no. That’s the great thing about real estate because you can do as much or as little as you want. I mean that’s the key. I mean who wants to go – I mean for me personally, I’ve done all phases of it. I’ve managed my own properties, which there is no fricking way I would ever do that again. Not my bag. I love having third party management. I love just dictating where things are going. They take the call, they plunge the toilet, they fix the pipes. I just have a call with them, depending on how new the property is, maybe once every 2 weeks and have a quarterly business meeting, and I get updates through email and I can look at that and say, “Hey! This is where we need to put the drivers in.” Yeah, I don’t. who wants to go out and do that? I mean believe me, property development I learned, I learned enough to know that I don’t want to do it anymore. I’ll let somebody else do it and I’ll make money.

Josh Mettle: Well, I think we stumbled on your secret sauce. Your secret sauce is you put yourself through that brain damage of doing it yourself and figuring it all out and learning the hard way. It’s the only way you can really learn this stuff.

Thomas Black: Right.

Josh Mettle: And now all of your co-investors at Napali Capital have an opportunity to leverage your experience in toe stubbing and invest alongside you, and I think that’s your secret sauce.

Thomas Black: Absolutely! I think one of the things about physicians and when I was learning with Tim, Tim being a major chief operations officer for a major company, and he realized this and I did. As physicians, you don’t realize you’re taught to think very independently and tend to not rely on too many people except for maybe your consultants and things like that.

But real estate, there is a team environment. You have to be good at people. you’ve got to rely on your partners. I mean you’ve got to rely on not only CPA, your insurance person, your third party management, your partners in general. You have to leverage other people’s experience in order to be successful because you’re not going to be able to do it completely on yourself.

Timothy Black: No doubt, no doubt.

Thomas Black: And you can, but you’re not going to be able to create wealth and wealth in a way that you can develop it quickly and truly be able to enjoy it. It is a team sport and that’s super important.

Josh Mettle: I love it. All right, guys, so I think we have done a pretty good job of diving into the way the way to grow wealth through passive income, and I think that there may be some people who are interested. We’ve mentioned a couple of different websites. Can we end by how can folks find you and if they have questions for you, what’s the best way to contact you?

Thomas Black: Sure. It’s –

Timothy Black: Sure.

Thomas Black: My email is Thomas, T-H-O-M-A-S, thomas@napalicap, N-A-P-A-L-I-C-A-P, dot com, thomas@napalicap.com and Tim’s actually is not Timothy. It’s just tim@napalicap.com. You can either email us directly. My book on Amazon and Barnes & Noble. If you just Google, Thomas Black M.D or The Passive Income Physician, it will pop up. Happy to talk to anybody, any questions are always welcome.

Timothy Black: Yeah. There is a Contact Us form on napalicap.com or freedomintheblack.com. We’re super accessible. I actually have 2 investors I’m talking to this afternoon that are on the West Coast that have reached out to us. If anything else, listen they just want to learn and that’s part, a pillar of our foundation is education, so whether they invest with us or not, that’s really not where we’re focused on. It’s education and if they happen to invest, great. If not, then –

Thomas Black: Yeah.

Timothy Black: We’re helping people learn about the space because we are so passionate about it.

Thomas Black: Yeah, I have to laugh. I had a gentleman in California, and he may end up listening to this podcast, but we have investors now from New York, Florida, Seattle, all the way down to California. This guy, he was an EM trained guy, and he was on Amazon searching for his board certification books and somehow my book, The Passive Income Physician, pops up and he bought it. Tim and I, Tim did the portal emails that go directly to him. It was like, “Hey! Look at this!”

I just thought it was an interesting way that it’s not only listen to podcasts and people are educating themselves, but other people that never even thought of this, he just saw this book, read some of the reviews and said, “Hey! I’m going to try this out.” It was that accessible, so just interesting.

Josh Mettle: Well, I love it. I appreciate you guys and the time you spent, so sharing so generously with us today, and thanks again for your time. I look forward to reconnecting with you, guys. I’m kind of curious how this unit, this 300 unit pans out, so we’re going to have to reconnect –

Thomas Black: Yeah!

Josh Mettle: Let us kind of know how well the final numbers shook out and what the next investment is.

Thomas Black: All right, sounds good. I’d love to do it.

Timothy Black: You bet!

Josh Mettle: I sure appreciate your time again and look forward to connecting with you soon.

Thomas Black: Alright, Josh.

Timothy Black: It sounds good. Thanks, Josh, for hosting us.