As you may recall from my Journey into Passive Index Investing Parts 1 and 2, I was a newly minted physician learning about personal finances and passive index investing. After a year or so of learning, I had a pretty good grasp of what it would take to become financially independent.
Financial independence essentially boils down to simple math:
- Earn as much income as you can
- Save as much of your income as you can
- Invest those savings into broadly-diversified low-cost index ETFs
Plug in your current portfolio value, savings and expected returns into any online investment growth calculator (or use Excel), and you can then predict what your portfolio value will grow to in 10, 20 or 30 years. In the beginning, I found this exercise fun, but after a while, it lost its lustre, which was a good sign I was on the right track. Successful investing should be boring.
During Years 2-5 as an attending, I was happily chugging along with my couch-potato portfolio, ignoring the white noise of Wall Street, reinvesting dividends and adding fresh money each month into whatever lagging asset my CCP spreadsheet told me in order to rebalance back to my desired asset allocation.
Index investing is not perfect, but as the late great John Bogle said: “it gives the investor a fair share of whatever market returns we get”.
Learning about index investing makes you appreciate the significant savings compounded over the long term from avoiding the typical 1-2% MERs in Canada, especially when you plug in your numbers in a T-Rex Score Calculator. No matter how nice your financial advisor may be, their fees are not worth “x” number years of your life.
The above 3 steps constitute the main road for achieving financial independence. This is the path I recommend to my family and friends to master.
In Year 5 as an attending, I read “Rich Dad Poor Dad” by Robert Kiyosaki, which offered me a glimpse into the mindset of the real estate investor. Like other real estate investors, this book was the book which sparked my interest in real estate investing.
Listening to real estate podcast interviews of sophisticated real estate investors, a common theme emerges. To become a sophisticated real estate investor, this journey is riddled with mistakes and failures, long hours of learning, stress, headaches, and, not uncommonly, marriage problems. Sounds a bit like residency but with no guarantee, it will work out at the end. You often hear about the success stories of real estate investors, but you don’t hear the untold stories of real estate investors who give up once they realize it is a full-time/part-time job.
I was definitely not interested in trading in my time for a second job.
I soon learned you can bypass the “residency” of real estate investing by leveraging the skill set and knowledge of the “attending” sophisticated real estate investor. What is the catch? You need to have money to enter this realm. As a physician or any other high-income professional, this is definitely within reach, if one takes the time to learn about personal finance and investing.
In my opinion, investing in:
- Private mortgage loans (aka syndicated mortgages with 2 or more investors)
- Joint Ventures
- Private equity in land development
are the most lucrative and efficient ways to invest in real estate passively in Canada at this time. I mention “at this time”, since this industry is more mature with our neighbours down South with their “crowdfunding” platforms. Only time will tell whether these platforms (which have arrived) will take off in Canada.
So why did I get myself into real estate investing and what have I learned so far?
Nudge from my JV partner:
Similar to the nudge I received from a friend to “check out ETFs”, which led me down the path of passive index investing, I received a nudge to check out real estate investing from my JV partner when I first met him by chance at a neighbourhood get-together several years ago.
I will always remember one of the first things he said to me: “I don’t get out of bed for an investment unless the returns are at least 30% annualized“. He wasn’t being arrogant. He was just stating the facts. This got me thinking that perhaps DIY index investing is not the only road to Rome.
Real estate returns are real:
Being a cautious person by nature, it took me a while to believe the returns in real estate investing.
Back in the days when I would lurk on the Bogleheads forum, I adhered to the thinking that index investing is the be-all end-all of investing and real estate investing was something to frown upon as “risky”. If there was a poster who touted the benefits of real estate investing, they were quickly shouted down into submission.
On the other hand, there are many real estate investors who think their way of investing is the be-all end-all of investing, and they look down on people who invest in index funds.
I think both parties are guilty of having tunnel vision and cult-like devotion to their chosen investment strategy.
There is no reason to draw a line in the sand between these 2 investment strategies. Why not have both strategies in your toolkit to use?
I know it’s difficult to trust a random, anonymous blogger online, but for what it is worth, I can vouch the returns in real estate are real, which I have attempted to illustrate in Investment Stories.
You do not have to “reinvent the wheel” in real estate investing. Real estate is a proven investment strategy for creating wealth. There are “inefficiencies” in the real estate market which are more easily exploited by investors vs the stock market being relatively “efficient”.
Starting out as a passive index investor, I had projected my portfolio growth based on a 6% annualized return with a balanced portfolio. DIY index investors can appreciate the significant long-term savings from eliminating 1-2% in MERs, which is, in essence, gaining 1-2% annualized compounded growth.
When you begin to factor in real estate returns even at the “low end” of 10-12% with syndicated mortgages, the return is already 4-6% higher than my projected returns with index-investing. That is a SIGNIFICANT increase in your portfolio compounded over the long term, which you can look at as either reducing your time to reach FI or increasing your net worth at retirement.
Who can say no to that?
Real Estate Investing is the “Wild West”:
Let me be the first to warn you, the real estate investing world can have a bit of a “used-car salesperson” stench to it.
Being a physician, we are accustomed to trusting the opinions of our colleagues since we make decisions in the best interests of our patients.
The trust we are accustomed to in medicine is, unfortunately, often exploited by others in the financial and real estate industry. Financial advisors do not necessarily have your best interests ahead of their own. The primary goal of advisors is to make them and their firm money first. Your needs are second to theirs.
The same thinking applies to real estate investing.
There is nothing wrong with this way of thinking, as we all invest to make ourselves wealthier. However, when you enter the real estate investing world, you need to take off your “doctor hat” and put on your “investor hat”.
“Shields up” as Captain Picard would often say when the Enterprise met a new encounter. The hardest part in the real estate investing world is to differentiate friend from foe.
I hate to admit it, but when my growing portfolio entered into the 7-digit territory, stomaching the market drops were tough.
Even in a prolonged bull-market, witnessing wild market swings which affected my portfolio by tens or hundreds of thousand dollars in a single day or week, can be unnerving, even for a disciplined investor who tries to ignore the market news. The worst part was the feeling of helplessness when your portfolio is affected by what a politician says or something that happens half-way around the world.
I still slept fine during those years, as I knew my index portfolio would grow over the long-term. However, I have found I sleep more soundly with my real estate investments.
At this point in my evolving investing career, what advice can I offer to others as they embark on their own investment journey?
Learn as much as you can about personal finance and passive-index investing. Stick to this well-traveled road and you will reach financial independence (FI).
Passive real estate investing in Canada is a lesser known road that is also well-traveled by others who take the time to learn it.
Being a high-income professional who saves a lot, is a passive index investor and a passive real estate investor is a potent combination for creating long-term wealth.