Real Estate

What is Financial Freedom for Physicians?

So, what is financial freedom for physicians? It never occurred to me, until one day an extremely wealthy businesswoman asked me, «So, what’s your number?» I thought, «What does she mean?» I’ll explain.

Real estate is the most powerful way to accumulate wealth. More people have become millionaires through real estate than any other means. We know how to find the property, create a plan for improving the cashflow, negotiate the deal, and manage the asset. Your passive investment provides you with the opportunity to earn an income without the nine to five. We create a unique business strategy that fits your financial and investment goals. Get the financial freedom you need to do more of what you love. We are Red Pill Kapital, with a K.

Making money as a physician?

So, when you make money as a physician, it’s an active endeavor. It’s a personal service business. What you’re doing is you’re trading your time for somebody else’s money. It’s a skill. It’s not something that’s fungible. You can’t go on Amazon and say, «Give me two units of a physician.» You can’t say, «Oh, I need a toaster, and I need it in black,» and they make 3,000 of these things a minute, and you need two of them. You’re not a widget. It’s a highly compensated, highly trained field, but unfortunately, because it’s such a specialized skill, because it’s so highly training, and it’s so lucrative, you have something called golden handcuffs.
• What happens if, for example, there’s a disruption?
• What happens if there’s death?
• What happens if there’s a disability?
• What happens if there’s a divorce? What happens even if you have to take a long vacation and you make your money actively?
• What happens to your income?
• How long do you have?
• How long does your family have before it runs out of money, if you have no active income?

How long can you survive on your savings alone, if you lose all of your active income?

Take your total savings divided by your average monthly expenses, and you’ll get a number, and it’s the numbers of months of survival.
Now, you might be able to prolong your months of survival, if you have a death insurance plan, a life insurance plan, or if you have a disability insurance plan. You might have an improvement in the number of months of survival, but you know what? This comes at the expense of the person who’s disabled. This comes at the expense or the life of the person who’s the insured. If you’re that person, it’s not a good thing, because the only way that your family members are going to get that value is if you expire. Even if you become disabled, it’s highly likely that your average monthly expenses will dramatically increase, not decrease, and they’ll never increase to the level that you made when you were an active participant in the labor force.
This might explain why there’s a very high suicide rate in professionals, such as medical professionals. There’s financial duress that occurs, and sometimes people face these horrendous potential disabilities and a future reduction in income, and they don’t really see a way out. This might partially explain why suicide rates are correlated closely with financial instability.

What’s your number?

It’s your average monthly expenses times 1.30. That’s your number. That’s how much money you need to survive. Based upon your personal number, how many months can you survive? So, take your total savings, divide it by this number, and that gives you months of integrity.

Disability is not a Black Swan event

I mentioned disability, and I want to graphically represent this. In the red line is your expenses. In the green line is your income, if you’re an active income worker. If you become disabled, which is the purple arrow, all of a sudden your expenses start to go up, and your income starts to go down, and what little you had left in savings disappears, and instead you start to accrue
debt. You’re far more likely to become disabled than die. On average, a 32-year-old male is six and a half times more likely to become disabled than die. Deaths due to cancer, heart disease, and stroke have gone down 32 percent, but the disability rate has increased 55 percent.
The things that used to kill people instead now disable them, and the problem is the disability costs way more than the death does.
Income vs Expense with disability


But I have disability insurance

You might tell me, «But I have disability insurance. I’ll be okay.» You know, the reality is even if you have insurance, it’s not going to recover your income to the level it was before, and it’s not going to cover the income to the same level as your expenses are going to go up. So, no matter what, you’re not going to be able to maintain the delta between your active income, your expenses, and you’re going to end up negative. You’re probably going to end up in debt.
Disability is more likely to occur long before retirement, but that’s only because the mortality statistics suggest that death is more likely as we age, and that disability is far more expensive to you individually than death. It’s really a catastrophic number that most people don’t plan on; they don’t anticipate. Some people have disability insurance, but they don’t realize how many loopholes are in there, how many hidden limitations, what the time limitations are, or what the occupancy specific limitations are.
Being a physician, and having a disability, and having it occupation-specific to a physician doesn’t mean much. It has to be occupation-specific to what you do specifically at this time. It’s interesting to me. People change what they do, even as physicians, three to four times in their career, and rarely does their disability insurance keep track of that. The other thing is people set and forget their disability insurance. They get it at one time, and 15 or 20 years later, it has no bearing on what they’re currently doing, and it’s usually not indexed
to inflation, and it’s usually not indexed to income changes. You’ve worked actively, and suddenly your entire future gets destroyed, and all of your years of sacrifice are evaporated, because you didn’t anticipate disability.

Population is living longer, but sicker, with greater financial needs

So, one year of nursing home care in a semi-private room in 2011 was estimated to cost about
$78,000. In 2021, the estimated cost is going to be $128,000. That’s a 64 percent projected growth rate. Did you earn a 64 percent projected return rate on your stock market investment from 2011 to 2021, 10 years? I don’t think so.


Most Americans live paycheck to paycheck

Most Americans live paycheck to paycheck, and the reality is that the median American household currently holds about $11,700 in bank accounts and retirement savings accounts. That includes all their money. Now, median balances are different than average balances. So, the average balance is $34,730. This is the difference between mean, median, and mode. But the reality is 29 percent of households have less than $1,000 in savings. Millennials obviously have the least amount. Baby boomers and older have about $24,280, but they’re getting close to retirement.
The Northwestern Mutual 2018 Planning and Progress Report found that Americans average about
$38,000 in personal debt, excluding their home mortgage. So, even though they might have $34,730 in savings account median, their average debt is $38,000, so they’re actually net negative. About 30 percent of Americans use up about $14,000 of savings a year, so they go negative $14,000 every single year.
The 2018 Federal Reserve Report indicates that about 40 percent of Americans struggle with just paying a $400 emergency bill. 27 percent of those surveyed would need to borrow money to cover a
$400 bill. 12 percent wouldn’t be able to cover it at all. About one in five adults had a major unexpected medical bill last year, and one in four adults skipped necessary medical care because they couldn’t afford it. So, people are living on the brittle edge of insolvency.
At any given time, about 17 to 20 percent of adults are unable to pay their current month’s bills. They’re going in debt every single month. The real median household income in 2018-2019 was about $61,372, which in real dollars is almost exactly the same as it was in 1999. So, the household income average is
$61,372. The average expenditure per consumer unit was $61,224, again indicating that really there’s no difference between people’s income and their expenses. They’re spending everything that they have.
So, what does that have to do with physicians? Physicians make more money, don’t they?
In other words, two thirds of physicians are net negative. After they get their income and they pay off all of their expenses, there’s nothing left over, and there are a lot of reasons for this.
I mean, obviously it’s the concept of “I finally made some money, and I’m going to do what I need to do,” or it’s the concept of keeping up with the Joneses, or it’s the concept of, “You know what, I’ve got hundreds of thousands of dollars of
medical school debt.” There’s an interesting study on neurosurgeons that the vast majority of neurosurgeons continue to pay off student debt well into their 50s. What’s happening is just like regular people, physicians’ expenses match their income, so they have nothing left in savings – just the numbers are a lot bigger.


Being an active wage employee leaves you exposed

If you’re an active-wage employee, you’re exposed.
The reason why is active-wage employment is taxed at the highest possible level. Active employment requires constant activity to maintain your financial integrity. It’s like bucketing out water from a lifeboat that’s sinking. The problem is all you can do is bucket faster, and once you start to get behind, it’s hard to get above water again. But the other problem is you don’t realize, as a physician, your lifeboat is only standing in about three feet of water, and you’re drowning in these three feet of water. If you get out of the lifeboat, you can stand up, and look at the horizon, and walk out of this mess.
These are the things that I want you to think about, immediately.
You need to set up some bank accounts and set up some hierarchical accounts. You want to set up an integrity account, which is essentially the number. You figured out what your number was, so multiply that by six, and set up an integrity account. This is where your emergency cash reserve is going to go. It doesn’t mean that you have to set it all up at once, but that’s your intention. Your first goal is to set up enough money being put aside that you have an integrity account, so that should you have an acute expense – should you have something horrendous happen – you’ve got six months of cash.
Your next account, the next flow over, should go into an investment account. You want to have a set dollar amount per pay period going into investment. Now, you notice that your living expenses don’t come until third. What you want to do then is identify what your actual dollars per pay period are that you’re going to use for living expenses, and put it into that living expenses account, and live from that living expenses account. Then you want to pay down
debt, and it’s a strategic pay down. I’m going to go through that in a few seconds. Only after you’ve done your debt pay down can you put some money aside for a splurge account – the dopamine account, the thing that makes you feel good. You have to have something that you’re looking forward to, and so that’s your splurge account. Then whatever you have left, it goes into your final bucket, which is your residual investment account. Sweep everything that you have left into a residual investment account.

Upgrade Wealth Operating System

What I’m really talking about is upgrading your wealth operating system. Your wealth operating system is how you perceive your relationship with money. Most people have an extremely defective wealth operating system. People think that if they spend money, it’s a bad thing. Some people think that money itself is a bad thing. Some people think that rich people are bad people. Ask herself a question, and just close your eyes and ask. If you’re asking, «Rich people are … Rich people do …» ask yourself if you’re getting any negative connotations. Are rich people greedy? Do rich people take advantage of other people? If these things resonate in your head, your wealth operating system is defective.
If you asked yourself, «Money is …» and you let yourself just write it down on a piece of paper, what is money? If money is dirty, if money is something that’s scary, if money is something that you lack, then your wealth operating system is defective. If you asked yourself, «Money makes people …» and if you end up with words greedy, if money makes people jealous, if money makes people behave badly, your wealth operating system is defective. Because money and wealth are merely tools as a process of success. Innately there’s nothing good and there’s nothing bad about money. Money is just simply something that you can use to accomplish a particular task. So, you need to upgrade your wealth
operating system. You need to definitely calculate your number. You need to accumulate your cash for six months of integrity.



Debt rules: Arbitrage interest rates

As you upgrade your wealth operating system, you want to remove rules. So, I want to talk about debt rules, specific things that you pick up along the way, things I wish somebody had mentioned to me. When you look at things that you have debt on, if they have a high interest rate and
their interest rate’s above 12 percent, you want to pay them off first, because you can generate probably in your investments, if they’re significant investments, you could probably generate 12 percent or greater. So, if you pay off debt and it’s above 12 percent, it’s better to do that, because it’s still an investment. You’re just paying it off. It’s just that you’re not getting the money directly, but you’re saving the money. If the cost of interest is between six and 12 percent, you need to evaluate it. You know, you might be better off paying off that debt. You might not be.
The key thing is take all of your debts and consolidate it down to the least number of units that you have to pay off. Usually when you consolidate debt and you aggregate it together, then the interest rate drops. If it’s a minimal debt interest rate, below 6 percent, you want to make a minimal payment on it, because you’re definitely going to make more money in other investments well above 6 percent. What you want to do is you want to take that cash that you would have used to pay down that debt and invest it into cash flow projects. If the interest rate on your debt is below 6 percent – 6 percent to
12 percent – you need to evaluate it closely. Above 12 percent, you definitely need to pay that stuff off immediately.
Really, the power of compounding is what this is. Let’s take an example. So, $10 invested for 30 years. Simple interest versus compounded rates of return. Let’s say that you had $10 at year one, and you took out $10 at year 30. At a 7 percent rate of return, you’d get $10 principal back. If you had invested without compounding, you would’ve made about 25 bucks, but with compounding, you end up walking away with $80 per $10 invested. That’s the value of compounding. Compounding is essentially a formula that allows you to reinvest that money on a monthly basis, and so you’re making money off of the money that you already invested, and it generates a rate of return. You add that to your principal, so that you make more money off of it. If you don’t have compounding interest, somebody else is eating your lunch.
Let’s just do a little, quick comparison, just because I think it’s important to understand what a huge difference compounding makes. Let’s say that you took an investment at 2 percent versus 10 percent versus 18 percent over 30 years, and you invested $100. You start with $100. What is it worth at 2 percent, 10 percent, and 18 percent over 30 years? At 2 percent, it’s worth $182. At 10 percent, your
$100 has grown to $1,984, but at 18 percent over 30 years, your investment is now $21,000. That’s a huge difference. This is going to become much more relevant shortly, when we start talking about what happens in the stock market and what your real rates of return are. I think you should pay attention to this, because your real rates of return are nowhere near what they’re telling you.

Quick analysis compounded returnRule of 72

Another way to look at it is the rule of 72. It’s a quick way to determine the number of years it takes to double your actual cash. Now, this is a quick and dirty way. This is not science. This is just a real simple way — back of the napkin. Take whatever interest rate it is. So, let’s say you’re going to make a 2.5 percent compounded return on something. Take 72, divide by 2.5, and it gives you the number of years it would have taken to double your money.

Debt rules: Arbitrage interest rates

Taxes – the failure to account for taxes is incredible to me. Most physicians are either employees or they’re self-employed. They have an average tax rate of 40 to 60 percent on their income.
Doesn’t that seem bizarre? Because these are the hardest working people we have in our community, and they’re the ones saving the lives, and they’re the ones that we’re taxing the most. Do you know who has the lowest tax rate? Investors and business owners – people that own dry cleaners, people that own convenience stores, people that invest their cash. In fact, if you make money on your money, you probably don’t even pay any taxes at all, but if you’re a hardworking physician, and you get blood on your shoes, and you have to deal with difficult patient situations that are life-threatening, you’re getting taxed 40 to 60 percent. It doesn’t make a lot of sense. This is the issue. The biggest single cost burden that you have to your wealth taxes, and you are in the wrong category, and so you have to understand that and see exactly why.

Retirement financial stability

Why is it that physicians don’t feel comfortable about their financial preparedness going into retirement? This is an AMA study that was done in 2018, and over half the physicians are worried about volatile market conditions and depleted savings. 43 percent of the physicians felt like they didn’t save enough. 28 percent thought that they started saving too late. If you look at all of these things, these physicians are heavily focused in on savings, and I’m going to conjecture that this is the wrong thing to do. Focusing in on pure savings is buying into the mentality of what portfolio managers want you to buy into, and I don’t think that you can save yourself enough to get to retirement, based on market volatility, and inflation, and fees. Most people will never be able to retire if you really look at it.


The 4% rule: (traditional investments in a balanced portfolio of stocks, bonds, and cash)

When I look at how much money can somebody take out of retirement at any given time, there’s something called the 4 percent rule, and that’s assuming that you’re using traditional investment tools, like balanced portfolios, bonds, stock, and cash. It says that you can take out about 4 percent of your total investment portfolio in any given year, and that portfolio will last you about 30 years. That assumes, though, that the inflation rate is the historical 2.5 to 3 percent, and it also assumes that the compounded rate of return in your traditional investment portfolio is about 6 percent. It also assumes that taxes don’t go up. It assumes that fees don’t go up. It also assumes that you’ve reinvested all of your dividends. So, what does this mean?
If you invested a million dollars in a balanced portfolio of stocks, bonds, and cash, you could withdraw about 4 percent per year with a steady decline in the principal over the next 30 years. The keyword here is steady decline in principle. At the end of 30 years, you don’t have anything. There’s nothing left. So, if you took $1 million when you were 30, over the next 30 years, by the time you turn to 60, you would have nothing left. Now, the problem is expenses. People are living a lot longer than 30 years, and they’re living a lot sicker. Only 12.2 percent of the U.S. population is now healthy. That means
78 percent plus of the population has significant comorbid diseases, and that’s going to be a very significant factor for most people.
It also assumes that the tax rates don’t go up, but the reality is tax rates are going up, and they’re going to tax your retirement. They’re saying that these are tax free, but when you look at use taxes, use taxes are I buy a piece of bubblegum, and it costs me 10 cents, and I pay 1 cent in tax, because I eat that bubblegum. That’s not a federal tax. That’s not state tax. That’s a sales tax. It’s a use tax. If I buy
a car, then I might have to pay a couple thousand dollars of use tax to the state. I might have to pay a municipal tax.
These use taxes have nothing to do with your deferred tax plans and your 401ks. So, once the money comes out of the 401k, you’re going to be using it. You’re going to use it to buy things, and the things that you buy are going to have definite use taxes. I also believe that real estate taxes will probably
go up. I also believe that the federal government will come up with all kinds of novel ways, because they’ve run out of money, and the only place that they can get their money is from you. So, they’re going to figure out innovative ways to get your money.
The other reality is we have a negative yield bond rate right now. So, that means that there isn’t a lot of money that you’re going to generate off of investments in bonds. In fact, it’s negative. When that happens over a prolonged period of time, stock market returns will start to drop, because people will
not be able to maintain high levels of stock prices as interest rates continue to drop. You have to have a certain amount of economic friction with inflation and you have to have a certain amount of economic friction in bonds in order to maintain elevating stock market prices. When those things disappear, stock market prices start to drop. In the short run, they go up, but in the long run, they drop.


What if your income is passive, and is growing >4% (non-traditional, tax-advantaged)?

So, if your income is passive, and it’s growing greater than 4 percent in non-traditional tax-advantaged states, it creates a whole different mechanism, because if your average monthly expenses times 1.3
is your number and based upon your number, assuming that you’re constant renewing passive cash flow exceeds your number, it really doesn’t matter what your total savings is, because as long as your monthly passive cash flow exceeds your number, your total savings could be zero and you would still have infinite months of permanent cashflow because that positive cashflow exceeding your number is all that really matters. Now, that doesn’t mean that I would recommend deplete your savings and live purely off of positive cashflow, because the reality is there are going to be fluctuations, but it gives you a different perspective. What you’re really looking for is to increase your monthly positive cash flow above your number, so that you can have an infinite capacity to survive passively, and then your total savings doesn’t really matter that much.


What if your income is passive, and is growing >12% (nontraditional, tax-advantaged)?

So, what if your income is passive and you’re growing greater than 12 percent in a non-traditional tax-advantaged plan? You know, again, the same thing. Total savings plus monthly passive cash flow divided by your number is infinite. What you’re doing is you’re leaving a huge legacy for the people behind you. Your savings is never depleted. You’re financially free, and you’re free to pursue your passions, whether that’s working in medicine, or whether that’s painting, or whether that’s travel. Most people that are physicians have spent so long becoming physicians and they’re so passionate about becoming physicians and are so passionate about delivering awesomeness and care, they’re going to continue to practice medicine, but they won’t feel the stress and the day to day grind of that, and the burnout of medicine disappears.
I recommend that you work the number. So, what that means is cashflow divided by an investment equals a rate of return. For example, if you get $100,000 of cashflow and your investment was $1 million, that’s a 10 percent rate of return. Cashflow is the rate of return times the investment. So, this is just another example. If you take your cash flow and you divide it by 12, you get what you need for your monthly cashflow. What you want is you want your monthly cash flow to be greater than your number.
So, if you take the number, multiply by 12, divided by your rate of return, you’ll get the exact amount of investment needed, so you can work it backwards to figure out how much you have to invest to achieve your number and what the interest rates are.
This is just a different way to look at the same issue, but everyone should go through this to figure out what investment level they need and what their rate of return is. Once you do this, and this rate of return is post-tax, post-inflation, post-fees, once you do this, you have a whole different approach to your investment.
• So, again, what’s your number?
• What’s your rate of return?
• What are your real risk adjusted rate of return after fees, inflation, and taxes?
• How much capital will you need to deploy to be successful?
The reality is is that you’ve already won the money. You’re losing time. You have a high income. You’re 90 percent of the way there. If you just do a few things right, you can be incredibly
financially successful. You can leave a legacy. You can leverage other people’s time with your money and be incredibly successful at a much lower risk and a much higher reward.

Is Red Pill Kapital right for you?

Are you looking to enhance your financial wealth and truly live the life that you deserve? Are you an accredited investor who’s interested in learning more about passively investing and cash flowing
commercial real estate? Are you interested in investing alongside us? Because we don’t need your money. What we’re trying to do is do bigger projects with more leverage, and the bigger the project, the less the risk because the leverage improves. We only make money if you make money. If you have any questions, please email me at and that’s Kapital with a K.
We search for value-added real estate for our passive commercial real estate partners, and we actively manage that investment long-term for a successful exit. We are Red Pill Kapital.
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Real Estate

Why multifamily? Asymmetrical Yield

I often get asked: Why did I pick multifamily as one of the major places where I invest? It’s the yield. There’s an asymmetrical yield that occurs in multifamily, and let me explain why. I’m an opportunistic commercial real estate investor, and I prefer mid-to large-size multifamily for a very specific reason.

Real estate is the most powerful way to accumulate wealth. More people have become millionaires through real estate than any other means. We know how to find the property, create a plan for improving the cash flow, negotiate the deal, and manage the asset. Your passive investment provides you with the opportunity to earn an income without the nine to five. We create a unique business strategy that fits your financial and investment goals. Get the financial freedom you need to do more of what you love. We are Red Pill Kapital, with a K.

What we do?

We leverage data. We take all the data that we can find, and we apply it to real-world experience. What we figure out is how to get a dependable passive income investing cash flow, and we look at tax-advantaged, commercial real estate. We look at doing value-adds to improve net operating income in our passive commercial real estate. When we do that, we’re able to significantly enhance the value proposition. We’re densely research and data-driven, and what we’re trying to achieve is asymmetrical returns, returns far greater than what one would expect for a particular risk ratio. I keep in mind that all real estate is local. It’s hyper-local. It’s driven by demographics and the local investment environment.

Each individual asset performance is based upon the skill of the management. It’s the management team that will determine the success of a project. The fundamentals of real estate, the dirt, the building, and things of that nature have little to do with the outcome. The asset is probably 10 percent of the job. Managing the asset and doing it correctly determines the performance of the investment, and what’s really interesting is, in real estate, you, as an investor, can have a massive impact on the outcome should you choose to.

Our core competencies

  • We find and validate projects.
  • We look for untapped potential.
  • We look for the local growth drivers
  • We look for upside potential.
  • We trust what people tell us, but we verify each and every single fact that’s verifiable.
  • We acquire real estate, we stabilize real estate, we value add it, we improve it
  • We have a goal to exit in four to seven years.

Now that may change in the near future because there are a lot of changes coming in inflation, and there are a lot of changes coming in interest rates, and so we keep our eye on the horizon. We’re trying to predict what’s going to happen five, seven, ten years from now, knowing that the farther out we look, the less predictable it is.

Our goal is to maximize cash flow, to drive the net operating income, and ultimately increase the realized sale value of a property.

We prefer mid- to larger-sized real estate because

You can leverage the systems inside a single campus. What that means is your maintenance, your overhead, your leasing costs, your branding, your unit mix, your ability to release, and your ability to communicate in social media is maximized, because it’s all one single campus. You’re not trying to rent 100 units over 20 square miles. You’re renting 100 units on one city block, and you can put your arms around it.

I prefer real estate that’s multifamily because it’s logic-based. It’s not subjective; it’s not emotional. It’s math.

Take the net operating income, divide by the cap rate, and that gives you the value. The cap rate for a particular asset, for a particular grade, is pretty well defined. So my goal is to affect net operating income. Net operating income is essentially income minus expenses. Can I increase the income? Can I reduce the expenses? If I can do that, I’ve increased the value. That’s called forced appreciation. It’s called a value add. Any increase in net operating income increases the value dramatically.

Let’s just say that you invest $1,000 in the property, and you get a $4,000 to $5,000 increased income net operating annualized. Assume that the cap rate is 5 percent. So a $4,000 change in net operating income from a $1,000 investment at a five cap results in an $80,000 increase in value. That’s amazing because you can’t get that in a house or a single-family residence, because single-family residences and houses are based on comparative value—the value of that similar house in the market in the same neighborhood—and they’re highly subjective.

Let’s take a worst-case scenario. Let’s say that your $1,000 investment only increased $1,000 net operating income. Even at a five cap, $1,000 increase in net operating income for a $1,000 cap times the expenditure still gave you a $20,000 equity gain. You can’t do that in a house. When you increase or put money into a housing situation, you usually will not get the money out. Very rarely will you get a dramatic increase in equity gain in a standard house.

There’s a lot less competition to buy in commercial real estate, and the reason is because it takes more money, it takes more knowledge, and there’s way more fear about it. Everybody knows how to buy a house, but I bet you in the population in general, 1 percent know how to buy commercial real estate. In that 1 percent, it’s probably half of a percent that’s very good at it.

Depreciation is your secret weapon.

Taxes are the single biggest drag on wealth accumulation. You have to realize that taxes are merely an incentive by the federal government to get you to do something that they themselves can’t do efficiently. They need people to develop housing, because there’s a tremendous difficulty for the federal government to develop housing. In fact, it costs the federal government. There was an
interesting study done in California where they built section eight housing. The per unit cost of section eight housing for the federal government combined with the state to build it was over $300,000 per unit. That’s ridiculous. Anybody else could have come in and built that for $120,000 per unit.

So, the government looks to the private sector by modifying the tax rates, creating incentives to have them do the work that the federal government can’t do, and realize that depreciation is a phantom loss. It’s not a real loss. What it is, is the federal government says this thing is going to devalue over this amount of time, and as it devalues, you’re going to have to replace it. It’s about three and a half percent per year for most structures. When you have this phantom loss, it goes against your income, and so it reduces your taxable income. Now with the recent tax law changes with accelerated and bonus depreciation, it has completely eliminated most of my K-1 distribution taxes that I’ve had to do on passives. It’s a secret weapon that most people don’t pay attention to, and it’s a huge equity kicker on rate of return that you can never get in the stock market.

Why not just buy a portfolio of single-family rentals?

Well, you can’t find property managers. It’s really hard to find them. Maintenance is incredibly difficult, because it typically takes my folks 30 minutes to an hour to get to a site, evaluate the site, look at the system, figure out what they need, then go to the hardware store, get what they need there, and put it in. A simple toilet repair, on average, takes about four hours on a single- family residence. That same toilet repair on our multifamilies takes under 30 minutes. Those parts are in stock in our multifamily; they’re all standardized. You don’t have to go and travel.
There’s not a trip fee. You don’t have to go look at the particular gasket or that particular item that you need, the flapper valve that’s unique to that particular toilet.

Single-family residences are incredibly market sensitive. If you looked at the 2008 recession, single-family residences had much higher vacancies than did the cheaper apartments and the value-add apartments, and so they had a much greater loss of capital. Single-family residences are highly dependent
upon the general economy, because they’re comparative market approach to valuation rather than cashflow valuation. Single-family residence is defined by comp rates, not by net operating income, so if you increase the rental rate by $500 per month at a 7 percent cap on a multifamily, it increases the value by $7,142 per unit. On the single-family residence, it wouldn’t matter. What we’d have to do is compare that single-family residence to something else that looked similar – similar architectural style, and whether somebody would want to buy it in that same neighborhood and based upon the schools, and a whole host of other factors that are highly subjective and completely out of your control. I don’t invest in single-family rentals. There’s too much hassle, there’s too much friction, and it’s too subjective for me.

  • There’s a stability of income even during a recession. You know, people think that a recession is coming, the recession is coming.
  • I don’t really care.
  • The sky may be falling, but it’s about cashflow.
  • Cashflow determines your success during any recessionary period.


If you looked at the numbers from the St. Louis Fed, and you looked at consumer price index for all urban consumers, and you looked at in the blue line the index for the average consumer of goods versus the consumer of residences. The red line shows what the cost is for rental, and the blue line shows just a general inflation rate or general cost. If you look at that and you look at the gray bars, which indicate recessionary periods, you’ll notice something interesting. The inflation rate ticks up but has a significant drop during the recession. The actual housing cost doesn’t shift, and this is specifically for multifamily. It really doesn’t make any difference. It may stabilize or it may flatten for a period of a few months, but then it continues to creep back up. The reason why, is that this is demographic driven. This is driven by the number of people, and unless we dramatically reduced the population in the United States, that average rental rate is going to continue to climb.


Foreclosure is exceedingly rare in multifamily, and the reason why is because of the stable income and the high demand.

It’s a cashflow-based asset that the banks will stress test before they give you a loan on it, and the banks love lending for it because they know that you’re not going to go into foreclosure. If you look at single-family residences, they’re foreclosed on three times more often than multifamily. Even in good times, they’re five times more likely to be foreclosed than a multifamily property. Lenders love
multifamily because the asset is stable. They can deploy a lot more capital, and there’s less potential for human factors to get in the way.

This is a chart of single-family foreclosures during the recessionary period: 2008, 2009, 2010. This is compared to the same period for Freddie Mac and Fannie Mae loans, which were commercial multifamily. If you notice, the historic average of rates of foreclosure is 0.46 to 0.47, and it jumps to
2.23 for single-family. The historic rate for multifamily is about 0.1 to 0.2, and it jumps up to a little bit below 0.8, then it drops immediately back down to 0.1, 0.2. Single-family foreclosures peak at 2.23 percent of the entire real estate market, and even at the peak of the financial crisis, multifamily was only 0.8 percent. That’s a huge, huge difference.

It’s about supply and demand.

So I’m going to throw something at you. Demographics is what happens to populations, and populations determine value. The more people that want a particular thing, the higher the price. The less people that want that particular thing, the lower the price. In real estate, supply of real estate and utilization of real estate is fixed as in terms of land. Certainly you can increase the supply of real estate by building, but what is easier to change is demographics – the number of people coming into a community. If you have a bunch of people coming into the community, you’re shifting your demand curve from D1 to D2. You have people coming in, and your supply is remaining linear, then what ends up happening is your price has to go up. But let’s say that instead, you’re in a community that is at D2 and you’re losing population. Your price is going to go down and your supply is essentially the same. Demographics are incredibly sensitive indicators as in terms of what happens to price.

I look at demographics as a headwind or a tailwind. If you’re flying a plane, and you’re going 500 miles per hour, and you have a 200 mile per hour headwind, you’re going to take longer to get there because your net rate is 300 or you’re going to burn more energy to get there. But if you’re flying that plane and you have a 200 mile per hour tailwind, you’re going to get there a lot faster, or you’re going to have a lot less energy burned to get to the same place. It’s almost the exact same thing. Demographics are headwinds and tailwinds, and the economics of the issue of price and demand.

Demographics drive the economy

It’s all based off of population statistics, so there are a couple of things that you should be aware of. America’s birthrate is really low, and we have not been producing enough babies for the generations to replace themselves. We have to have a steady influx of people coming into the country, because if we don’t, we’re not going to have enough people to maintain our demand levels. If our demand levels start to drop, our prices are going to start to drop. Certainly, I know that real estate is a fixed total supply, but the reality is if your demand drops in a fixed total supply, your price goes down, and so it’s just something that we have to be aware of. Now there are other factors, and part of those factors are as that population ages, they live longer.
So the demand may go up as an aging population goes up. But, we have to be very careful what economics they have, and what they’re willing to buy and not buy, so I use the demographics to help predict what happens to price and supply in a particular asset class.

It’s a combination of net migration, intra-country and inter-country. So let’s say that I’m going to buy something in an area that’s losing population quickly. I’ll give you an example: Detroit. Detroit continues to lose
population. No matter what you do, your population is leaving, so you have headwinds there. You’re not going to be able to increase price over time, because you don’t have the demand and your population is leaving. Whereas, let’s say you compare that to Orlando or Tampa where a lot of people are moving in no matter what. That same real estate, that same asset that’s at that location, is going to have a higher demand, and there’s not more of it, so the price goes up.

Jobs pull people to a locality. People don’t move to a locality because they want to move there. The vast majority of people move to a locality because they’re able to work. Jobs drive the economy, and a lack of jobs drives crime rate. This combination of stuff poses some interesting thoughts on what the future of real estate investing is – assisted living facilities, skilled nursing facilities. What happens to the millennials? What happens to retirement? There’s a whole host of things that I’ll be discussing in other modules that we’ll look more closely at, just that demographics. This is really meant to be an overview.




As you get more new households formed, then rental demand goes up, and the thing is that the vast majority of household formation, new people coming into households, they’re really looking for B and C quality property. But the only thing we’re building is A quality property, because it’s almost impossible to build B or C. It’s too expensive, and so B and C properties actually have reduced production and high demand, and A properties have high production and reduced demand. What do you think is going to happen to the price on these things?

This is just a simple display of household demand, household growth, and what’s happening over time. Household formation is far exceeding the completion rate of multifamilies, and if you look at it a little bit closer, you’re going to find out that the multifamily completion is in class A facilities, but the vast majority of household formation is B and C.



If you look prospectively—if you look at the future—the number of new apartments needed far exceeds the construction rate that we have available, and we’ll have a deficit of probably 2 million units by the year 2030.


As the population continues to increase, whether it’s by net migration in, or by intrinsic population increase, that combination will maintain a demographic growth rate. Now that demographic growth rate is hyper-local. It’s not going to be all over the country. It’s going to be in urban areas. It’s going to be in a core area that has a lot of benefits for the local community. What we’re noticing is that even the people that have retired are now moving to more urban areas so that they can have more access to amenities and health care, and the millennials are also moving to these more urban areas so they can have more access to entertainment venues. What’s interesting is, there are very few construction opportunities in these areas, so they’re having to rent.

We’ve converted to a renter nation

People have been disillusioned by the housing bubble crisis of 2007 to 2010, and a lot of homeowners had total equity destruction. They’ve given up on owning houses. Younger households look for mobility. They have a tremendous amount of student debt. They’re postponing home ownership, or choosing to have the flexibility of renting. It’s the Uberization of housing. We’re looking more at the use of an object rather than the ownership of the object, and the tighter underwriting standards have resulted in a significant reduction in supply of multifamily and single-family housing, especially on the coastal markets.

Home ownership rates are dropping dramatically despite the fact that our GDP is stable. Despite the fact that our mortgage rates are decreasing, the home ownership rates are decreasing.

Our expected homeownership rates are going down no matter what you say, no matter what you think. It’s going to look bad for ownership of single-family residences going into the future no matter which way you turn.


The rental stock needed is very significant, and the availability of that rental stock is diminished.


This is a graph indicating the net rental units needed by the year 2030 in comparison to what’s available. You only start to see a shift in about 2030, 2030-plus. The reason why you see the shift is that we may have a decrease in net immigration, and if that happens, then by 2030, we won’t need as much housing. But all the way to there, we’re going to need a significant amount of housing that we cannot build.

If you look at household formations and percentage of households, you’ll notice that more and more households are becoming single-family households, and fewer and less households are becoming multiperson households. What this tells you is that there’s an increase in the amount of wealth in each individual household, and household formation is increasing and people are living by themselves or living with just one other person and taking up apartment units, so this is going to put an additional burden on the utilization of the number of apartments rather than large houses.

The U.S. population growth will continue all the way to about 2030, assuming that we’ve decreased our immigration rates. If our immigration rates go back up, then these numbers will obviously change significantly.

There’s more households in the U.S. renting now than any other time in the last 50 years, and the majority of them are millennials.

The largest generation in U.S. history prefers renting over buying. They’d rather use something than own something. It’s Uberization and the sharing economy that is pushing this trend.

Our process

We’re a demographic-oriented, first and foremost, company. We identify general areas of interest, but then we quickly narrow our focus to the specific deal and the situation in that specific opportunity in that hyper locality. We acquire assets, but that’s just the beginning of the process. The real process is value addition. It’s changing the income, reducing the expenses, actively managing the resource, and anticipating the ideal exit time period.

Our market selection is based upon migration rates. It’s based upon job creation. Job creation determines the direction of the local economy’s future. If you don’t have job creation, you don’t get net migration in. If you don’t get net migration in, you don’t get housing build.

So what’s Red Pill Kapital?

Red Pill Kapital is a physician-owned, commercial real estate investment and education company. It allows you to invest passively alongside us. We find the property or we find the investment group. We create and validate their plan. We look at how to improve the cash flow. We negotiate the deal. We manage and oversee the asset. Your passive investment provides you with an opportunity to earn an income without the nine to nine because physicians don’t work nine to five. We probably work six to nine. We create a unique business strategy that fits your financial investment goals because we understand the specific needs of physician professionals.

Is Red Pill Kapital right for you?

Are you looking to enhance your financial wealth and truly live the life that you deserve? Are you an accredited investor who’s interested in learning more about passively investing in cash flow and commercial real estate? Are you interested in investing alongside us? Because we don’t need your money. What we’re trying to do is do bigger projects with more leverage. The bigger the project, the less the risk because the leverage improves. We only make money if you make money. If you have any questions, please email me at That’s Kapital with a K.

We search for value-added real estate for our passive commercial real estate partners, and we actively manage that investment long-term for a successful exit. We are Red Pill Kapital.
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