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For this edition of the X-ray Beam, I interview Dennis Bethel, M.D.
Dennis is an Emergency Medicine physician who made the decision to retire early from a medical practice and transition into a career involving real estate.
Dennis became a principal in the private placement syndicator, 37th Parallel (full disclosure I am an investor in 37th Parallel and they have recently become a paid advertiser of my blog).
I have never met Dennis, but I have read many informative posts by him from various sources such as 37th Parallel, White Coat Investor, and his own website, NestEggRx.com.
I am hoping he will give some insights on how he transformed from a career in medicine to a real estate entrepreneur.
And now on to the interview:
What was your inspiration for medicine and how did you choose your specialty?
Growing up, I was a baseball fanatic.
I ate, drank, and slept baseball and was convinced that someday I’d play in the major leagues.
However, in college I had to come to terms with the fact that I wasn’t very fast and struggled to hit a good off-speed pitch.
That’s when my backup plan came into effect.
Years before, my father had suggested to me that I should consider becoming a doctor.
I was always a good student and loved helping others.
When I began to focus strongly on medicine, I knew that I needed to get some volunteer experience in a hospital or medical setting.
My father, who was a firefighter, suggested I volunteer with the fire department.
I went on countless medical aids, became an EMT, and even rode along in the ambulance.
Those experiences sowed the seeds of my emergency medicine career.
How long did you practice medicine before transitioning into real estate and how old were you when you did?
I started a four-year emergency medicine residency in 1998 and saw my last patient at the age of 45 on September 30, 2016.
In 2004, I got married and read the book Rich Dad Poor Dad on the airplane ride to our honeymoon destination.
For the first time, I really understood the importance of developing passive income and knew that I would take that path.
In 2005 I bought my first properties – two quads (eight units) that shared a parking lot in Albuquerque, New Mexico.
Had I known then what I know now, I would have skipped residential real estate altogether and gone bigger from the start.
Nevertheless, the education that I’ve obtained through those years has been invaluable.
What were some of the factors that made you decide to retire from medicine at an early age when most medical colleagues practice well into their 60’s?
Working as a physician for earned income required me to trade my most valuable asset (time) for heavily taxed dollars.
As a full-time physician, I spent years working a 50 to 60 hour workweek.
I can’t tell you how many baseball games, piano recitals, and family gatherings I missed through the years.
Those hours in the ER began to take their toll on me and I started to burnout.
During my tenure as a physician, there was a seismic shift in medicine.
I’m convinced that we doctors have seen more changes in medicine in the last decade than our predecessors saw during their entire careers.
Government regulators and other third-party payers began inserting themselves into the patient-physician relationship and mandating a focus away from patient-care and toward cost containment.
More and more, I saw my meaningful work get encumbered by meaningless mandates and bloated bureaucratic nonsense.
I wanted out.
Additionally, as a family we were hit with some bad news when we discovered some chronic health issues that would impact us.
It became crystal clear that I needed to cut back, work less, and spend more time at home with my family.
Seeing first hand how drastically the third-party payers focused on cost-containment, I started to worry about my family’s access to future health care.
I decided to commit myself to creating financial independence.
Come hell or high water, I was determined to make sure that they would be taken care of.
Those two factors moved me into commercial multifamily real estate and ultimately provided me with a path to an early exit from medicine.
The rest is history.
Can you point out some instances where expectations for your medical career did not meet reality?
My expectations in medicine centered on the patient-physician relationship.
I went into medicine to help others and considered that my calling.
I believed that I would be able to practice autonomously for the benefit of my patients.
What I encountered was an ever-increasing burden from hospital administrators, insurance executives, and government mandates that stood in the way of quality patient care and physician autonomy.
The thing that scared me the most was the electronic medical record.
The one we were forced to use was fraught with errors and clearly wasn’t ready for prime time.
ER orders survived upon admission to the floor meaning that many patients had duplicate medication orders.
Patients, who were discharged from the ER and returned a few days later, had their previous visit’s orders populate into their new visit.
And the ER list of patients constantly scrolled up or down as patients were admitted or discharged from the ER.
This created numerous situations in which orders got entered into the wrong patient record.
In short, the EMR created an incredible number of errors that had real consequences for patients.
When the doctors complained, the vendor noted that they could not fix those issues and the health care network made it clear that they were unwilling to scrap their multimillion dollar investment.
Working in the ER became exponentially scarier.
How difficult was it for you to leave medicine? Any regrets?
With physicians losing autonomy and medicine shifting more toward cost containment, it really wasn’t hard for me to leave.
Fortunately, I had done well financially and could afford to leave.
No regrets, but I do miss caring for patients. That was the best thing about medicine.
Unfortunately, through the years of practice, more of my time shifted away from direct patient care and toward mandated reporting requirements.
I don’t miss those at all.
How did you develop an interest in real estate?
There’s a lot to like about real estate, but I see it as a means to an end.
I fell in love with the ideas of financial freedom and freedom of time.
Extensive research and experience has taught me that a great way to achieve that was through passive income created from real estate investing.
That is the reason why I invest in real estate.
You have developed a strong relationship with a syndication company called 37th Parallel Properties, which deals with multifamily apartment complexes.
What has been your experience with your syndicated deals?
I’ve been with 37th Parallel Properties in one way or another since late 2010.
In 2016 I became a Principal in the company.
Along the way, I’ve invested my own money in multiple projects and those results have been excellent.
As a company we are very proud of our track record as every one of our multifamily properties have been profitable.
I am sure there are many potential new investors that would be quite hesitant to invest in something they are unfamiliar with.
What advice can you give them when making an investment such as this?
I totally agree that it’s important to familiarize yourself with any investment before you invest.
That is one reason why we spend so much time educating our clients.
Our website is filled with educational content and I like to point people to a research paper I wrote entitled Evidence Based investing.
Once someone familiarizes themselves with this asset class and determines that passive apartment investing is right for them and their portfolio, then the next step is to vet the syndicator (company bringing the deal).
It’s important to know their experience, business plan, and track record.
How transparent are they?
Will they show you their prior returns, grant you access to clients as referrals, and let you speak to third-party contractors?
These are important things to look at before you invest.
In order to do syndicated deals, one has to be qualified as an accredited investor.
Why is such a requirement necessary and does this mean that all the risk is shifted to the investor?
The rules revolving around being an accredited investor are outlined in federal securities law.
These laws were passed to limit the investor pool that is exposed to higher risk investments like venture capital, hedge funds, and angel investing.
Typically, private real estate investments get lumped into this category due to their lack of a guaranteed secondary market (lack of liquidity).
In the case of commercial multifamily real estate this is ironic given it’s historically low risk profile.
Whether you look at the catastrophic failure rate (foreclosure rates) or the risk-adjusted return (Sharpe ratio) in commercial multifamily real estate, the evidence is clear that this is a lower risk investment.
For those who want to take a deeper dive into the subject of apartment investing risk, I’d point them to these two articles:
Multifamily – An Investment in the Basic Need of Shelter
Commercial Multifamily Real Estate – Significantly Less Risk Than the Stock Market
37th Parallel Properties primarily deals with Grade B (older properties) for investment opportunities.
What is special about this particular class that makes it a good investment when compared to much older (class C) or newer (Class A ) properties?
So the way it works in our industry is that A-grade properties are the new stuff.
People who rent these tend to do so out of economic preference.
It’s not that they can’t afford a house; they just prefer to rent for a myriad of reasons.
You can make money in this space, but it tends to be an amenities race.
Your competition is the newest properties coming online.
And while your amenities stack is already completed, they can always up the ante.
So if you have an Internet café, on-site car wash, state of the art fitness center and a resort style pool, they can always match that and add some new amenity that you can’t compete with, like a lazy river for example.
The A-grade space has more volatility from a constant supply of new properties hitting the market and they have economic sensitivity as people will abandon high rent properties and downsize when the economy is bad.
B-grade properties are work-force housing.
There is some who rent out of economic preference in this space, but it’s primarily people who rent out of economic need (they can’t afford a house).
So providing them with a clean, safe place to live in low crime areas with good schools, lends itself to longer term renters.
Additionally, if you look at the bell-shaped curve of who rents, the bulk of those people (those under the fat part of the curve) are people who have a median income of roughly $58,000 a year plus or minus.
These are the people who typically rent B-grade apartments.
So we are serving the long-term needs of the largest segment of people who rent and we are insulated from the volatility present in the A-grade space.
On the other side of the spectrum, B-grade investing limits our exposure to functional obsolescence, environmental risk, and the tenant challenges that come with older properties (C and D-grade properties).
Often these investments require a minimum of $50k which may seem a bit daunting to my readers especially when there are crowdfunding platforms available that allow much smaller buy ins such as $1k-5k.
Why would an investor pick a private syndicator over a crowdfunding platform?
Crowdfunding isn’t what we do, and unfortunately, those lower minimums often entice new investors to dip their toe into the real estate waters without understanding the increased risk they are assuming.
I’ve written about those risks in an article I’ve linked below:
Crowdfunding – The Good, The Bad, and The Ugly
What many people don’t understand is that crowdfunders typically aren’t real estate companies.
Instead, they are marketing platforms that raise money (for a fee) for many types of things including real estate companies.
In other words, they act as a middleman.
Allow me to back up for a minute.
Before 2012, our industry was highly regulated.
There was a ban on advertisement so there was a real obstacle to raising capital.
Therefore, companies like ours typically started with their own money, family money, and friend money.
Excellent results would lead to repeat customers and referrals through word of mouth.
As long as you continued to produce, you could grow slowly.
One false move could set you back dramatically or even close your doors.
It was kind of like natural selection in that only the strong survived.
However, in 2012, the Jumpstart Our Business Startups Act (JOB’s Act) changed all of that.
Economically, times were tough and the government was looking to add fuel to the economy.
Passing this law deregulated our industry and did away with the ban on advertising.
The JOB’s Act has made entry into the private real estate world easier than ever before and opened capital pools (investor money) to inexperienced syndicators.
No longer was it necessary to grow through excellent performance and track record.
Instead, newbie syndicators and failed syndicators could use a middleman-marketing platform to bring investors to their projects.
Unfortunately, that has introduced a lot of manager risk to unwitting investors.
Established companies with excellent track records typically don’t use the crowdfunders.
They don’t have trouble raising money themselves and can spare their investors the extra fees that come with crowdfunding.
I have no doubt that some of those newer syndicators that utilize crowdfunding will turn out to be quality syndicators.
But since most of them have been in business a short period of time, it’s very difficult to separate the wheat from the chaff.
In your posts you have mentioned that commercial multifamily real estate is an evergreen commodity.
Can you elaborate what you mean by that?
Whether you’re investing in a business, a product, or a service those investments often have a lifecycle.
They get introduced, they grow into maturity with maximum penetration until they decline.
And if you owned a company that was on the S&P 500 in 1958 then you would have stayed on that index for an average of 61 years.
Today, that average is only 18 years.
We are living in transformative times.
New products are coming into existence at a faster pace and displacing old technology and services at an unprecedented rate.
Keeping up with the latest technologies, fashions, and trends is nearly impossible.
Fortunately, commercial multifamily real estate investors don’t have to worry about that.
After all, an investment in an apartment building is an investment in the basic need of shelter.
As long as mankind has been around and as far as we can see into the future, people have always needed and will always need a roof over their head.
Our business cannot go the way of the horse and buggy, the steam engine, Kodak film, Blockbuster video or a myriad of other business that got displaced by something else.
That is why I say commercial multifamily real estate is evergreen.
Have you had any bad experiences with real estate that you care to share?
What can readers do to avoid such an outcome?
When I first started investing, I invested in residential real estate.
At my peak, I owned a single-family rental, a triplex, and seven quads.
I did pretty well, but I lacked knowledge of the importance of market selection, economies of scale, and professional property management.
I simply purchased properties in proximity to where I lived and utilized mom-and-pop property managers to manage them.
There is no doubt that there are some really great mom-and-pop property managers, but I had to go through several poor ones until I found a great one.
In fact, I even took over property management at one point.
So I was managing tenants, toilets, and 2am phone calls.
I was already experiencing burnout as a physician and there I was taking on a second job managing my rentals.
It wasn’t what I wanted to do.
Additionally, because there are no economies of scale with smaller properties, I was always one vacancy away from negative cash flow.
As long as my properties were full I made a little money each month.
As soon as I had one vacancy in a fourplex, I was writing a personal check to cover the mortgage payment that month and scrambling to get that unit filled.
It’s hard to sleep at night when you’re one vacancy away from negative cash flow.
The economies of scale that comes with larger properties cures a lot of those worries.
So, in answer to your question, I wish I had gone bigger sooner.
I wish I had known about how to invest passively into commercial multifamily real estate as a fractional investor.
If any of the readers want further information about syndication and in particular 37th parallel properties, what are the next steps they should undertake?
A few resources I highly recommend they check out are:
Apartment Investing – How to Get Started with 37th Parallel Properties
Also, if they have any questions or need more resources, I’m happy to help them any way I can.
They can contact me at firstname.lastname@example.org
I would like to thank Dennis for placing himself under the X-ray Beam.
Since May, 2017, after maximizing all my tax deferred options, I have directed all my investment dollars into 37th Parallel offerings and have been pleased with the results.
(Don’t forget to please subscribe to this blog if you haven’t done so. My growing lists of subscribers re-affirms to me that this blog is providing valuable content and drives me to continue my mission)
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Great article, crowdfunding vs more traditional syndicator very clear explanation.
Thank you for stopping by and commenting. Dennis definitely has a great gift for explaining various real estate options. It was his articles I first saw on White Coat that made me aware of private syndicators in the first place. Once I did some research, I really like the space he was talking about and decided to invest. Have a great day and appreciate the comment.
Thank you both for your kind words. I enjoyed the interview and the opportunity to share some insights with your community.
Great interview. It’s true that a lot of sponsors on the real estate crowdfunding sites are emerging companies that don’t have a long track record. One major criteria going forward is to invest in sponsors that have a long track record and have been through multiple real estate cycles. Thanks for the insights.
That is a great point MD. A lot of sponsors/crowdfunding sites were not around when the Real Estate bubble happened. It would be interesting to see how they would have navigated through that.
Dr. Linus points out potential for another cycle coming up: https://www.dadsmakingcents.com/storm-brewing-in-crowdfunded-real-estate/
This is definitely something I’m looking into and even had a couple of calls with 37 parallel. I like their model of investing in the same type of property with a structured format for every deal. Thanks for sharing my post on the risks in crowdfunding. I think it’s important to always know the alternative so you can properly asses the risk profile of your investment .
Glad you found this post useful. Dennis pretty much opened my eyes a year ago to this type of investment through his posts on WCI and I haven’t looked back since. I still have stock/bond/Reit investments as well to balance this, but if I had to choose, I prefer this asset class. Thanks for the comment and hope if you do go through a 37th parallel investment it gives you the same type of feeling I got.
Great interview! My wife is an ER physician as well, but continues to practice part-time. I’m still not clear on the difference between 37th parallel and other crowdfunding sites. Can you elaborate? I was perusing the 37th parallel website and saw that you can invest in individual real estate assets…much like a crowfunding site. How is it different?
Thanks for stopping by. I will see if I can get Dennis to respond as well but this is what I have gleamed between 37th parallel and Crowdfunding. 37th Parallel is not a crowdfunding site, it is a private syndication company. To invest in private syndication such as 37th parallel you have to be an Accredited Investor (if single income >$200k (if married > $300k) last year with expectation to continue at that level OR you have 1 million in assets excluding primary home). Crowdfunding sites do not have this requirement. The deals crowdfunding have are typically smaller properties as… Read more »
Hi Jake, I can definitely understand the confusion, as the investment is similar. Either way, you are investing with a syndicator. Most crowdfunders are not syndicators. They are marketers that raise money for syndicators. They charge the syndicator a fee for raising that money. Typically syndicators with more experience and good track records do not use crowdfunding marketers to raise money for them. Their track record has secured them a loyal following of repeat investors and raising capital tends not to be an obstacle for them. For that reason, crowdfunding is an attractive alternative for newer syndicators and failed syndicators.… Read more »
Super article. I learned more than the other 10 attempts at understanding this form of investing
Thanks Gasem, I will pass it along to Dennis as well. I’m a big fan of this type of real estate investment and it has created a growing passive income stream that I hope continues in my golden years providing a safe floor. I have 5 investments so far with 37th and there is talks of another opportunity coming up in the pipeline and I plan on going in on that as well. These investments plus my part ownership in the medical building I work in has definitely supplied nice passive income.
Thanks for your kind words and feedback. It’s really important to us to provide high quality information and education so that people can better evaluate this asset class and determine if it’s right for them or not.