Episode 43
Money Miniseries 4: Our “Secret Weapon” Tax Strategy (My Wife)
Episode Transcript
Dr. Randy Lehman [00:00:00]: Foreigner, welcome back to The Rural American Surgeon podcast. I'm your host, Dr. Randy Lehman. We are in our miniseries about money, and we have gone through several topics already. We started talking about the purpose. We then talked about frugality, minimalism, and why that's the upgrade. We discussed different types of investing that you can do and how you want to start making money while you sleep. I started sharing a little bit more about my personal journey and why I've chosen real estate as a primary vehicle. We are now talking about tax management today. Again, I am not an accountant, and I'm not an attorney. I'm telling you my story about what I've done, and I'm not telling you personally to do anything. I strongly encourage that you consult your tax situation with a professional. But I am going to share some personal things and specific details.
I have a very special guest joining us on today's episode, and it is my lovely and talented wife, Brittany. The core component of what we're doing from a tax strategy is something called real estate professional status. We’ll talk in detail about it. Basically, it's something that you have to have a certain niche in order to take advantage of. It is very much a thing that the IRS has done to incentivize certain activities, and it is working well for us and those involved. I appreciate you tuning in, and without any delay, let's get into the show. Welcome back to The Rural American Surgeon, where I'm joined by a special guest today, my wife, Brittany Lehman. Thanks, Brittany, for joining us.
Brittaney Lehman [00:01:56]: Thanks.
Dr. Randy Lehman [00:01:57]: So today, we're talking about essentially our tax strategies. I brought Brittany in because she's a core part of the tax strategies that we have that we're running in our life. You get to a certain point, and tax management is one of the most important things. We employ a strategy called real estate professional status. Real estate professional status is an IRS designation, and it is a pretty powerful tax strategy for a dual income or a married couple, where one person has a really good job, like being a surgeon, and then another spouse who wants to get after it but didn't do all of that kind of schooling. For example, if you're a two-physician couple, it doesn't really work. If you're otherwise sort of average income, then it also doesn't work. It might be better for you to have two working spouses, but basically, you don't have to be a realtor or have any specific license. Real estate professional status means that you are working as a real estate professional, and that is your primary job. That's Brittany's primary job. When somebody asks what she does, she says, I do real estate. But then people are very confused because they don't know exactly what that means. That's why I brought Brittany onto the show to tell you, the listener, what does that mean? What do you do when you say you do real estate? Thanks, Brittany, for joining me. Maybe start by telling the listener what real estate professional status is. That being said, I'm not an accountant, neither is she. I'm not an attorney, neither is she. You look it up, but this is what we are doing in our life and confirm anything that we say. I'd say this should be considered for entertainment purposes only. We're not your advisors from this perspective, but we have our own accountant and our own attorneys who advise us and know our personal stuff. Just like, I'm not giving you personal advice. I'm an authority, and I could talk to you about the gallbladder, and you can take it to the bank what I say, and I can stand behind it because that's my job. But I am not a lawyer or an accountant. All that being said, the strategy is working very well for us, and we're using it the way the government has intended it to be used. So if you're trying to talk in layperson's terms about real estate professional status, what exactly is it?
Brittaney Lehman [00:04:48]: Okay, so like Randy said, you don't have to be a real estate agent to do this. I ended up getting my license to, number one, learn more about real estate, but also to have it under my belt because it makes myself feel better that I have my license while managing our own properties. I can use that to our advantage because now I can list things or buy things, put our own offers in. In the state of Indiana, I manage all of our properties. Besides, I still manage it, but we have a property management company for an apartment building in another state. I do everything from, and I have somebody helping me as well, do all of any type of billing, property taxes, making sure those are being paid, insurances are staying up to date, point of contact if there's a maintenance issue from any of our properties and things like that.
Dr. Randy Lehman [00:06:01]: So the actual IRS designation is that you have to work 750 hours in a real estate trade or business and not work any more hours in any other type of industry or business. You can't have a full-time job and do real estate professional status. You have to be doing real estate as your job. Then you need to track it by saying, these are the hours that I actually worked.
Dr. Randy Lehman [00:06:31]: Because you can be audited for this, the IRS can say, prove that you are a real estate professional. As long as you legitimately are, you have nothing to worry about. But if you're just faking it and not doing the work like Brittany is, then you'll have issues. The first thing is you have to have a certain amount of real estate work done in the first place. That's where Brittany getting her license, listing a few homes, selling a few things, buying investor-level properties come into play.
Dr. Randy Lehman [00:07:03]: Hours do not count for real estate professional status. So if you spend time analyzing deals and buying them, you can't just say, Well, I spent 700 hours doing that, that doesn't count. Things like taking maintenance calls and doing the actual work to get it accomplished do. But you don't have to be the person doing the plumbing. That is an easy way where a lot of people, especially if they have smaller assets, can also accumulate those hours.
Dr. Randy Lehman [00:07:34]: You can spend time managing your property, like mowing your property, doing maintenance at your property, painting, installing tile, and different things. Whatever your business, your primary business, is determines that. What moves the needle for us is if we buy commercial properties, so our tenant is a business that's helpful for us and for Brittany because the negotiations aren't as emotional and things normally happen during normal business hours.
Dr. Randy Lehman [00:08:07]: The dollar amount is big enough to move the needle for us. If I were buying $100,000 houses, which is a great strategy for some people with $50,000 to $100,000 income, that's a great deal. But when you have bigger dollar amounts of income, each property that you buy has one tax bill to be paid and has one insurance policy that needs to be maintained and kept in force.
And if you buy a $100,000 property or a $2 million property, either way, it's going to take the same amount of time to do that. So you need to buy the thing that sort of, like, moves the needle for you and your personal financial situation. There are some other rules with real estate professional status, and I would say the Real Estate CPA Guys is a great podcast. I would point you towards. I believe they have a series, I'm not sure if it's still up, but four episodes back to back to back, that explains the history of real estate professional status and what you need to do in order to meet the IRS designation. Because it's not just working 750 hours in real estate. You also have to be materially participating in what you're doing. And so you have to meet a second set of. I believe it's seven criteria, but one of which can be just that you're the primary person managing a specific property. So there's easy ways basically to hit it, but you do want to make sure that you are hitting those things. And then you're going to want to have a personal accountant that will guide you on this. If you go to a personal accountant and you say, hey, thinking about doing real estate professional status, and they look at you and say, that's not really. I don't know anything about it. I've never heard of it. Okay. That's when you turn and run and go find somebody else and interview. And we finally found an accountant that we've had several great accountants, but it's not going to be the guy at H&R Block that's going to, like, walk you through this strategy. You're going to have to have a real accountant. You're going to have to really pay for it. And you probably need to have an attorney, and you probably need to get your attorney and your accountant together, which we finally are doing. And it's. You get. It's a process over time, but you have to have somebody, like, in your corner that can help plan and think ahead. But still, even last year, your accountant's not going to be as in the know as what you. You are in the know. And so I knew certain things were coming out. I was like, I'm going to be having a tax problem. And I'm like, three months out, and I'm saying, I'm going to be having a tax problem this year. And part of the issue was changing environment. So interest rates going up, but nobody wanting to sell. Everybody's still sitting on five-year balloons for commercial real estate that are like three and a half percent. Nobody wants to sell yet. So what can you buy? And we couldn't really find things to buy that fit our box. Plus we're very busy with our business last year and we get to the end of the year and our strategy, you know, it's like, so I had to do something and that's where we end up buying an airplane to lock in some tax savings. I mean, it is an airplane that we use for our business. You gotta have more than one strategy on how you're going to be able to save and invest. So we talked about reps and now I'm going off on a tangent like I often do. I think the listener mostly cares about what you do on a day to day to accomplish that. And what are the perceived positives for you doing that like as a job. And so maybe tell me what you think are the good parts about you doing reps.
Okay. So at the beginning it was mainly doing a lot of the work ourselves, but mainly me doing like construction work and things like that. But then as I was getting more and more busy with that and then getting my real estate license and actually selling homes, which wasn't my end goal. Not saying that this is wrong for everybody, but I really enjoy being with my kids, especially at the time right now, their ages and Jack wasn't quite in school yet. Charlotte just started school and so she was gone a couple of days. But then I was away from Jack during those times. And then the last couple of years it's changed from Jack going to school two days a week and Charlotte going five days a week and then Jack three days and Charlotte's still five days. Pretty soon they're going to be doing five days. So it's a little bit easier to work through the day because it's not a guilty feeling of, you know, my kids are at home with the babysitter and I'm out working way too hard. But right now doing real estate, professional status, just managing our own buildings, I'm at home with the kids. Even in the summer. I'm able to do my work from home. I can pause at any time to take a break to be with them. So plus sides, obviously tax purposes really helps us out a lot. Plus it's fun too, meeting people. It's one of my things that I really like. I love all of our tenants.
Brittany's really good with people. So that's the thing. It may just, you know, there's an element of knowing your own skill set and stuff. But if she wasn't good with people, but she was good at other things, then that might be the component that she holds close to her chest. And the other stuff she, you know, hires out or finds other people to do. So you don't have to do every single piece of all the work in your. Right, in your real estate, you just have to do it as your full-time job, basically. So there was a moment when we were in residency when it was paralyzing.
For me at first.
Well, that's not what I was gonna.
Say it was though, because I thought about all the responsibility and how it could actually be something that I totally hated because I knew nothing about it.
So how did you get over that?
Kind of just being pushed into it pretty much. But realizing, just learning. Once you learn your people, you have your people, you have your maintenance people, you have the things that you can fix, you learn the stuff that you need to learn eventually through trial and error sometimes, but just the experience, the more that you do it, the more, the more you run into that you've never seen before. But then the next time it's when that problem arises, it's no big deal.
Yeah. Once you've seen it before, right? Yeah. Anything. I mean, I think if there's a surgeon listening to this podcast, they know how that is. The first time you manage a complication is a lot more stressful than each additional time, for example, or any even just doing the operation. Not talking about complication, but basically you're saying you adopted the Amelia Earhart method. The best way to do it is to do it right, just do it. So that's not a bad strategy. But what I was thinking was something different than what you said is I remember having a conversation with you where I explained that if you did real estate, professional status, the savings that you were going to bring home to our household, in order for you to bring home the net, the same net dollar amount, you would have to go get a job making $300,000 a year because all of that money is going to be taxed at the higher tax brackets and you're just going to get crushed. And so we have a team, Brittany and I have a team. And it works this way on personal finance as well as our tax strategy. It's kind of ironic where we have one person, that is me, that's generally out there shaking the bushes and like, for example, finding real estate deals. Like, you don't spend a lot of time finding real estate deals, even going and getting the degree and doing the job and getting, bringing in the top line revenue is pretty much my responsibility. But keeping it is your responsibility. And you almost sometimes have to keep me in line and in check about that. And you're very good at that. You're very good at helping us keep what we accumulate.
And so when we had that conversation, it was one of these weird conversations that I can distinctly remember because I saw a light bulb turn on. It was this like fear, fear, fear thing. And then we had that one conversation. And every time since then, it's been, how do I figure this out? Because you realized how valuable the strategy was. Yeah, that's how I remember it. But maybe you.
Brittaney Lehman [00:17:02]: Well, I think of the fear that I had probably, and then. But yeah, no, yeah, that makes sense.
Dr. Randy Lehman [00:17:09]: I just remember it. And we were residents. I was a resident at that point, going through all that. The nice part about it is because we were residents and we were not delaying thinking about earning, saving, and investing. We were maxing out our retirement accounts, paying down debt, moonlighting, real estate investing, having kids, and doing residency. We were doing about 60% more than the average general surgery graduate in general surgery.
Dr. Randy Lehman [00:17:40]: at Mayo Clinic. While we were hammering down in that phase of our life, we came out on July 1, 2020, with this super deep understanding of personal finance, understanding of who we were. We knew this moment was coming where the paycheck was coming, and we knew what we were going to do with it. Day one, it was, let's find deals, let's knock them down. Here's our written criteria.
Dr. Randy Lehman [00:18:11]: for deals and then buy and then whatever. So, is that how you remember that? Yeah, it's pretty much, yeah. Happened like that. Yeah. And then that allowed us to really make a lot of progress in a few short years. The other piece of the pie with the tax strategy is it's not just reps. So, what does reps do? I guess I should have started with this. You have an active and a passive bucket.
Dr. Randy Lehman [00:18:42]: for your money. Your active earned income is your job, your W2, or other job-related activities income that you're generating from a vertical income perspective. Then you have a passive bucket. The passive bucket is essentially horizontal income, and all real estate income is passive per se in the eyes of the IRS. When you buy a real estate asset, you can take, you depreciate that asset. The asset will not stand the way that it's standing forever without maintenance, and there is depreciation. There's not depreciation on the land, right. So there's a component that's broke out.
Dr. Randy Lehman [00:19:14]: So when you take that depreciation, your rental income can be reduced by however much the depreciation is. When you buy a typical real estate asset, it's usually over 27 and a half years. You break the total purchase price, take the land out of it. Now you just have the improvements part, which is the building itself. You depreciate that over 27 and a half years, and then that much can be reduced against your income each year. You can also take advanced depreciation.
Dr. Randy Lehman [00:19:44]: I'll talk about that in just a second. We do that back in like the 80s. Go to the real estate CPA guys, they have a really good explanation on this. But back in the early 80s and before, there were not these active and passive buckets, it was all just one. So you could buy some real estate, depreciate it, and then sort of like shelter your income without doing what we're doing. Basically, what the politicians are generally always trying to do is try and increase their tax revenue and try to pin it on the smallest number of people so that they can get votes.
Dr. Randy Lehman [00:20:14]: What happened is they separated those two things out because there's a perception that people are using real estate just for the tax advantages, which we are not. We are investing in real estate because we believe in investing in real estate for the long term. I also own stocks. I've talked about this in some of the previous shows. We have other investments besides real estate. But real estate is definitely the thing that we have the most money tied up into. It is our strategy for achieving financial freedom by buying real estate for the long term.
Dr. Randy Lehman [00:20:45]: and living off of it and having our freedom come from the rent that comes from that real estate. But anyway, it does also help with taxes at the same time. What happened was they separated the active and passive buckets out. But there were people that were doing what we're doing and their primary thing that they're doing, which is like what Brittany's doing, is real estate. They were real estate professionals. Those people got hurt by that change in the tax code. There was a second sort of thing put in place called real estate professional status, I believe in the early 90s, to protect people from being harmed by the negative effects of the law.
Dr. Randy Lehman [00:21:45]: That's why we're sort of in a unique position where reps help us more than an average person. But it is not a loophole, it's actually a part of the tax code that exists to close a loophole. Now there's certain little nuances to it, like for example, short-term investing, like VRBOs and Airbnb. If you're managing it yourself, you don't have to do real estate professional status to take the tax advantages of those properties. Again, talk to your accountant. I'm not an accountant. I'm doing my thing, and I know the little bit that I need to know to keep myself legal.
Dr. Randy Lehman [00:22:18]: Don't let the tax tail wag the investing dog either because if you're buying expensive stuff that's not going to be worth what you're paying for it in a couple of years and you have a big loan, you're going to set yourself up for a big problem. Now I want to talk about the cost segregation. You want to talk about the cost segregation?
Brittaney Lehman [00:23:00]: I like to listen to you.
Dr. Randy Lehman [00:23:04]: There's also a component of, as good as Brittany is with people, I have a natural draw and love for working with numbers and math and spreadsheets, which Brittany doesn't like doing. So again, complementary and knowing your own strengths is going to help you out. She doesn't really have that much to do with the cost segregation. But you do actually understand it.
Brittaney Lehman [00:23:27]: Yeah.
Dr. Randy Lehman [00:23:28]: When you take the depreciation against 27 and a half years and just divide it out straight line, that's one way that you can do it. But if you need the depreciation now and you've done reps, so now your active and passive buckets are put together. Your doctor income is in this bucket, your rental income is back in this bucket, but now the depreciation from the real estate that you bought is also in this bucket. For example, buy a million dollar property depreciated over, you know, 27 and a half years—what is it, $40,000 a year, something like that, you know, roughly.
Dr. Randy Lehman [00:24:00]: You could instead do what's called a cost segregation study. This is where you hire an engineering firm or an accounting firm, some company that provides these reports for you. They look at the building, they should be visiting the building and inspecting it, and they're breaking down the building into all of its components. Because if you come into your building right now and you put paint on the walls, you can expense that this year.
Or if you come into the building and you put in a new door or window or HVAC unit, those things are going to be placed on different depreciation schedules over time. So, and I'm not, I don't know what they are, each individual one. I rely on my accountant to tell me that. But it may be that a certain thing you buy is going to be depreciated over
Dr. Randy Lehman [00:25:01]: 10 years. Another one's going to be depreciated over five years, and I may have other things even longer. What the cost segregation study does is it breaks your building down into all of those components. Doors, windows, studs, you know, electrical stuff, paint. I don't really know exactly how detailed they get on it, but they break it down like that and they put each thing on its own depreciation schedule, which would be shorter. And then you have bonus depreciation which came out in, I believe, the 2017 Tax
Dr. Randy Lehman [00:25:31]: Cuts and Jobs Act. You can fact check me on that one too. But bonus depreciation, which was phasing out and in 2024 was down to. Was it down to 40 or 60%? Can't remember. 40 or 60%. It was phasing out like 100, 80, 60, 40, 20. I think so too because I think we bought the plane and put 60% bonus depreciation. So anyway, the bonus depreciation means that if there was something that you could depreciate over five years, now you can just take it all in year one. If you'd rather you
Dr. Randy Lehman [00:26:03]: combine the cost segregation, which lets you take a lot more of your depreciation early on, with the bonus depreciation, which means a lot of that early on depreciation you can take even sooner. And now in year one, I'll tell you how it has worked out for me is if I buy like an industrial property a lot of times to take 20% out for the value of the land, so then you're only depreciating 80% of the total purchase. And of that I was
Dr. Randy Lehman [00:26:35]: able to get usually about 28% in depreciation in year one, it's 28% times 0.8 to get your total depreciation, whatever, it's maybe 23% or something like that. And then that means. So say it is 23%. You buy a million-dollar property. Now you can take $230,000 in depreciation in year one and maybe your rental income was, you know, 100 grand. Now
Dr. Randy Lehman [00:27:06]: you're taking much more against your income and then that can funnel over against your earned income, basically your W-2 or whatever. Let me summarize the components. Component number one, real estate professional status, which you have to meet the IRS designation for, which if you have a spouse that works in real estate, you can do that allows you to combine your active and passive income into two different buckets. Strategy number two, cost
Dr. Randy Lehman [00:27:37]: segregate that asset so you can take early and bonus depreciation. Understand that you are just, it's a bit of a shell game. And in the future you're going to have to have another strategy for your taxes, otherwise you're going to pay more taxes in the future. Right. But maybe the strategy is you work less in the future, and so you don't need to shelter your income in the future. Right. And it's a year-by-year basis thing. Strategy number three is bonus depreciation. So the new news with the big beautiful bill
Dr. Randy Lehman [00:28:08]: is that 100% bonus depreciation is coming back, and it's going to continue indefinitely. That's my understanding. Talk to your accountant. But in the things that I've listened to. So it's a good series of tools. And yet at the same time, we're investing in things that even if it wasn't for the tax strategies, we would still buy. Maybe the fact that we have to pay the tax is kind of like a kick in the pants that makes us have to close on deals and otherwise inertia might keep us from doing
Dr. Randy Lehman [00:28:38]: so many. So in that way, the tax strategy that politicians are putting in place is actually working because what the government wants is it wants people to invest in real estate and to maintain, because the government cannot maintain efficiently, obviously all of the real estate that's needed to support the industrial needs and housing needs of the United States. So that's why these incentives exist in the first place, is to give an investor a reasonable
Dr. Randy Lehman [00:29:09]: return, give them a break on their taxes, so that they're doing the things that the government wants you to do. The most expensive thing you can do is make a lot of money, spend a lot of money on personal spending. But if you're actually investing and growing the economy that way, then it makes sense that the government would want to support those things, which is like exactly what we're doing. And so we have written criteria. We need to buy real estate that's a certain size, we buy in certain markets, we need a certain return. I
Dr. Randy Lehman [00:29:39]: have a way that I calculate the return which is basically if you listen to BiggerPockets, they'll tell you there's four different ways you make money in real estate. There's the cash flow, there's the mortgage pay down, there's depreciation and appreciation. So what that means is we'll go depreciation is all the tax advantage we just mentioned. But what ironically happens is that the real estate asset doesn't actually go down in value; it actually goes up in value. Might keep up with inflation, might beat it or whatever,
Dr. Randy Lehman [00:30:10]: but it actually appreciates over time. The other thing is you have essentially a forced savings plan because if you use debt to invest in real estate, which you can look at the podcast on leverage and you can understand the concept between what I would consider to be debt and what would be leverage and how that actually works. And it basically, spoiler alert, has to do with the spread and the interest rate, which might be logical and obvious to some people, but it was not obvious and logical to me for, until I finally figured it out. But
Dr. Randy Lehman [00:30:41]: you have this forced savings plan of paying down a mortgage over time. And so then when you fast forward 20 years and you bought basically a cash-flowing leveraged real estate asset, you took advantage of all those tax advantages throughout the year, your mortgage is now paid off, and your building's worth three times as much as it was and you got all the cash flow like there's no other asset that you could buy that is going to treat
Dr. Randy Lehman [00:31:12]: you like that, that's going to treat you that good. Now you can buy wrong and you can lose your shirt and you can go bankrupt and you could, you know, regret it. And that's what Dave Ramsey did. But if you're smart about it and you're calculated and you're careful and you're doing your best in terms of stewardship and a series of things doesn't stack up against you and you buy at
Dr. Randy Lehman [00:31:42]: just the wrong time and we have a global recession, there's things that can happen is all I'm saying. I think it's more likely like for us that we're going to be sitting later in life wishing, like, that we had bought more rather than wishing that we had bought less. My grandpa, for example, told me he's only ever regretted the only real estate deals he's ever regretted is when he sold real estate. That's coming from a 96-year-old guy now living in greatest country
Dr. Randy Lehman [00:32:13]: in the world and the greatest time period in the world too. He was born in 1929, so he only lived basically in the post-Depression era. So again, I'm not telling you what to do. I'm just entertaining you for this short period of time and telling my story. What would you say to the person that the person that's considering real estate professional status, what would you tell them to do? Anything. We've talked to several friends and colleagues, things people that I know through my mastermind
Dr. Randy Lehman [00:32:43]: and whatnot. And.
And you've talked to several spouses that are considering real estate professional status. What exactly did you tell them to do?
Brittaney Lehman [00:32:51]: Well, getting your real estate license helps because you're obviously teaching yourself more about real estate, and not only getting your real estate license. If you were to just for a short amount of time, like I did. I have an amazing manager who I still work under, and she is super great. Every question I have, she is just, if she doesn't even know it, she is right there with me trying to figure it out.
So having a good group of people behind you, I also tell them, too, like if you have any questions, I am more than willing to talk and try to figure things out with you. I've had one of them specifically that I talk to quite a bit. Just having a connection with them, they go through some things that I haven't gone through and vice versa, so that helps. But it gets easier as you go and the calls become less sickening.
Dr. Randy Lehman [00:33:47]: Yeah, your stomach kind of turns when you get certain calls and are not sure how to manage the situation, but you.
Brittaney Lehman [00:33:53]: Can always figure it out.
Dr. Randy Lehman [00:33:55]: Yeah. So you touch on some things like your net worth is your net worth. Basically, your network is your net worth, however you want to say, but the people, like, all of a sudden you are interacting with people and getting something from them, and you're giving, so you're both stronger.
And I would say extend this again to the medical analogy. Like one of the most common things that I've heard in the podcast question about resources for the busy rural surgeon is your cell phone is your biggest resource. So the people that you know that you can call to help you get out of trouble, I have literally FaceTimed another surgeon from a rural hospital in the middle of an operation for help. I have people that call me regularly and ask me questions as well.
And so you need to have that network that you can trust to people. And of course, it always starts by giving. About any good relationship is give and take. And then the other thing I was going to say that triggered me when you were talking is just to say that you're the five people that you spend the most time with is a great phrase. But they don't have to be physical people that you're physically spending time with.
Brittaney Lehman [00:35:20]: Right.
Dr. Randy Lehman [00:35:21]: If you read a book, for example, if you read the Bible, Jesus can be one of the five people that you spend the most time with. If you listen to the Dave Ramsey show, Dave Ramsey can be one of your top five people if you're spending the most time with them.
That can work both directions. It can work against you if you're spending a lot of time in entertainment or if your YouTube feed or your Facebook feed is filled with garbage. But I would say podcasts and reading books are great ways to spend time with somebody without actually, you know, obviously being with them.
And we live in a time era where you can sort of curate who you are and who you want to be by being careful, like with your friends, and you can become the person you are. Obviously, I have changed a lot because I've been with you and you've changed because you've been with me. And I would say, like, we're generally trying to manage each other up.
Brittaney Lehman [00:36:20]: Right?
Dr. Randy Lehman [00:36:22]: Doesn't always work. It's not like, you know, rainbows and butterflies all the time. But mostly it is. So what else would you tell the listener in parting? Is there anything else about real estate professional they need to know or basically? Keep learning.
Brittaney Lehman [00:36:39]: Keep learning. Educate yourself. Reading like you said. Podcast.
Dr. Randy Lehman [00:36:43]: Yeah. And then talk to your, of course, licensed professionals, your CPA and your attorney. And it's a strategy that we use, and it works well for us. I think we're investing smart in the process and helping others. I have one little anecdotal story that I would say. Our property in Rochester, Minnesota that we bought at the height of COVID. Yes. Okay. So we bought a two-tenant property at the height of COVID.
Dr. Randy Lehman [00:37:14]: Not knowing it was sort of hidden from us, that the tenants were receiving rent abatement. And then, like, right when we closed, we found that out. One tenant was a gym, and it was like a jiu-jitsu gym type thing. The other one is an autism education company. The gym was not paying as much rent per square foot because it's not built out the same. It's just like an open gym versus like classrooms and stuff.
Dr. Randy Lehman [00:37:44]: And the issue is they, each company came to us in different ways. Autism education pretty much didn't need rent abatement. They were essential, they stayed open. The gym was not. They were really struggling. I thought, well, maybe the, I had heard before he closed, Autism Education Place was really expanding. I thought maybe they would want to expand into the space and maybe the gym could just, like, pack up their mats for a while, go lick their wounds and then come back later and maybe there would be a deal, you know, for them.
Dr. Randy Lehman [00:38:14]: So, then we approached the autism education company and they said, no, we're not interested. And I'm like, oh, great. So I had to go back to the gym and talk to them about, here's the situation, you know, here's your lease terms. I have my own obligations. Like, you need to, this is what you signed, you need to meet your obligations. And there was some component of, like, I went in there and I sat down with them and I asked them, like, what are you doing with your time?
Dr. Randy Lehman [00:38:45]: Because now the pandemic had set in for a while, and there were opportunities. I mean, let me put it this way. Home Depot was hiring, okay? And everybody was hiring. People had sat around, and they weren't going back to work. And there it was, it was the end of the pandemic. The opportunity abounded. And, like, one guy's just, like, sitting there waiting for something to happen and saying, oh, woe is me in my business. I'm like, no, not woe is me in my business. This is the time, this is the phase where you go get a job and pay.
Dr. Randy Lehman [00:39:16]: Your rent and hang in there and gut check through this, and then you'll be better on the other side. Don't ask for more deferment, because the deferment is going to come next year. And your rent, now, if it's like, I can't remember what it was, like four grand a month or something in the future, you know, how are you ever going to be able to pay this obligation? You're not going to be able to. And I sat down and I penciled out the math, and the math didn't. Math, you know, I explained, is.
Dr. Randy Lehman [00:39:47]: Not in your best interest. Definitely not in my best interest, but it's not in your best interest either for you to continue to take the deferment. So that led to them doing some restructuring things. And it was a sincere conversation. And I talked to my grandpa, who's my business partner, about it. That is being human. And here was my. My grandpa lived through the Depression, everything. And his perspective was, you have to tell them he lived several states away. He's not really involved, but he's my business partner.
Dr. Randy Lehman [00:40:17]: In the deal, and he said, you have to tell them they have to pay their rent, but call us before they put a gun to their head. And it's a pretty traumatic statement. Brittany's like, geez, you know, we're going to put this on a podcast. But it actually comes from a point of recognizing that's a human being and money isn't. It's not too bad that somebody's gonna, like, have an actual, you know, total.
Dr. Randy Lehman [00:41:18]: You know, the hardest thing is, you know, the stock market crashes and people throwing themselves out of a window. You know, there's always a solution besides that, especially now in the 21st century. And, yeah, that means if somebody's doing that, they've got themselves too wrapped up in the money, too. So I went and sat down with them and explained, like, don't let things get too dire, but here is, like, what needs to happen for you and for us. Then the funny part is, a couple of months later,
an autism education company calls me and they say, "Hey, actually, we do want to expand." Okay, great. Then I go back to the guys at the gym and I say, "Hey, I've been approached. Here's the deal." And now they'd already kind of thought about it, they got themselves in a good situation. And I had a lot of clout with them because I sat down and cared about them and took the time. And I didn't just call them and scream at them, and say, "You've got to pay your rent." I did the math with them and helped them out.
Dr. Randy Lehman [00:41:48]: I went to lengths of playing with them, and they were just my tenants, but I kind of treated them like partners because, you know, we have the relationship. Long story short, they ended up moving out and kind of paying their way out. So they saved a lot of money, but I didn't really get hurt by it. Then I got the autism education company to expand in there, and I sort of brokered this deal, and there was a lot of massaging of the things and doing what needed to be done. When I was talking to Brittany earlier, it's funny because we were talking about risk management, and I said, "Why do you feel like I'm not actually risky with the things that I do?" And she said, "You always figure out the thing that needs to be done in the end."
Brittaney Lehman [00:42:27]: You always figure out how to get it done. Yeah, that's how.
Dr. Randy Lehman [00:42:31]: How to get it done.
Brittaney Lehman [00:42:32]: How. Just how to get it done. You do all the things so you can get it done. You don't stop until you really know. And that's why I feel like you don't fail at a lot of things.
Dr. Randy Lehman [00:42:45]: Yeah, just never quitting. It's a lot of the things that make you a successful surgeon. I've had situations, like, here's another tangent. I'll come back to the real estate thing. I had a patient that was doing at-home acupuncture, and she was sticking a needle into her breast, and the needle broke off. Then they went to the ER. ER took an X-ray and made an incision but couldn't really get it. She ends up a couple of days later in my office. I kind of explored through that excision but couldn't find it. So I went under fluoroscopy to the operating room, and it had migrated all the way to the axilla. A tiny, very fine wire. It took me a long time to get it out, but I didn't quit, and I got it.
Dr. Randy Lehman [00:43:16]: The CST, who was working with me, this batty old bird that I'm really good friends with, said, "Well, good job, doctor. I think I would have quit a long time ago." That was it, right? That's her, like, compliment way. I don't actually know if it was a compliment, but basically, you don't quit. You just gotta keep moving. If you're sincere, honest, and people can trust you, and you're thinking ahead and working hard, you're not trying to do it all at once necessarily, either. That's the other thing, like, in terms of risk and everything, not trying to get rich quick, get rich slow, you know, but then managing things well. That's how you're going to have, like, I think, extreme success in anything. You probably already have had success in your professional career, but you could have success in your money career and that sort of thing as well.
Dr. Randy Lehman [00:44:17]: So the way things turned out, the gym went out, autism education came in, we did this whole thing. Then we moved to Indiana, and the neighbor got tired of all the traffic, and he had to get trucks in and out, and they were parking on the street. I guess he had actually gone to the city and requested no parking on one side of the street or something, taking a little bit of an artistic license with this story here. The city had said they were going to block the parking on that side of the street, but he went out of his way to bang in street signs that he made up—personal handwritten street signs that said, "No parking by police order" on his side of the street, right?
Dr. Randy Lehman [00:44:48]: We got the really upset call from the autism company about this or that, and you've got to do something, you know, this guy can't be doing these. They're made-up signs. Brittany, I'm in the river with the kids at 6 PM when we took this call. This is one of the rare times where we got it, but they were on central time. So, usually, we get the calls during business hours because we invest in properties that are rented to businesses. Anyway, she's on shore and talking to this guy, and he's laying into her, from our tenant, right? She's trying to say, "I know people at the city, and I can look into this and figure out, like, what the deal is," but he just couldn't believe it; he didn't really understand, right?
Brittaney Lehman [00:45:53]: Yeah, yeah.
Dr. Randy Lehman [00:45:55]: So anyway, she's on the shore, like, crying by the end of this conversation.
Brittaney Lehman [00:45:58]: First time I think I've ever cried in front of a tenant.
Dr. Randy Lehman [00:46:02]: Yeah, and, but anyway, the neighbor had actually a good point, right? And he's a human being too, right? Maybe he didn't do it exactly the right way. But long story short, Brittany then makes some calls first thing the next morning. Turns out the guy had gone down to the city and there was going to be a ban on parking over there. We made a few phone calls, got the guy on the phone, said, "What do you need? Here's what we need, here's what you need. Of course, there's room for everybody to coexist." By 10 o'clock the next morning, I called back the manager of the company and said, "Here are the full facts and here's what I did about it. Here's how your problem is solved."
Oh, okay. You know, obviously, things—you make your money in anything by solving problems. So whether you're a surgeon, whether you're a real estate investor, whatever, you make money solving problems. That was an example of that. I said, by the way, I don't know exactly how the conversation went yesterday with my wife. Did I tell you this?
Brittaney Lehman [00:47:06]: I don't think so.
Dr. Randy Lehman [00:47:07]: Oh, shoot. I did such a good job. Kept a secret for five years. I said, "Call my wife back and apologize."
Brittaney Lehman [00:47:15]: Okay, that makes sense then.
Dr. Randy Lehman [00:47:18]: Yeah. Then I heard the next day from Brittany, she said, "You know, hey, by the way, he so and so called back and apologized because of how he treated me or whatever." He's so happy. Yeah, and I kept that secret. I just kept that to myself. I was like, oh, that's great. I'm glad he really did that. But the funny part about that is that the same guy, about two or three years later, had actually left the company.
Dr. Randy Lehman [00:47:48]: But he called my personal cell phone, and he's a quarter owner of a business with his brother and two other guys. It's a boring, profitable business. I think they're probably trying to exit the private equity at some point. Private equity doesn't want the real estate, and they own this other asset a couple of states away from where we were.
And he wants to convert it to a lease. And he calls me up and he says, "Hey, here's the deal. We want to sell our real estate but stay in the property on a long-term lease. Would you be my landlord?" No broker. Off-market opportunity. This happens now to me every day. Opportunity falls in my lap. And the reason is because of integrity. So, because of how I treated that guy and how he knew, like, and it has to do with getting the gym out. And I didn't, you know, I didn't screw the gym guys. You know, I communicated with them, I treated them. I hear a lot of people in real estate, they say, "Oh, you know, well, if you do this and that and this, then you've got them over a barrel." I hate that phrase so much. It's so disgusting. And it's like, you're not trying to like stick somebody else. Everybody knows that you have to protect your interests.
So, I write a lot of deals where, like, I wrote an offer on a property and it's contingent on this, this and this. And if those things happen, then I will do this part of the bargain. But if they don't, then I'm excused from it. Everybody understands, like, right up front, you put it in writing and you communicate clearly the things that you need for the deal to go forward. And then there's always enough. Like not always, but a lot of time. If there's not enough, then the deal doesn't have to happen, and it's fine. But there's usually enough food at the table for everybody to eat, everybody to get what they need. If you just put your cards out there, you know.
And that's how you're going to have success long-term in life and in investing. And so then this guy calls me back. And then we end up buying the property at what I would consider are great terms with no broker and no commission. Right. And we can set up things that work very well for him, and it's way easier for him than what he would have had, but it's also good for us. And then he basically has his hand pick of the landlords, and he chooses us. Then a couple years after that, the company calls us and they say, "Hey, we have this other property in another state and this is a listed property. Send me the link. It's vacant and it's for sale. Would you be willing to buy this and then lease it back to us? And we want to be your tenant here, but we don't want to buy the real estate." And I say, absolutely.
So, I write an offer contingent on getting a lease, you know, in place with them and all the things that I need, and I get basically a great deal because I get to do a value add where I have a vacant building and then I put a tenant in, and now it's worth, you know, more. So my returns are much higher than what they would be, you know, double-digit cap rates and things like that. These deals are falling into my lap because I'm doing what I said I would do for them in other areas. And I've got. I wouldn't be able to do without Brittany because she's the one that ends up, like, pushing all the little details through, like, with that, you know. I can manage that first start, and then she kind of took it, took it over and got it closed.
So those are sort of some thoughts that I had about the way things snowball is not always just you're getting a 20% return on your investment, and the next year you're getting a 20% on your initial principal and your 20. It's actually like a reputation snowball and an integrity snowball that kind of carries you into the next phase of your life. And if you don't start, then you lose all that snowball. And starting small, like a duplex or quadplex, renting out, doing Airbnb or something, just getting your feet wet in real estate, trying to buy something, or even just in business, like buying a business or getting involved in some way where you're trying to take your money and make it make money for you, that is a switch which is different than just working and trading time for money. And I think it's a switch that's worthwhile for everybody to make over the course of their life. And so that's why we're bothering talking about this stuff in the first place.
And maybe real estate, professional status, and all this stuff that I'm talking about is not for you. That's where you can go back to the episode on investing, and you can see that there's actually thousands of different options of things that you can invest in. And Warren Buffett says there's no called strikes in investing. That means that if you stand there at the plate and they throw three strikes at you, you're going to be out in baseball. But investing is not like that. You can watch perfect pitches come right by you and wait, and you don't get. You don't strike unless you swing and miss. So wait for your pitch. Swing and connect. You still have to swing at some point. Right? But that's where there's no called strikes in investing. And I love that phrase. And then the other baseball analogy is when I was in econ class and the professor said, tax evasion is a federal crime, but tax avoidance is as much America's pastime as cherry pie and baseball.
And that's also what we're talking about is pay, obviously your taxes and report all your income, but at the same time, keep good records and have a strategy for your taxes. Because once you hit, you know, your attending salary, you have a tax problem. So, and that's how you have to have some sort of strategy and your investing can carry you through that. We have other things besides real estate, such as the farm, which has. Is a component where we can tailor up and down our income and our expenses. So we have a place where we can kind of do that on a year by year basis to even things out for us. The other thing is going into my own private practice helps you from a tax perspective because there are expenses you can take when you're your own business that you can't take when you're a W2 employee. So there's pros and cons of both sides of that. You know, you weigh it out with your CPA and everything.
I almost wish, like, I could ask you guys if there were any questions and do a Q and A session, but obviously it's. I'm just in your ear. You're ready to get off the treadmill. So thanks again for listening to this episode of The Rural American Surgeon. And thank you so much, Brittany, for joining me.
"Yeah, thanks for having me," Brittany adds.
"Yeah," I say. Brittany's like, "My head's literally pounding, so will you just shut up?" So, anyway, join us again next time on The Rural American Surgeon and until then, dominate the day. Sam.
