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HOW TO MAKE YOUR JOB OPTIONAL”

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HOW TO MAKE YOUR JOB OPTIONAL”

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Your Finances Are at Risk and You Don’t Even Know It!

Summary: When we think about ways to reduce financial risk, many of us think about it in terms of portfolio management. The idea is to balance the risk by having different asset classes in your portfolio. That way, if one asset class goes down, the others remain steady or maybe even go up. Your goal is to mitigate risk, so your entire portfolio doesn’t ever take a hit. While it’s good to think about portfolio risk, there’s another risk that very few of us are doing anything about, let alone thinking about. In this article, we discuss a type of risk called concentration risk and why this type of risk might be even more important for you to address than portfolio risk. 

The other day, I was talking to a friend about his finances. 

He and his wife have done an amazing job saving and maximizing their retirement accounts. They’ve even paid off their student loans and the mortgage on their house. 

Their main concern now is that their portfolio is unbalanced. They’ve got too much in retirement accounts and not enough in other asset classes. They specifically brought up real estate, since they’ve been thinking that they probably should add some real estate to their portfolio to lower their overall risk through diversification.

I think this is a common concern. We all want to balance our portfolio and diversify so that one or two asset classes can buoy the others during a recession. 

For many of us, this is the only way that we think about financial risk. 

However, what if I told you that there is another type of risk that most of us don’t think about, let alone have a clear plan in place to mitigate?

What if I told you that this type of risk poses an even greater risk to you and your family’s financial health? 

What type of risk am I talking about? I’m talking about concentration risk.

What is Concentration Risk?

Concentration risk is something that is commonly found in businesses. It’s when a business gets most of its income from a single customer or a single product. 

The risk is that when you lose your main customer or there’s a significant drop in sales of your main product, the business’s income takes a huge hit. You might even risk going out of business all together. 

So what do companies do to mitigate this risk? They go out and acquire more customers or add new products so they aren’t reliant on one customer or one product. 

So how does all this apply to you and your personal finances? 

Like the businesses described above, you (and nearly everybody you know) have a high degree of concentration risk. And you’re not even aware of it. 

Similar to a business, for most of us, all of your income comes from a single source. Losing this source of income usually creates financial havoc on a family’s finances. 

Maybe you feel better because you have an emergency fund. But that’s not going to last very long if you lose your income or have a significant increase in expenses. 

Sure, you can tap into your retirement savings, but you’ll pay a severe penalty (10% + state and federal income tax) for early withdrawal. 

You don’t think you could lose your job? Guess again. Your job isn’t as secure as you might think.

How about a medical issue? It’s not just about what could happen to you. It could be your spouse, children, parents, or any other close family member or friend. The risk of a medical issue is further magnified because you aren’t just losing income, you could incur major medical expenses on top of that.

Then, there’s the risk of burnout. Sure, you might not feel burned out at the moment, but any change in your work environment, whether it’s a new boss, new policies, or basically anything that makes you feel like you’ve lost control of your life could make you feel burned out. 

And this risk is present over the course of an entire career. Either something happens over a 30-40 year career or you get really lucky and you skate by without any financial consequences. 

You can see why I would argue concentration risk is far greater than the risks posed by having an unbalanced portfolio. 

So What Can You Do to Mitigate Concentration Risk?

Concentration risk is a major concern because once you lose your only source of income, there’s very little you can do in the moment to address the issue. 

That’s because creating additional sources of income takes time and planning. The key is to start the process as soon as possible, before you have issues and need it. 

While there are many possible sources of income, there are few that can be significant enough to allow you to generate enough income to cover living expenses. 

I know of doctors doing medical surveys and other small side gigs, but at the end of the day, none of these are significant enough to sustain you and your family when disaster strikes. 

We like to think of income streams as the legs of the Parthenon in Greece. The goal is to have numerous strong pillars so the building can stay standing even if one or two legs are knocked out.

Your clinical income is one leg, bringing in several hundreds of thousands of dollars per year. If your side gigs aren’t bringing in an income stream that is as solid as your clinical income, it’s probably time to get to work on building up another pillar of your financial Parthenon. 

In our opinion (and if you’ve been following our blog you already know this!), real estate is one of the best ways to do reduce your concentration risk. Let’s explore the reasons why:

1. It can be completely passive if you choose.

One of the issues with our jobs is that we have to show up to work every day to earn money. In contrast, real estate can be as passive as you want it to be. Owning rentals requires work initially, but once your portfolio brings in enough income, you could potentially make it nearly completely passive if you choose.

That’s what my parents did. They bought a number of rental properties, hired a property manager, and then forgot about them. Even to this day, these properties bring in several hundreds of thousands of dollars per year with almost no effort.

Of course, we choose to stay active with our rentals because we are still growing our portfolio and so we can claim the tax advantages of real estate professional status, but this is a choice. If something were to happen where we couldn’t work anymore, either clinically or on our real estate business, our rentals would continue to earn income for us even if we weren’t overseeing them like we are now.

This pillar would remain standing.

2. Building up your portfolio isn’t a full time job.

We talked about how real estate investment income can be 100% passive once you build up your portfolio, but what about the effort it takes to get to the point where your rental income is significant enough to sustain you?

This takes effort, but the beauty is, it’s not as much effort as you might think.

We know single moms and dads as well as parents with 3+ children juggling full time jobs who are building up their real estate portfolios. What we’ve found is that if you have the right mentor to guide you, you can be successful and you can do it more efficiently because you avoid the mistakes you might make if you were trying to do it alone.

Also, we like to think of real estate as easily fitting into the corners of your life. I know many people who make real estate-related calls at work or during their commute. Most of the vendors I work with text me with questions. Most of us are somehow able to fit in texting with our family members. It’s no different than responding to texts from your vendors.

3. The income is significant and tax-free.

Unlike a side gig, the income from your rentals is significant and can easily rival or far exceed your clinical income. Not only that, this income is generally tax-free. The reason is that you generally show a loss on your tax return even though your property is cashflowing. To read about how this works, check out this post.

This means that you don’t need to make as much cashflow from rentals as you do in your day job. For example, if your salary is $300,000, an equivalent amount of tax-free cashflow is probably around $200,000. So once you reach this lower number, you’ve replaced your salary.

4. Anybody can do it.

Unlike many start-up businesses, real estate is accessible to nearly anyone. I’ve started three companies. I can tell you that real estate is the easiest of the businesses that I’ve started.

Why?

The reason is that it’s a well-established business model, almost like a franchise. The product, systems, and people are readily accessible to anyone. For example, do you need a property manager? All you have to do is look at Yelp or ask an investor real estate agent. Need training or coaching about how to buy rentals the right way? You can take our course!

5. There is no cap on how much you can make.

Interested in creating a legacy for your family by achieving generational wealth? It’s unlikely your W2 job is going to get you there. There’s a cap on how much you can make. In contrast, there’s no cap on the amount you can make from your rentals. You can keep on growing it as much as you want. Want $1 million per year in cashflow from your rentals? How about $2 million? If you make it a goal, you can make it happen.

So what about you? How is your concentration risk? How do you feel concentration risk compares to portfolio risk? Which is more important? And, what are you doing about it?

Interested in learning more about how to build a portfolio of cashflowing real estate? Be part of the conversation! Follow our general Semi-Retired MD Facebook page and then join our physicians or professionals group!

Semi-Retired M.D. and its owners, presenters, and employees are not in the business of providing personal, financial, tax, legal or investment advice and specifically disclaims any liability, loss or risk, which is incurred as a consequence, either directly or indirectly, by the use of any of the information contained in this blog. Semi-Retired M.D., its website, this blog and any online tools, if any, do NOT provide ANY legal, accounting, securities, investment, tax or other professional services advice and are not intended to be a substitute for meeting with professional advisors. If legal advice or other expert assistance is required, the services of competent, licensed and certified professionals should be sought. In addition, Semi-Retired M.D. does not endorse ANY specific investments, investment strategies, advisors, or financial service firms.

Do you want to learn how to creatively fund your real estate portfolio and achieve financial freedom? Join the conversation! Follow our Semi-Retired MD  Facebook page and join our Doctors or Professionals  group!

Semi-Retired M.D. and its owners, presenters, and employees are not in the business of providing personal, financial, tax, legal or investment advice and specifically disclaims any liability, loss or risk, which is incurred as a consequence, either directly or indirectly, by the use of any of the information contained in this blog. Semi-Retired M.D., its website, this blog and any online tools, if any, do NOT provide ANY legal, accounting, securities, investment, tax or other professional services advice and are not intended to be a substitute for meeting with professional advisors. If legal advice or other expert assistance is required, the services of competent, licensed and certified professionals should be sought. In addition, Semi-Retired M.D. does not endorse ANY specific investments, investment strategies, advisors, or financial service firms.

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Hi, we’re Kenji and Leti

we provide coaching and mentorship for doctors and high-income earners

Several years ago, we were newlyweds working as full-time hospitalists. On paper, it looked like we had everything: the prestigious careers, the happy marriage, the luxurious rental home, the cars, etc.

But in reality? Despite having worked for several years, we had very little savings. Despite our high income, we had very little freedom in terms of time or money.

One thing was clear: we had to do something.

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