Episode #507: Finding Your Path to Financial Freedom, with Dr. David Phelps

How do you gain more freedom in your life? It’s all about cash flow, cash flow, cash flow — and you can create it outside of Wall Street! And to help you find your path to financial freedom, Kirk Behrendt brings in Dr. David Phelps, creator and CEO of Freedom Founders, to share those alternative investment strategies. While it’s not for everyone, you can supplement and even start replacing active practice income with real estate. To learn how with Freedom Founders, listen to Episode 507 of The Best Practices Show!

Episode Resources:

• Dr. Phelps’s social media: @DrDavidPhelps
• Freedom Founders: https://www.freedomfounders.com
• Freedom Founders Facebook: https://www.facebook.com/FreedomFoundersGroup
• Dentist Freedom Blueprint Podcast: https://dentistfreedomblueprint.com
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Links Mentioned in This Episode:

Books by Dr. David Phelps: https://www.amazon.com/David-Phelps-DDS/e/B00RPCHD42  

Main Takeaways:

You can diversify your portfolio with real estate.

Don't invest all of your wealth into 401(k)s and stocks.  

Understand your “freedom number” and lifestyle burn rate.

Get your passive or asset-based income higher than your burn rate.

Be proactive with your finances to finally step off the financial treadmill.

Quotes:

“What I learned in life is in order to really have financial freedom, the real focus has to be on cash flow.” (16:06—16:14)

“I'm not saying investing in 401(k)s, the stock market, index funds, and mutual funds is a bad thing for people to do. But I found, in my experience — and now we’re hundreds of members of Freedom Founders — that the curation of real estate alternative investments, and particularly, the inefficiency of that market, allows for a lot more ability to navigate like we’re doing right now in the markets where we have a lot of downside risk protection. So, my philosophy, overall, is to really gain financial freedom, which is what we’re all after, at some point.” (16:17—16:51)

“How about practicing on your own terms where you can ditch some of the PPO managed care contracts you've got, or just practicing because you like to do it? You need to replace a certain amount of your active income. Maybe not all of it. So, it’s asset-based income. When you focus on the cash flow, there's also value-add inflation hedge to real estate.” (16:54—17:15)

“It’s the cash flow, it’s the cash flow, it’s the cash flow. That's where we differ from Wall Street, which is all about accumulation. You'll build up an estate, build up as big as you can. And then, when you “retire,” you're going to start to deplete it 3%, 4% a year. And they have these algorithms, over time, you'll deplete it. And hopefully, by the time you expire, about that time is about the time your accounts will expire. We look at it completely differently. We never want to kill the golden goose. The golden goose continues to produce. In fact, that's what gets to be passed on to heirs and beneficiaries in this way. So, that's the overriding philosophy.” (17:16—17:49)

“The first milestone is getting to a point where your passive or asset-based income, that cash flow, is equal or a little bit more than your lifestyle burn rate. So, your burn rate is different than your income. Most of the time, your income is going to be up here, and you pay taxes. And then, you get down to your lifestyle, and you put money in savings or investments. So, I want to show people that if you can get to whatever your burn rate is, that's going to give you a lot of margin for peace of mind. It doesn't mean you're ready to retire, but it means you've got peace of mind to actually change the model under which you're currently living your career path, your practice, whatever it might be, that you could even take some pressure off. Because when you know you've got something there that's giving you a safety net, everything changes.” (18:24—19:12)

“The first step is figure out your freedom number, which is your lifestyle burn rate, and reverse engineer. We look at, what do you need in actual capital that you could invest in the right kind of assets to produce that income? And so, we’re very diversified in real estate. Some people say, ‘Well, if you're in real estate, that’s not very diversified.’ But I say, ‘Well, actually, you can diversify a whole lot in real estate.’ I'm not saying that needs to be the end-all for all people. It is for me. But I've been doing this for over four decades, so I'm very comfortable with it. But when people first come to Freedom Founders, we let them take baby steps because most of them have had money in the markets and 401(k)s. And look, I get it. So, we, little by little, encourage them to test-drive another model. And before long, most people have moved a significant amount of their capital from their stock market Wall Street into alternatives.” (19:25—20:15)

“Wherever people are, whether it’s in business or investing in assets, it’s a time to realize that the markets are changing a lot. And whatever people thought they knew or experienced in the last several years is changing. It doesn't mean you quit. It doesn't mean you put your head in the sand. But you have to realize that you have to be very prudent about your next moves. And there are good moves and not-good moves. It depends upon where you are in your life, and what assets you have, and the skillsets.” (22:37—23:03)

“Probably the greatest thing . . . it’s about relationships. Who do you know? Who do you know that you can trust for insights about anything in life?” (23:03—23:14)

“Realize your own time value, what's important. If your time is better expended in your practice — which, for most doctors, it is — and with your family, then probably trying to have a few rental properties on the side until you get to a certain run rate of those kinds of properties, you can't really scale it — scaling it to get over the hump where you could actually afford to pay a manager, or be more passive in investing into real estate syndications or funds, which is more passive. But then again, you've got to know, ‘Who am I investing with, and what's their track record? What do I know about them?’ That's a whole other level of due diligence that you don't necessarily have to do so much when you're in control. Now, you're giving up control to buy your time back. There's always a trade. There's always a trade.” (24:11—24:56)

“The freedom number is your lifestyle burn rate. If you can keep that down — I don't mean to live like a pauper. I don't mean to live in austerity like you did when you were a student. But don't go for the, ‘Let's get the big house in the big neighborhood, and let's get the big cars.’ If you can keep things down and truly learn how to get invested in assets that will produce some kind of a dividend or rent or interest off of assets, and see that number start to climb, and don't let your lifestyle elevate faster, and if you can get it even close within a few years by keeping your lifestyle down to a decent modicum of living, that changes everything. And it’s hard to do. It is so hard to do because we go to school for all these years, and we've invested time, and we’ve got student loan debt. Of course, that has to be paid back. And that is a real anchor to people. But still, you've got to build the stuff in. Because if you don't, you get on a treadmill. You get on this treadmill. And it’s like, ‘When do I get off this treadmill?’” (27:27—28:36)

“In your mid-to-late 40s, your 50s, for sure, mentally and physically, the work that we do in dentistry, it’s exhausting. It takes its toll. And so, if you're going to want to practice for longer-term — and I'm not saying that people are going to have to. Again, if you watch your finances, you're not going to have to. But let's say you want to. You want to have longevity. Just like a prime athlete, particularly in athletics that are very physical like football, well, those athletes don't usually last very long because it’s so physical. They get pummeled and beat down. And if they get three, four, or maybe five years, that's a career. Well, dentistry could be, relatively speaking, the same thing. I mean, three or four years is small. But let's say you go really, really hard early on and bust it for 15, 20 years. Your body is not going to be able to take it.” (28:43—29:31)

“If you have a little bit lighter run rate and don't feel compelled to have to play the societal expectations of, well, you're not successful unless your practice is doing this, or you're having a run rate of this, or this many ops, or you don't have multiple practices, or you're not doing this or this — I mean, the comparison factor today, not just in our industry but in society, overall, I think, is very, very bad. And I think people need to say, ‘Look, I'm going to live my life.’ A lot of our young people are looking at it that way. We see it with the generations coming up. Not so many are as compelled as maybe we were about, ‘We’ve got to get out there and hit it, and crank it, and take it while we can get it.’ There's a whole lot of life for you to live if you take a little bit more of your time and don't feel compelled to have to keep up with everybody else.” (29:31—30:16)

“Geography plays a big part. There are places in the country where it definitely makes more sense to rent or to lease. Realize, when you buy and you own, that real estate — again, I'm very much a fan of real estate. So, you might say, ‘Well, sometimes it makes sense to rent.’ But you tie up a certain amount of capital. Typically, on a commercial building of any kind, the bank, today, is going to require you to put probably about 30% down. Well, if you're talking about, let's say, a $1 million building, which that could be the case in many places, that's $300,000. That $300,000 is tied up in real estate, which is good. But when you're in a business building mode, having access to cash, and not having to borrow everything you do to expand or add to, your biggest engine is your business, your practice. Don't start putting too much money out into investments until you've really optimized your business strategy or model. I think too many people start thinking, ‘Well, I need to go out there and get all this money invested in other stuff.’ Even though I'm a big believer in real estate, I still tell people, ‘Look, stay focused on where you're going to get the biggest return on investment.’ In business, if you do it well, your return on those dollars invested, it’s going to be at least 50% to 100%. That's your return on well-placed invested money back in your business.” (31:09—32:25)

“As soon as people start making money in their business, they’ll start complaining to their CPA, who tells them, ‘You'd better write this big check, Dr. Jones. Get ready. Coming up in April, you're going to owe $75,000.’ Dr. Jones has barely written a $75,000 check in over four or five years, and all of a sudden, he’s profitable. And he’s going, ‘Oh. What can we do about this?’ And the CPA or the financial planner goes, ‘I've got exactly the thing for you. It’s a 401(k).’ ‘Oh. How does that work?’ ‘You put money into this vehicle. It’s going to compound. And you get a tax deduction, so it’s going to lower your taxes.’ ‘Great! Sign me up. Sign me up.’ There's, in Wall Street, a great marker of this. It’s really a construct that's been oversold.” (32:49—33:31)

“I'm not against the discipline of people putting money in anything where they are actually doing it on a regular basis. That's not the worst thing that could happen. But what I don't like is the fact that when you put money in tax-deferred retirement accounts, that money is locked up until you're 59-and-a-half. You can't take it out without paying a penalty in tax. So, even though people say, ‘Well, it’s compounding,’ yeah — but you know what? In your hands, your ability to use that money in other opportunities can far more make up for these — it’s not even savings in tax. It’s a tax deferral because you will pay that tax someday. So, it’s not tax savings. You're putting it off.” (33:32—34:06)

“Your tax rates are likely to be higher down the road when you “retire” or start taking money out than they are today. It’s just, I think, a fact of life. We can all say taxes are not going to go back down. They're going to go up. So, is it better to pay taxes on the acorn, that is, the money down here, versus the oak tree up here? Well, it makes more sense to pay it here, be done with it, and have what I call unfettered money that you could put in anything. You could put it in your business, your practice, real estate, or even stocks and bonds. I'm just not a fan of locking that money up where you can't get to it.” (34:07—34:37)

“I can't tell you how many people come to Freedom Founders where the majority of their wealth outside their practice is in 401(k) type vehicles. I'm talking about significant, seven figures or more. And yet, they're 42, 45, 49 years old. They're a decade or more from being able to access that money. Yet, if they have that money that they can actually put in viable investments today that can get the cash flow, they could cut back on their practice time immensely, if not sell. But it’s locked up. And I go, ‘You know, we can help you self-direct that money, at least get it out of the stock market, if you wish. But you still can't touch it until you're 59-and-a-half.’ And they just drop their head and go, ‘Ah, I wish I would've known.’ It’s not for everybody. Some people, if that's all they do and they make a regular contribution, then that's better than doing nothing at all. So, I'm not trying to bash it. But for people who really want to be on the forefront of their finances and their future freedom, I’d say it’s better to keep that money close to the nest and use it appropriately for your means.” (34:38—35:40)

“Being a landlord, it’s not all fun and joy. There are things that you have to take care of, even if you have a “manager”. And so, it depends on your personality, it depends on the market, it depends on where this building might be. So, I'm not saying you do it or you don't do it. It’s really got to be an assessment that somebody helps you look at it, scrutinize it from all the angles, and then make a decision. It could be a really good decision, or it could be a really bad decision.” (37:42—38:08)

“I think it’s time to go back to quality and say, ‘How can I get more freedom in my life?’” (41:34—41:38)

“As long as you keep escalating your lifestyle as fast as your income goes up, you really never get free.” (41:44—41:50)

“If you get to that [freedom] number quickly with investments replacing your lifestyle burn rate, it changes everything. And that's what I try to sow into everybody I talk to, especially young people who are starting out, because I think they look ahead and go, ‘I should be doing this and this by this age to have this kind of house.’ It’s like, stop that. You're going to be a lot freer a lot sooner if you change that model a little bit.” (42:00—42:20)

Snippets:

0:00 Introduction.

1:55 Dr. Phelps’s background.

4:03 The important call that changed his life.

10:11 The genesis of Freedom Founders.

15:08 Why this topic is important in dentistry.

17:50 Financial freedom, explained.

20:20 What most people get wrong about real estate.

25:33 Advice for getting started.

30:26 Should I own, or should I rent?

32:38 Tax-deferred retirement accounts, explained.

35:48 The landlord market.

38:26 Books by Dr. Phelps and more about his podcast.

40:56 Last thoughts.

Dr. David Phelps Bio:

Dr. David Phelps owned and managed a private dental practice for over 21 years. While still in dental school, he began his investment in real estate by joint-venturing with his father on their first rental property. Three years later, they sold the property and Dr. Phelps took his $25,000 capital gain share and leveraged it into 31 properties that produced $15,000 monthly net cash flow.

Multiple health crises suffered by his daughter, Jenna (leukemia, epilepsy, and a liver transplant at age 12), caused Dr. Phelps to create the freedom to leave practice and make time for what mattered most.

Today, Dr. Phelps is a nationally recognized speaker on creating freedom, building real businesses, and investing in real estate. He authors a monthly newsletter, Path to Freedom, and hosts The Dentist Freedom Blueprint podcast. He is also the CEO of Freedom Founders, through which he provides hundreds of professional practice owners a blueprint to create Freedom in their own lives.