How to Transition From W-2 Employee to Real Estate Investor Earning Passive Income

We’re going to be talking about how you can get started in real estate and how you make that mental mind shift from working a W-2 job, going out there, and putting your wealth into real estate to build a passive income that can last for multiple generations.

She’s someone I’ve known for many years. She’s an expert in her field. Not only is she a doctor, she was able to make that shift from being a W-2 grinder to going out there and building sustainable wealth through real estate.

She’s going to be sharing with us those secrets and how to make that shift. Also, we’re going to be talking about the market and the things that you should be looking at right now because we know that this market is in flux and there are different opportunities here in 2023 that did not exist in 2021 or 2022, and you got to be on the lookout for those types of things if you want to build a sustainable portfolio.

Without further ado, I want to welcome Dr. Bala. Thanks for coming on.

Dr. Bala: Thank you, Clint. So excited to be here.

Clint: It’s great having you. I’ve been wanting to get you on here for a while now because of the way you’ve gone about this whole approach, which I think is unique because a lot of people, when they go to school, get an education, and get trapped into this mindset that, hey, I’m going to work and trade my time for money, they never seem to get out of that.

I have a good friend. He’s a doctor, and he’s been practicing now for 15 years. He makes great income, but he’s not building wealth. That’s a problem.

Why don’t you tell us your backstory and how you got started on this path to where you are today?

Dr. Bala: I think my story is similar to probably other guests you’ve had on the podcast where anyone who gets started in real estate investing all start with the same mindset. Our job is supposed to be financial security.

I started until I was 30. I started working as a physician with multiple six-figure incomes. It seems like you’re super successful on the outside.

I had a million-dollar home and 12 weeks of vacation. You think you’re all set, but you’re uncomfortable because you don’t really have control over your time. Maternity leave was 3–4 weeks. It was never enough.

My dad was diagnosed with cancer. I didn’t have too much time to spend with him. I got to spend a few weeks with him, but I wanted more. It’s still not to the point where you’re thinking about making a shift.

You’re okay with working until you’re 60 and following the traditional retirement model. That seems okay. I think for me, the shift happened when I went through—there was a merger at work—a rough career transition. The terms didn’t make sense that I pivoted, and there was a six-month period where I was between jobs.

That’s when I actually started looking at my numbers. You’re like, okay, well, I have the money in the bank, I’ve been doing everything right, and I’m a high-income earner. What does that look like in terms of passive income? What if I had to wait a little longer before I found something else that made sense?

That’s when I realized that my passive income at that point was I think 25% of what I needed to make ends meet. That’s when I really started thinking about financial freedom because unless I kept working, there was no way I was going to be able to sustain my lifestyle. That’s where a lot of people read Rich Dad Poor Dad, and it’s this whole mindset shift.

I started deep diving into financial independence numbers. What does that really mean? What does it look like with my stock portfolio?

I had acquired a few rentals along the way, but I put them on the back burner because I didn’t understand what was happening with them. I was looking at the cash flow, and I said, $500, where is this going to get me?

When I actually ran the numbers, I realized that with a third of my money in the rentals, I was generating twice as much in passive income compared to the stock market because equity had built up over time.

At that point, I was just doing turnkey buy and hold. I would just buy it and have a property manager rent it out to someone. I wasn’t even doing anything fancy.

I came up with a plan. I said, okay, if this ever happens to me again, I don’t want to be in this position, so within the next three years, I’m just going to amp up. I’m going to invest in real estate.

As I started reading and learning more, I learned about rehabs, adding value, short-term rentals, mid-term rentals, and saving multiple six figures in taxes.

What happened then is that I expected to have this linear path. Within a year, I hit financial freedom. It took off. I was 41. That was a year after I made the decision and I said, okay, I’m going down to a day a week in medicine because my kids are little and I have the freedom to do it. I just want to take advantage of it, and that’s what I did.

That was my pivoting point. That’s when I built out the community because people don’t really think about it as a game of returns. You think about the stock market. That’s what you’re supposed to do. What you don’t realize is that you’re trapped in the 4% safe withdrawal world which means that to even get $100,000 of passive income from that portfolio, that portfolio needs to be $2.5 million, and it takes years to decades to get there.

Real estate is completely different. Your returns are anywhere from 20% for just buy and hold. Some of our members get 200% returns in year one from short-term rentals.

When you factor that in, that compresses that time to financial freedom from 3 decades to 2–3 short years if you want it to be, so you need to decide. For me, that was the pivotal point. It was like, okay, do I want to keep doing this for another 17–20 years?

I used a retirement calculator. We built one out, and I can share that resource. My number was 17 years. If I kept investing in the stock market, it would take me 17 years to get to financial freedom, and I did it in a year with real estate. That was the mindset shift for me. That’s what made me realize that I have to think about things differently.

Clint: For a lot of people, wouldn’t you say that it’s hard to make that because we can always find excuses? Oh, I don’t have the money to do that, or I don’t have the properties. They’re not near me, so that’s not going to work.

What do you typically find are some of the reasons why people don’t go out there and start investing more?

Dr. Bala: The four big things are always going to be, I don’t have the time, I don’t have the money, it’s super risky, so I don’t want to do this, and then I don’t have the knowledge, and I don’t have the teams. Those are the big ones. We could break each of those down.

I don’t have the time. It’s always going to be about prioritizing time because what you’re doing when you go to work every day is trading time for money. When you’re building wealth, you do it upfront, but then it’s saving you tons of time on the backend. It’s really understanding that whatever time you put in now is buying you time exponentially in the future. It’s about prioritizing time. I think you do need to make it a priority.

Even within real estate, it’s a spectrum. You know this, Clint. You have a huge portfolio. You could go in, be completely passive, and invest in other people’s deals. All you do is vet the person you’re investing your money with. Go in there, just put it in there, sit, and get mailbox money.

You can do that with a buy-and-hold rental if you know what you’re doing. It does require a little more education, so it’s a little more time-intensive there. Then, you can go in, be an entrepreneur, own a portfolio of short-term rentals, and manage it like a business. The returns vary and there’s a spectrum, but you can pick wherever you need to be depending on where you are at that stage of life, and then that’s fluid.

I know a lot of people in our community will go in and be super hands-on and super active in real estate because they want to get those $500,000 of clinical income sheltered from taxes in year one, but the next year, you can go back to spending 15 minutes a month on real estate, and that’s perfectly fine.

It’s totally fluid, but you do what you can. Even if you’re super passive, your returns are about five times what you would see with the stock portfolio, so you get to pick and choose.

Same thing with money. There are strategies with real estate where you’re leveraging other people’s money. There are strategies where when you have creative financing, you can go in with a smaller amount of money. You can invest in markets where your down payment is less. There are so many ways to make your money go further, and just educating yourself can help you get started as far as risk goes.

I always say the stock market is so much riskier, that’s why you have drawdown strategies. That’s why when you’re in withdrawal, you have to move your money out of stocks, which are more volatile into bonds, so a lot of that reduces your returns overall.

In real estate, if you really know what you’re doing, there are so many ways to de-risk your strategy. We can deep dive into that, but it’s all about educating yourself, really knowing where you are on that spectrum, and picking the thing that makes the most sense for you.

There are options for everyone. Even the most passive way of doing it still gives you significantly higher returns, which is why I feel like everyone has options. It’s more about really seeing the possibilities and understanding what options are out there that make sense for you.

Clint: If right now, I’m a busy professional or just a busy individual, I’m listening to this, and I’m thinking, it makes sense, I would like to get into that. I can allocate the time. I’m going to make that commitment, but I need to get educated.

When you were starting out, where did you get that education? You go out on Google, and you can get a lot of conflicting information. Do you have some tips for people that are in that position right now on what they should be looking at to start that process?

Dr. Bala: That’s a very valid point because you can get educated and you can keep learning by listening to podcasts and reading articles. Sometimes, it feels scattered where it could get you into analysis paralysis, and you’re not really taking steps.

For me, I was fortunate I had mentors. I had people who connected me and who were very open to talking about what their strategy was. They connected me to teams and great markets.

I didn’t understand what a landlord-friendly market was at the time, but fortunately, that’s where they were investing and so I did great, but it still took me a decade to figure it out myself.

The fastest path is obviously tapping into the community. This could be Facebook Groups, or it could be communities online like BiggerPockets and Generational Wealth MD. These are communities and spaces where there’s education. It’s a little more structured.

Then, there are podcasts, a lot of free content that you can get and have access to. I’ve been coached by other coaches, and I’ve had coaches along the way. I am a coach, and I realized that structured training just again compresses the timeline it takes for you to learn everything you need to do and to learn to vet things.

There are multiple ways of doing it, but staying in the right spaces, interacting with the right people, and possibly even getting into a more structured coaching program is a good way to kickstart things where you get the support system, get the education, and then have the network.

I think another big barrier I see with people is who I trust. Which markets do I go into? Who are the right people to assist me? Am I doing this right? Being in the right space with the right community and maybe even in a program really helps with all of those things.

Clint: Coaching is really important. A lot of people sometimes are reluctant or hesitant to go the coaching route because, in real estate, you can evaluate that pretty easily. You can get it appraised. You can see what the markets are like in that area.

You’re talking about a coach. How would you go about selecting a coach? What are some of the criteria someone should be looking at or the questions they should be asking that coach to determine, is this person a right fit? Do they have the knowledge about what I’m looking to do? The last thing is always wanting to know, are they actually doing it?

Dr. Bala: You’re absolutely right. You don’t always necessarily need a coach. It could be a mentor, someone who’s done this who’s willing to help you do it.

I always say piggyback onto friends and family who’ve done it. Piggyback onto their teams and systems. You can ask for references. You can learn from them and have them take a look at your deals.

That’s obviously a really good way of doing it, but if you are looking for a specific coach, then I would look to see what their track record is. Have they done this themselves? How successful have they been? Look at the social proof of how their clients are performing. What are their results?

Then, I think a really big part of this is also having the right network. We have agent networks throughout the country for long-term and short-term rentals because those are two different animals. Are they able to connect you to those people?

We work with you, Clint, as far as Anderson Advisors because with asset protection, everyone needs assistance with that. We need to be connected to real-estate-savvy CPAs.

You really have to find a community where they’re able to also give you that support system because all of that is really going to be critical in your journey. Seeing what they’ve achieved, how they are growing, what the students are doing, and then seeing if they can actually connect you to all of those people or help you form your team because that’s a big part of real estate investing.

Clint: Maybe I have some experience, or I’m going to go out there and start looking for a team or coach to help me. Now, the question that comes up a lot right now is what we talked about in the opening. Hey, the market’s been changing. What are you seeing and what are you doing differently right now than you did last year?

Dr. Bala: That’s a great question because the same strategy that worked two years ago is not going to work right now. Interest rates are super high. Because inventory is so low and people are still sitting on properties, prices haven’t really calibrated with the interest rates going up. You’re in a situation where you have high-interest rates, prices are high, and there’s very low transaction volume, so you need to be competitive, but you also want to stick to your criteria.

I like to break it up into three different things. You have to have criteria about what you’re going to buy, and it has to be very strict. You need to stick to it because you want to make the right decisions.

Then, you have to have the ability to hold because in the long term, real estate will always do well. It’s just that are you in a position to weather market cycles.

Finally, it’s controlling what you can control. We can break it down. As far as buying, the single-family space in multifamily is very different, especially from a lending perspective, so that’s going to look different.

The similarities are going to be you want to buy properties if you can that are discounted so you have that built-in buffer in terms of equity. You want to buy for the long term. I don’t think this is the environment to be doing flips or have a short-term strategy where you’re trying to enter and exit within two years. Everything we’re looking to do is something we will be willing to hold on to for 5, 7, or 10 years if we need to.

That’s going to be important on the buying side. Buying properties that cash flow day one is going to be really important.

When we underwrite for short-term rentals, it’s the same thing. Interest rates have gone up, but we’re always stress testing and making sure that even under worst-case scenarios, you want to buy something that’s cash-flowing and gives you the ability to hold a property. I think that’s important.

With the larger multifamily properties, what we’ve been doing is like a flight to safety. We’re buying more Class A- properties cash flowing on day one and assets that have the right kind of debt on them in the right markets. Market selection is going to be super critical. You know this. Real estate is hyperlocal. Every market performs differently during different market cycles.

The ability to hold is going to depend on having the right debt and really stress testing your deals to make sure what if revenues dropped 10%, with short-term rentals, if occupancy is dropping 10% and my ADR is dropping 10%, is it still going to be cash flow positive?

And really only settling for properties that make sense. We sometimes have people who will come and say, well, I’m going to save multiple six figures on taxes for this property, and the numbers don’t really make sense, but that’s okay. No, that’s not okay because you can’t let the tax tail wag the dog. The numbers absolutely have to make sense. We’re constantly stress-testing deals.

For the listeners who are listening, if you’re looking for calculators, we have them on our website, generationalwealthmd.com, in the Resources section. Definitely check it out. Would you really want to be plugging everything in and factoring everything when you’re making those decisions? That’s going to be super important.

In the multifamily space is where you have to be super careful about the debt you take because you have lender requirements and DSCR. You want to make sure that even when you’re stress testing those deals, you’re hitting those DSCR requirements and are going to be able to hold on to the property.

We’re looking at fixed agency debt whenever possible because that’s safe as opposed to going for a bridge debt. We’re not looking at those deeper value-add deals over there, but it’s getting the right debt, really being able to stress test the properties, and then controlling what you can control.

We can’t control market prices, but what we do know is that even during the worst cycles, rents drop by maybe 10%. National historic numbers show that for the hospitality sector and long-term rentals, rents dropped by 5% and 4%, in ‘08 and ‘09. That’s about it before they started going back up.

We can’t control market prices, but as long as you have properties where you’ve stress tested them, you go in, and then you control the things that you can control.

If you can tap into advanced tax strategies—that’s something a lot of our high-net-worth investors do—you can shelter multiple six figures of income from taxes. That’s something that gives you that additional buffer, which is a cash reserve they can hold on to, which again, gives you the ability to hold on to that property. That’s for tax strategies.

The other thing is going in and rehabbing or reducing your expenses and increasing your income in any other way possible. A lot of our members who used to do long-term holds now are doing maybe a midterm rental model where their cash flow goes up. It’s 4X […] with a typical long-term rental model. It gives them the ability to go in and still get those returns, but they’ve shifted their strategy.

Pivots and strategies where you can control income aren’t necessarily dependent on the market cycle. That’s how I like to look at it. What are you buying? Can you hold the property? What can you control because the market cycles are out of your control? What can you control to make this still a valuable investment proposition?

Clint: You talked about properties, interest rates, and things like that. I read a report the other day, and I forget who released it, but it was in maybe 20 markets. It showed that of these 20 markets, in 18 of them, it was still cheaper to rent than it is to buy, so they’re really strong rental markets.

It’s counterintuitive. You’re like, well, everything’s going down. It’s really not because interest rates went up. As you stated, prices haven’t dropped, so people cant afford those homes.

The rental markets are strong in a lot of different markets. You definitely want to look at your numbers and do the research like you mentioned when it comes to evaluating real estate.

You talked about midterms, and I think that’s important as well because what you mentioned—I hope people caught this—is that if you buy a property, you’re going to hold it long-term. Great, that’s your strategy, but if you find the market, you could optimize the market by choosing a different strategy and learning about midterm rentals. Don’t you teach some of that as well and provide guidance on that?

Dr. Bala: We do. I feel like when you are a real estate investor, you kind of need to understand all the different options out there.

We coach on short-term, midterm, and long-term rentals, and we always say—especially for our short-term rental investors who are investing in metro markets like those residential cities—regulations are changing all the time, so when you go in, you need to know your exit options. Midterm rentals are a great exit option.

We also make sure they run numbers to make sure that that property can function as a long-term rental and at least break even. Those are your exit options, especially for short-term rentals in a metro market. I feel like when you go in, it’s good to have knowledge and understanding of all of those different things in addition to large multifamily because we have people who buy four units and run two of them as short-term rentals.

Real estate is essentially the spectrum where you have the highest returns with the highest effort that you’re putting in and maybe higher risk. Then, the other end of the spectrum is lower returns, lower risk, and lower effort. You can pick and choose, and you can modify where you want to be at different times, but knowing your options and understanding that is really helpful.

Clint: If I’m an investor and I’m thinking about getting into it, are there certain things you would say are the two things that would probably produce for you in 2023 the greatest impact as far as investing is concerned that we should focus on?

Dr. Bala: I would say in 2023, it still depends, single-family versus multifamily. Focusing on debt is going to be really important. You want to make sure you’re getting the right debt. Market selection is something you cannot ignore in any market cycle especially now.

With short-term rentals, you want to pick markets where regulations are favorable and seasonality is less, or you can expect higher occupancy. Market selection is going to be super critical, but I feel like even with long-term rentals and multifamily, picking markets that have strong demographics like migration and great job growth tends to really be more recession resilient, so picking the right market and the debt aspect I would say are also super important.

Clint: Are there certain resources that you like to use when it comes to evaluating markets that are out there that people should consider?

Dr. Bala: Well, city-data.com helps you if you’re doing market research. I’m actually coming out with an ebook with a checklist for due diligence, but when you’re looking for job growth, median household income, and population growth over time, I think City-Data is a great resource to grab that information for any submarket that you’re looking at.

Clint: When is that ebook coming out?

Dr. Bala: That’s for our syndication investors. I know you’re going with a sponsor, but are you doing your own due diligence? Does this meet your criteria? Sometime next month, July, is the target. It was supposed to come out this month, but we’re working on it and trying to perfect it and make it really good.

Clint: Great. What I’m going to do is I’m going to get that link from you if you’re willing to share it.

Dr. Bala: Absolutely. Another great resource is the retirement calculator I was talking about, Clint, because I would say that’s how people make a shift. They never go into real estate because they want to own real estate. They go into real estate because they want to buy back their time and have control over their time and money.

We have a financial independence worksheet, which I say go plug your numbers in and just realize what you’re doing right now. If you started investing in real estate, it actually gives you the numbers that you would plug in, and that shift is pivotal to help people think about it differently.

Clint: Is your community limited to just physician enrollment? If I am a non-physician, can I be part of it?

Dr. Bala: I think 75% of our community are physicians, but we have 25% of the people who are non-physicians. Some of them are high-income owners. It is open across the board to people.

I think strategy-wise, real estate is very similar. It depends on how much capital you have to invest and how much time you have. That’s where the difference is. We have a lot of physicians who probably only have $30,000–$50,000 to invest, and they may not have a lot of time. I think those are the two key differences, but it is open to anyone who’s interested in learning.

Clint: That’s important. You can also meet people who have funds but not the time, and then you can partner up on deals.

Dr. Bala: Absolutely. I think that’s key because when you don’t have time or the money, the next best thing is to find someone who has the complementary resource and then have a joint venture where you guys bring different things to the table.

Clint: What do you tell someone is the benefit of being part of a community? If they’re sitting back going, well, how’s it going to benefit me, what do you really gain out of that?

Dr. Bala: I’ve been part of multiple communities, and it has completely transformed my life. When they say you’re the average of the five people you surround yourself with, that is so true because when I read Rich Dad Poor Dad, I did this. One exercise is who are the five people you spend the most time with? Write down their names. Which quadrant do they fall into? My parents did W-2 jobs, but they were also investors. They were the only people who were actually in the I bucket. Everybody else was an employee in the E bucket.

You’re not going to shift your thinking if you’re surrounded by people who cannot help you in your journey and who may actually thrust their limiting beliefs upon you.

The community is super important, not just for partnering with people. It’s a whole mindset shift when you’re surrounding yourself with different people. Then, there’s the education, the ability to lean into people, and the mentorship.

There are so many advantages to it. I think the most important thing is to surround yourself with people who are doing something similar. Otherwise, you’re going to get bogged down.

Clint: When you were joining communities, were there a few mistakes that you made possibly in choosing the communities that you could share that people should be on the lookout for?

Dr. Bala: I don’t know if there were mistakes that I made because from every community, you end up learning something. You learn how to do things right, or you learn how not to do things the wrong way, but think you outgrow communities after a certain point. I would say if you’ve gotten to the point where you feel you aren’t getting anything more from that community and you’ve plateaued in terms of your learning, maybe it’s time to look out for a new community where you can take it to the next level. I think that’s the only thing I have to say about that, Clint.

Clint: What are you investing in right now?

Dr. Bala: Right now, we are just opening up another syndication opportunity where like I said, it’s a flight to safety Class A- asset that’s cash flowing in your property with a 3% loan assumption, which is excellent. The numbers actually work, which is kind of hard to find in this market, but those are the only deals that actually pencil out where you can be super conservative.

Capital preservation is key, so we’re beginning to syndicate on that opportunity. In my personal portfolio, I’m looking at joint venture opportunities and networking with like-minded people where we complement each other and looking to scale in multifamily.

Clint: Great. It’s been great having you on. You dropped so many nuggets here that people who are listening are probably going to listen to two or three times just to pull out the important points.

What I got out of here are where the market is going and what you see there with the midterm rentals, change in the properties, finding communities, getting together with the coaches well, and really aligning yourselves with people who can add value to your growth so you can get out of a W-2 job and start building that passive income. Is there anything you’d like to leave in passing?

Dr. Bala: I would just say, guys, you’re never going to be ready to start. You just have to start and take that action. Like I said, just take one little step today. If that is downloading that retirement calculator, do that. If that is joining a community of people who are investing in real estate, if that’s what you want to do, do that. Just take one tiny step, and then before you know it, you’ll be headed in the right direction.

Clint: Awesome. We’re going to have the links to your website to check out the community and retirement calculator, and you’re going to give me that ebook as well. We’re going to get that link in the show notes. Lots of resources. That’s why we like bringing on people who deliver value to our listeners.

Definitely take advantage of what she’s providing. All it’s going to do for you is help move that needle in the right direction and help you build that passive income.

I appreciate the fact that you took the time to be here. I know you’re very busy with your family, your investing, and your career, so I appreciate that you shared all the information you did today.

Dr. Bala: Thank you, Clint. Always a pleasure talking to you.