Real estate investing offers advantages for physicians
Andrew Carnegie once said, “The wise young man or wage earner of today invests his money in real estate,” and “Ninety percent of all millionaires become so through owning real estate.”
Like it or not, real estate investing is a powerful vehicle for wealth generation that should be considered strongly by physicians and residents as a means to achieve their financial goals. What is it about real estate investing that creates generational wealth for so many? In this column, we will explore the advantages and disadvantages of real estate investing, evaluate how this asset class may fit with investing practices unique to physicians and discuss strategies for real estate investing at various stages in one’s career.
Advantages of real estate investing
Real estate has many unique properties that make it an ideal asset class in your portfolio. For starters, real estate has a psychological benefit, as one can see/touch this tangible asset as opposed to securities. Also, a physician, with dedicated time and effort, can build some expertise in local markets and apply that as a possible competitive advantage.
In many cases, when viewed through the lens of mortgage financing, real estate allows you to use leverage to gain an outsized return when compared with just the down payment. In addition to appreciation, there are also many tax benefits to real estate investing, including the potential ability to deduct depreciation and expenses from a property’s yearly income. If you or your spouse qualifies as a professional real estate investor according to the IRS, there may be even more tax advantages that offset other income coming into your home. Finally, real estate investments, in most cases, can provide a steady flow of passive income, if set up well.
Disadvantages of real estate investing
Real estate is not without some disadvantages, however. Despite the promises made on various TV real estate investing infomercials, developing a quality real estate portfolio typically requires significant upfront capital for down payment financing costs, property taxes and repairs that are needed up front, as well as on an ongoing basis. Further, the benefit of leverage that was previously mentioned can become a significant drawback when a property’s value decreases, as the investor can go “underwater,” with the physician still beholden to the lender through personal guarantees.
Moreover, all real estate properties require a certain amount of time commitment for proper upkeep and tenant acquisition. In some cases, hired property management services may assist busy physicians with these tasks for a fee, however this may significantly eat away at profitability. Finally, it should be noted that real estate investing has unique risks that are not inherent to stock investing, namely the liability for accidents that happen on your property and bad tenants that require eviction.
Physicians as real estate investors
Despite the inherent risks of real estate investing, physicians, overall, are uniquely suited to take advantage of this powerful asset class as part of their portfolio for a variety of reasons. For starters, the high income and savings that most physicians enjoy provides them with access to startup capital for various real estate investment ventures.
Second, private practices have the unique ability to create significant real estate investment wealth by locating their practices in buildings they own or ones they develop. The value of commercial real estate, unlike residential investments, is primarily affected by the net operating income that a property brings in. When a medical practice moves into a previously unoccupied building, one in which the net operating income is close to zero, the value of that commercial property rises exponentially, especially if a long-term tenancy is signed. The investors of the practice’s building could then sell the building for a profit or keep their ownership for annual passive income.
Real estate investments for residents
Although a high level of disposable savings is beneficial for real estate investing activities, residents and newly minted physicians can still develop passive income and equity with real estate even if they have little or no savings.
The first strategy, called a “live-in flip” involves simply rehabbing the home you live in during your spare time and selling it for an increased profit. Because there are no holding costs since you live in the property you are rehabbing, there is a higher return on investment.
The second strategy involves purchasing a multifamily home, such as a duplex, as your primary residence and renting out the unused space. The property could eventually be sold or kept for passive income, even after residency.
Real estate investing offers many advantages, including the ability to benefit from leveraged appreciation, equity building, tax depreciation and passive income. However, it comes with its own risks. Physicians and residents can take advantage of this investment vehicle and should consider it as a key part of their diversified portfolio.
- Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free in print or ebook formats by texting HEALIO to 47177 or at www.ojmbookstore.com. Enter code HEALIO at checkout.
For more information:
Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon at Northwestern Medicine in Warrenville, Ill. He can be reached at firstname.lastname@example.org.
David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm, OJM Group, www.ojmgroup.com. He can be reached at email@example.com or (877) 656-4362. You should seek professional tax and legal advice before implementing any strategy discussed herein.