Would you like to become a real estate magnate? Investment real estate is perfect for doctors. But you must learn and you must gain experience. Don’t jump in without careful study.
Doctors have a history of high incomes, but relatively low net worths. We just are not good at converting income into wealth. It is simple to do so. But apparently it isn’t easy.
Living below your means is key. That gap between earning and spending provides capital for investment. We then should prudently deploy that capital to build income-producing assets.
The good news is doctors continue to make a generous income, in the 95th percentile of household income in the U.S.
With that kind of income, we don’t need to take big risks to reach financial success. Simple saving and consistent investing will do the trick.
How to Invest
Still, we do need to preserve and grow financial assets. One way to do that is through diversification. You don’t need to invest in everything that comes along. In fact, you shouldn’t. But owning 3-5 non-correlated assets is smart. By non-correlated I mean that ideally not everything trends in the same direction at once.
Some of my investments include private companies, public companies, preferred stocks, and bonds. I also have grown my wealth through investment real estate. That isn’t required, but it worked for me and countless other doctors.
Real Estate is Not About Toilets
You may think “I don’t have time for that” or “I can’t take calls about a clogged toilet at 2 AM.” I have never gotten such a call in 20 years of investing in real estate. You can avoid that hassle too – if you want to.
There is a spectrum for real estate investing. One can invest more passively. Examples are REITs (Real Estate Investment Trusts), triple-net leases, or syndications. More time and effort provides more return and diversification. Examples include medical office buildings, self-storage, surgery center, or small multi-family housing.
Owning SFH (Single-Family Houses) may be one of the more demanding approaches, especially if you attempt it without a professional manager. Yet that is where many doctors start. They become an inadvertent landlord of a rental property. This happens after moving from a primary home. I know this can happen: I did it once.
Where is the best place along the real estate spectrum to invest? It is up to you. Anywhere and nowhere are acceptable answers. Investing in the entire spectrum, from one end to the other, gives me the most diversification.
Not Sweat Equity, but Still Sweet
So why persist, learn, and invest in real estate? It is worth overcoming the hassles and disaster stories. Real estate investing is sweet. Sweet like CANDY.
I created the acronym CANDY to represent the main benefits of investment real estate. It reminds me why I invest – Cash Flow, Appreciation, Net Worth, Depreciation, and Yield.
How to Learn
I have written elsewhere about reading good books and learning from other physician investors who have done it, such as my friends, Tom Black or Cory Fawcett.
Lots of work and time required. I would need more detail if I were new to this. Otherwise, I would invest like a “normal” doctor and lose money.
I recommend we take our time, spend time, get an education, and grow wealth and knowledge slowly. Just like you learned your specialty.
We should proceed carefully. I worry about increased vacancy rates soon as we enter a recession. Job loss and unemployment applications are skyrocketing. Many thousands of Americans cannot currently pay their rent.
Ponder where you want to be on the real estate spectrum from active (hands-on) to passive (hands-off). I like to own everywhere along the spectrum. That is part of how I diversify. Others put all their eggs in one basket. High returns can be achieved, as long as you watch and care for that basket.
Pandemic Portfolio Panic
This coronavirus crisis has hit Americans hard. Health care workers have not been exempted from health threats. Nor have they been spared financially. Many found that as their stress went up, their portfolio went down as did their job stability. Furloughs, unemployment, and pay cuts are terms I now see on physician blogs.
For many of us, this drives home the need to decrease our dependence on W-2 income. We need other income streams to reduce the damage from job changes. Currently, administrators render furloughs, 20% pay cuts, and prolonged clinic closures. Don’t be solely at their mercy.
Start now and prepare to build your real estate assets. If you wait until the perfect time it will be too late. Even if you time it perfectly you will be unprepared to pull the trigger. Now is a great time to begin your studies from these experienced mentors.
Run The Numbers
You may consider further tax reduction by becoming a “real estate professional.” REPS (Real Estate Professional Status) is perfect if you have a stay-at-home spouse. Especially if they have some interest in real estate. I can’t figure out how to make that work in my family. My wife has zero interest in real estate. If you can achieve “REPS status” – go for it!
Even a Real Estate Magnate Needs a Team
You will need to build a team and foster relationships. Team building is important in real estate. That is foreign to many physicians.
You won’t need an MBA or an apprenticeship, but finding a mentor can help jump start your active real estate investing.
Whether through a course, mentor, or books, I encourage you to keep learning. Don’t hesitate to reach out to me if I can help.
What do you think? Have you invested in real estate? Was that a good experience? How should doctors learn to invest well?
Points well-taken, WD.
You’ve mentioned previously that you were well-diversified with real-estate holdings – can you comment on your multi-family experience and what you’ve learned from them?
Thanks for stopping by.
Yes, my portfolio includes stocks, bonds, private companies, imaging, surgery centers, and real estate.
Within real estate, there are REITs (U.S. & foreign), Funds, Syndications, MOB, and SFHs.
Not counting the funds I’m invested in three separate apartment complexes. They have gone fine so far. It would take a full post to lay it all out.
Suffice it to say I’m bullish about the segment in the long-term, but nervous about the short and medium-term devastation from job losses and vacancy rates.
I’m not expecting a great time to sell in the next year, but there may be more buying opportunities.
Sending this to my ER friend who has been itching to get into RE. Awesome post!
I’m personally very interested in investing in real estate but nervous about over-leveraging as you start to accumulate properties. Any tips to avoid this issue?
I share your debt-aversion.
I think you answered your own question though by using the phrase, “over-leveraging.”
Don’t do that and you will be fine.
A small amount of low-interest debt against a growing asset like rental real estate is fine. Interest rates are at historical lows. So that debt can grow your wealth faster and allow you to buy more properties.
If you want to avoid all debt, that is fine too. Just save and invest. There is nothing wrong with owning a few single-family homes with cash and renting them out.
What are you thoughts on REITs as a method of investing in property?
I love REITs. I have invested in publicly-traded REITs or REIT mutual funds for over two decades. It is part of the spectrum that I own.
It is hands-off investing and generates cash dividends. Public REITs are scrutinized and held to high accounting standards. More on REITS.
Downsides are it generates income tax liability when in a taxable account. You don’t have as much control over when to buy and sell the asset. And they can behave a bit like stocks when the market is going wild. REITs seem more correlated with the S&P 500 than my rental houses for example.
But nothing wrong with investing in REITs to get some real estate exposure without taking time from your busy life. Thanks for the comment.