From Burnout to Financial Freedom: Real Estate Investing for Doctors
Even though a full-time physician in the United States earn on average $208,000 per year, this alone may not be enough to achieve financial freedom.
If you’re a doctor or other high-income earner, it’s vital to understand how and where to invest your income.
And one of the best areas to do just that is real estate investing.
Real estate investing can provide:
- passive income (cash flow)
- asset appreciation
- tax benefits
One of the main benefits of real estate investing is creating passive income (my favorite). Passive investments such as real estate syndications for accredited investors can be appealing for those who don’t have the time or want to be a landlord.
From tax advantages to passive income, here are some of the reasons why doctors should consider real estate investing.
- Despite a high average salary, physicians may not achieve financial freedom through their income alone.
- Real estate investing offers opportunities for passive income, asset appreciation, and tax benefits.
- Passive real estate investing is often more suitable for busy professionals like doctors.
- Active investing involves hands-on management and can be time-consuming but offers more control.
- Passive investing, such as REITs and syndications, requires less involvement and knowledge but offers less control over the investment.
- Real estate investing provides several benefits for doctors, including passive income, tax advantages, lower volatility, and property appreciation.
- For busy doctors, investing as a Limited Partner in a syndication can be an effective way to invest in real estate without sacrificing time and effort.
- Due diligence and evaluating the sponsor are crucial when investing in real estate syndications.
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Are You Trading Time For Money?
If you work for a hospital or clinic, you’re used to receiving a paycheck at regular times.
This is the standard “trade time for money” strategy.
There’s a clear relationship between work and compensation while working like this.
NO work = NO money
Most of us are aware of how the stock market works. Before becoming a real estate investor, I was 99% invested in mutual funds.
The majority of money made in the market comes from stock appreciation. However, unless you sell them, the earnings that remain are merely speculative. This is NOT the situation when it comes to real assets.
If you own an investment property, the tenants pay you rent each month, and you benefit from the property’s appreciation.
By developing multiple streams of income from real estate, you’re able to pay for personal expenses and end the “time for money” problem.
How To Invest In Real Estate (Active vs Passive)
Before investing in real estate, medical professionals should first answer the following question:
Should I invest actively or passively?
For most professionals, the answer is passive investing because…
Our BIGGEST wealth generator is our INCOME.
Think about how much time, money and energy you put in to get to where you are today.
Doctors spend a lot of time, money and effort to attain their degree as medical students and their time is better focused on treating patients.
When you start dealing with tenants and all of the maintenance problems that come with being an active investor, you have to cut time out of your life (family, travel, etc.).
It’s up to you whether to invest actively or passively. My goal for you is financial independence, passive income replaces your W2 or active income.
Real estate is a great way to build financial security because there’s multiple ways to get started. It’s your job to find out which part of it will help you accomplish your goals.
Real Estate Investing Strategies: Active Investing
Active real estate investing is also known as being “hands-on.” This is someone that’s involved with the acquisition process, including:
- securing financing
- selling property
Once the rental property closes, they’re also involved in:
- property management
- screening potential tenants
- writing and signing lease agreements
- collecting rent
- available 24/7 for solving repairs or problems
Pros and Cons of Active Investing
- Complete control over the investment
- Tax advantages go straight to the real estate investor
- Minimal costs as a leasing agent/property manager aren’t employed.
- Investors must fully understand property management
- Requires detailed knowledge of the growth trends and landlord-tenant laws of the market
- Hard to scale when all rental properties is actively managed
Active Income Investments
#1. Fix and flip
The active investor will fix or rehab a property and turn around sell it as quickly as possible for a profit. The shorter the time frame, the better.
#2. Short-term rentals (STRs)
Want to invest passively in STRs? Find out more about our STR (AirBnB) Fund II by clicking HERE.
A short-term rental (STR) is a property that’s usually rented out for less than seven days at a time for vacations or business trips.
And with the rise of online platforms like Airbnb and VRBO, it’s never been easier for almost anyone with a vacation/second home or rental property to use it as a short-term rental.
Many times, a short-term rental investor can make more money than a long-term rental investor because they can:
- charge more
- turn over residential properties quicker
Related article: STR Tax Strategy for High Income Earners
But investing in STRs also takes more work as it’s similar to being in the hospitality business.
Investors are constantly:
- marketing for guests
- making sure it’s clean and fully furnished
- doing everything they can to make sure tenants leave a good review
Real Estate Investing Strategies: Passive Investing
After I hurt my wrist while snow skiing, I realized I needed to find other ways to make money besides practicing dentistry. This incident eventually led me to start investing passively in real estate.
Unlike active investing, passive real estate investing is completely hands-off. This means you’re putting money into real estate assets without taking care of the day-to-day running of them. So, the risk is much lower than with an active investment.
This type of investing is GREAT for busy, high-income professionals with limited time wanting passive income streams.
Pros and Cons of Passive Investing
- Minimal knowledge required in property management
- Less time consuming vs active investing
- Diversification is easier as you can invest in smaller amounts of money into several projects
- Do not need much capital to get started
- Significantly less control over the real estate investment
- Not all tax advantages are available to the investor
- More overhead and fees are paid to third parties who supervise the investment and profit from it
Passive Income Investments
When you invest in real estate investment trusts, or REITs, you buy stock in a company that buys and sells commercial real estate. They can be a public or private REIT.
Hotels, apartment buildings and self-storage units are a few examples.
Investors can purchase these shares on the stock market by buying stock in a single company, a mutual fund, or an exchange traded fund (ETF).
A real estate syndication is when a group of passive investors pool their money to buy real estate properties that are too expensive for any one person to buy on their own.
The Securities and Exchange Commission (SEC) is in charge of these investment opportunities, and you have to file paperwork like a private placement memorandum (PPM).
The two main groups involved:
a. General Partner (GPs)
Also known as the sponsor. Their roles are:
- find and underwrite deals
- place under contract
- obtain financing
- provide individual investors financial information
b. Limited Partner (LPs)
This group is made up of people who choose to invest without taking on a lot of extra risk. They have no active responsibilities in managing the asset.
Benefits of Real Estate Investing for Doctors
#1. Cash flow (Passive income)
Doctors work hard for their money and only have “W-2” income which is taxed at the highest marginal income tax rate. The harder they work, the more taxes are paid.
Real estate investing can generate passive income with no little to no effort which is taxed at a lower rate.
The Internal Revenue Service (IRS) differentiates between passive real estate income and earned W-2 income.
Withholdings for federal and state income taxes, FICA, FUTA, and SUTA are required on earned income. However, passive income from real estate is often not subject to withholding and is taxed according to a taxpayer’s tax bracket.
Collecting rental income is a great way to boost your personal finances and increase your cash flow and is one of the main reasons I invest. We’re using this additional income to replace our annual personal expenses. This helps in not having to continue trading time for money.
#2. Tax benefits
Depreciation is a tax deduction that allows rental property owners to deduct the cost of their property over time. The Tax Cuts and Jobs Act reintroduced bonus depreciation, which allows investors to deduct a percentage of the cost of their property in the year it was purchased.
From 2023 to 2026, this benefit will be phased out, after which investors would be able to depreciate their homes at a slower rate.
Real estate investors can benefit from bonus depreciation by conducting a cost segregation analysis on their properties to establish which components of the building are “dedicated, decorative, or removable.” These items may qualify for 100% bonus depreciation in the year they are purchased.
This benefit is estimated to be worth 20% to 25% of the purchase price of the building.
Do you want to lower your taxes and increase your cash flow? Schedule your cost segregation study HERE.
#3. Less volatile
Real estate is known for being recession-resistant. Unlike the stock market, which is a highly liquid investment, any bad news can force a significant sell-off but typically doesn’t affect the value of a property.
Another benefit of investing in real estate has to do with appreciation.
In general, the value of real estate tends to go up over time. In several of the multifamily properties I’ve invested in, there’s something called “forced appreciation.” This is where the property is updated, which allows the rents to be raised to “force” the appreciation quicker than normal.
A buy and hold strategy is a great way high-income earners can build wealth over the long term.
Frequently Asked Questions Investing For Doctors
What’s the best option for doctors to invest their money?
Because doctors are busy professionals, one of the best options is to invest passively as a Limited Partner (LP) in a syndication. This allows them to lower their risk without giving up valuable time to take an active role in the investment.
By doing this , they’re able to share in all the tax benefits and gains that come with owning something like commercial real estate.
How do you tell if a syndication is a good deal or not?
One of the most important aspects of investing in syndications is the sponsor. This is the group that is actively involved in finding and managing the property. Being able to perform your own due diligence is a good way to tell if this type of investment is right for you.Join the Passive Investors Circle