Real estate investing offers advantages for physicians

May 13, 2021 Beth McCandry

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Bhatia and Mandell do not report any relevant financial information.

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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 do so by owning real estate.”

Like it or not, real estate investments are an effective means of wealth creation that should be considered by doctors and local residents as a means of achieving their financial goals. What about real estate investments that create wealth for so many generations? In this column we will examine the pros and cons of real estate investing, how this asset class fits into investment practices unique to doctors, and discuss strategies for real estate investing at different stages of careers.

Benefits of real estate investments

Properties have many unique properties that make them an ideal asset class to add to your portfolio. For starters, real estate has a psychological advantage as you can see / touch this tangible asset as opposed to securities. In addition, with a lot of time and effort, a doctor can build up expertise in the local markets and use this as a possible competitive advantage.

Sanjeev Bhatia, MD

Sanjeev Bhatia

David B. Mandell, JD, MBA

David B. Mandell

In many cases real estate allows you to use leverage to get an oversized return compared to just paying the down payment. In addition to appreciation in value, there are also many tax benefits for real estate investments, including the potential to deduct depreciation and expenses from a property’s annual income. If you or your spouse are qualified to be a professional real estate investor according to the IRS, there may be even more tax breaks that offset other income that goes into your home. After all, real estate investments can, in most cases, provide a steady flow of passive income if well established.

Disadvantages of real estate investments

Real estate, however, is not without its drawbacks. Despite the promises made in various TV real estate investment infomercials, developing a high quality real estate portfolio typically requires significant up-front capital for down payment financing costs, property taxes, and repairs, which are required upfront and on an ongoing basis. Additionally, the aforementioned benefit of leverage can become a significant disadvantage when the value of a property declines as the investor can go “underwater” with the doctor still obligated to the lender by personal guarantees.

In addition, all properties require a certain amount of time to be properly maintained and acquired by tenants. In some cases, contracted property management services can assist employed doctors with these tasks for a fee, but doing so can have a significant impact on profitability. Finally, it should be noted that real estate investments have unique risks that are not associated with stock investments, namely liability for accidents on your property and poor tenants requiring eviction.

Doctors as real estate investors

Overall, despite the risks associated with real estate investments, doctors are uniquely suited for a variety of reasons to leverage this high performing asset class as part of their portfolio. For starters, the high income and savings that most doctors enjoy gives them access to seed capital for various real estate investment firms.

Second, private practices have the unique ability to create significant real estate investment wealth by locating their practices in buildings that they own or that they are developing. In contrast to residential investments, the value of commercial real estate is mainly influenced by the operating results of a property. When a doctor’s office moves into a previously unoccupied building where the operating income is close to zero, the value of that commercial property goes up exponentially, especially when a long-term lease is signed. Investors in the practice building could then sell the building for a profit or keep their property for an annual passive income.

Real estate investments for local residents

While high levels of disposable savings are beneficial for real estate investments, residents and newly minted doctors can develop passive income and equity on real estate even when they have little or no savings.

The first strategy, known as the “live-in-flip”, is to simply redevelop the house you live in in your free time and sell it for a higher profit. Since there are no holding costs as you live in the property you are renovating, there is a higher return on investment.

The second strategy is to buy an apartment building like a maisonette as your main residence and rent out the unused space. The property could eventually be sold or kept for passive income even after the residency.

Conclusion

Real estate investments offer many benefits, including the ability to benefit from leverage, equity accumulation, tax write-offs, and passive income. However, it comes with its own risks. Doctors and local residents alike can use this investment vehicle and should consider it an important part of their diversified portfolio.

Reference:

Wealth Planning for the Modern Doctor and Wealth Management Made Easy are available free of charge in print or e-book formats by sending HEALIO to 47177 or at www.ojmbookstore.com. Enter the code HEALIO at checkout.

For more informations:

Sanjeev Bhatia, MD, is an orthopedic sports physician with Northwestern Medicine in Warrenville, Illinois. He can be reached at [email protected].

David B. Mandell, JD, MBA, is a lawyer and founder of the asset management company OJM Group, www.ojmgroup.com. He can be reached at [email protected] or (877) 656-4362. You should seek professional tax and legal advice before implementing any of the strategies described here.