Tax Planning

4 Practical Real Estate Investment Strategies for Physicians

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By Bill Martin, CFA

Published February 28, 2024

There's no doubt real estate is a popular investment strategy for high-earning physicians – it is often a solid way to diversify your investments, save more for retirement, protect against inflation, and potentially enjoy some tax benefits. 

Your busy schedule and lifestyle may not leave much room to get into the weeds of real estate investing or participate in intrusive and time intensive tactics, such as renting out a room or flipping properties. If you're a physician looking to diversify your existing portfolio with real estate, Here are four practical investing strategies you might want to explore:

 

  • Publicly traded Real Estate Investment Trusts (REITs)

  • Registered funds

  • Private real estate

  • Direct purchase of investment properties


Here's a comparison of these strategies, based on factors such as investor eligibility, minimum investment requirements, tax treatment, and effort involved:



Publicly Traded REITs, Mutual Funds, ETFs

Registered Funds: Interval Funds / Tender Offer / Non-Traded REITs

Private Real Estate

Direct Purchase

Eligibility

All

All / may be restricted*

Qualified purchasers**

All

Investments

Public and private investments

Public and private investments

Private investments

Direct Ownership

Minimum Investment

No minimum - $5,000 minimum

$2,500 - $25,000 minimum

$100,000 - $1M+ minimum

Varies by property value and type; can be > $100,000 in prime markets

Tax Treatment

1099

1099

K-1

1040 - Schedule E

Liquidity Provisions

Daily

Quarterly***

10+ Year lockup Early liquidity not available or at high redemption fees

Low liquidity Holding period can be 2 years or more

Capital Calls

No

No

Yes

Additional capital may be needed for renovations, repairs, etc.

Effort Involved

Low

Low

Low

High


Source:

Investments & Wealth Monitor, January/February 2023, “Private Real Estate: Unlocking Opportunity Beyond Stocks and Bonds”


*Eligibility restrictions may vary by product and may require investors to be accredited investors. Accredited investors are individuals with gross income of $200,000, or with joint income with a spouse or partner of $300,000 or more in each of the two most recent years.

**Qualified purchasers are individuals or family-owned businesses with $5 million or more in investments, or individuals or businesses that invest $25 million or more for others, such as a professional investment manager.

***Tender offer and non-traded REITS typically offer quarterly liquidity at board direction while interval funds’ quarterly liquidity provisions are mandatory.





REITs, registered funds, and private investments - passive real estate investing


Passive real estate investing, which is mostly hands-off, means physicians put money into real estate assets without the responsibility of managing the properties. This type of investing often requires less upfront capital and can be easier to diversify holdings, but usually has more management fees and misses out on some of the tax benefits.


Passive real estate investment options include REITs, registered funds, and private investments. These strategies are highlighted below.


Publicly Traded REITs


REITs are specialized investment vehicles that make direct investments in a variety of commercial properties such as apartments, warehouses, self-storage facilities, malls, and hotels. Shares in public REITs are tradable on public exchanges with daily liquidity.


REITs are required to distribute 90 percent of taxable income to shareholders and generally are oriented toward income generation. The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37%, plus a separate 3.8% surtax on investment income.


Rather than purchase individual REITs, investors can also invest in REIT mutual funds and real estate ETFs, gaining immediate diversification at low investment minimums.


Registered Funds


Non-traded REITs are registered with the Securities and Exchange Commission and are subject to the Investment Company Act of 1940. They offer certain investor protections and may require investors to meet the accredited investor requirements.


Two other types of registered funds include Interval and tender-offer funds. Interval funds are a type of closed-end fund that is not publicly traded and allows investors to withdraw some portion of their investment at regularly scheduled intervals. Tender-offer funds are much like interval funds, but redemptions are only at the discretion of the fund board rather than being available on a predetermined schedule.


Many interval and tender-offer funds provide retail investors access to private real estate investments that normally are reserved for large institutional investors. By limiting liquidity, managers of these funds can deploy strategies that may benefit from longer-term investment horizons. Participation in interval and tender-offer funds may be limited to accredited investors. 


Private real estate investments


In contrast to REITS and registered funds, private real estate funds are structured as long-term and capital-intensive investments. These funds take direct ownership stakes in commercial properties, seeking to generate long-term appreciation as well as income. Private investments generally involve making long-term capital commitments across multiple properties. 


Private real estate investing can have a high degree of illiquidity. These funds may impose withdrawal restrictions, set high investment minimums, and could require investors to provide periodic funding via capital calls as needed. Participation may be limited to qualified purchasers (e.g, individuals with $5 million or more in investable assets).


When selecting a specific private fund to invest in, physicians should ask themselves if their primary goal is for that investment to generate income, or if they’re hoping to make a return from capital appreciation, as summarized in the table below:  


Real Estate: Stages of Development

When investing specifically in real estate or infrastructure funds, there are four types of investment strategies that a fund manager can deploy. These strategies are differentiated by the asset's current stage of development and the level of work needed to get it to a position where it is generating consistent income or returns.


Source: iCapital


Direct purchase - active real estate investing


Active investing means being directly involved with buying, maintaining, and selling of the property. This often has greater tax advantages, but requires more of the physician’s time overseeing the property.


Accordingly, direct ownership requires the most effort but gives you the most control over your investment. For physicians who are inclined to do the research, selecting, purchasing, and maintaining investment properties has the potential to be lucrative. It all depends on the amount of time and work you put into it. 


Direct real estate ownership offers a variety of tax benefits, such as deductions for mortgage interest, property taxes, and depreciation. Additionally, real estate owners can potentially defer capital gains taxes through strategies like 1031 exchanges.


A potential disadvantage of direct real estate ownership is that it is typically less diversified than REITS, registered funds, and private real estate investments. Holding one or just a few properties carries higher risk relative to diversified investments across location/region and property type.  Furthermore, unless physicians hire property managers, they have to manage the tenants and repairs/maintenance as they come up.  


Passive vs active real estate investing for physicians


For many physicians, passive investing is a commonly chosen strategy.


Why? Your career is already your biggest wealth generator, and active investing may require too much of your time to maintain balance between your practice, your family, and your investment pursuits. Also, passive investing may help reduce the risk of investing in real estate through more immediate diversification.


However, some physicians have the time and ability to actively manage real estate. For those in this category, active investing can bring more tax benefits and control to your real estate investments.


How Earned can help with your real estate investments


We’ve seen firsthand just how popular real estate investing has become among today’s physicians. 


Real estate is cyclical, so keeping tabs on the market can be hard. If you have exposure to multi-family properties or other real estate investments, our expert advisors at Earned are ready to help you assess your risks and identify opportunities. 


If you’re a physician interested in learning more about real estate investments, Earned is ready to hear from you. Contact our team to set up an initial consultation.






The information in this communication was prepared for educational purposes only and is not a solicitation to buy or sell any security or insurance product, nor an offer to provide investment advice. All examples are for illustrative purposes only and may not be relied upon for investment decisions. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the investment recommendations contained in this communication; nor should any past recommendation be taken as personalized investment advice.  Nothing contained herein should be construed as legal or tax advice and is not intended to replace the advice of a qualified tax advisor or legal professional. The information presented may have been compiled from third-party sources we believe to be reliable but cannot guarantee its accuracy or completeness.


Investing involves market risk, including the possible loss of principal. Investment objectives cannot be guaranteed.


Earned Wealth Forme Financial is an SEC-registered investment adviser. Additional information about Earned Wealth Forme Financial, including its services and fees, is available online at http://adviserinfo.sec.gov/.

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