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In this guide, we'll break down the basics if you're considering real estate investing. We'll take a look at the different types, the level of effort involved, and what to expect.
Given the unique challenges and opportunities physicians face, only some strategies out there are worth your time. If you're a physician who already has a real estate portfolio, here are three practical real estate investing strategies you should consider.
How you should invest in real estate depends on your financial goals, risk tolerance, and the effort you're willing to put in, just like any other investment strategy. To decide if real estate investing is right for you and which type you should choose, first ask yourself a few questions:
How much money are you comfortable investing? Some types of real estate investing, such as private investment funds, require a high minimum amount to get any skin in the game, anywhere from $10,000 to $100,000 or more. Other types, such as Real Estate Investment Trusts (REITs), typically don't have a minimum requirement.
How long are you OK with keeping your money tied up? Depending on the type of investment, you may have to wait years to access your money, which is why real estate investing has low liquidity. Owning real estate may come with required holding periods, whereas REITs, which are often publicly traded, may allow you to access your money more easily.
There are two overarching types of real estate investing: active vs. passive. As the names imply, one approach requires effort on your part, whereas the other needs some upfront due diligence, after which you are mostly hands-off.
Physicians are likely to prefer passive investing because of busy schedules or a desire to avoid getting into the complexities of real estate investing.
Let's take a closer look at both types of real estate investing:
Passive real estate investing involves indirect participation in real estate ventures. You contribute capital to real estate projects such as REITs, syndications, or private funds. In return, you receive a share of the profits generated by the venture, if any.
Passive investment options include:
Syndications: This is an arrangement by a group of investors to pool capital and invest in real estate, such as a single property. Investors hand the money over to people who actively manage the property and use it to generate profits using different real estate strategies.
REITs: They are similar to mutual funds. They can be publicly traded or private companies that invest in a variety of real estate properties, including multifamily apartment buildings, offices, retail complexes, and more. Investors can purchase shares of REITs through a broker and expect to receive steady dividends. (REITs must pay out at least 90% of their taxable income annually in the form of shareholder dividends.)
Private real estate funds: These private investments use investor capital to acquire, develop, and sell properties to generate returns. You typically need to be an 'accredited investor' or 'qualified purchaser' to invest in this type of fund.
Active real estate investing means you take on the responsibility of selecting properties to invest in, performing renovations, leasing, and day-to-day operations. You own the property and are directly involved in decision-making, with the potential for higher returns than passive investing.
Active real estate investing
Passive real estate investing
How it works
Purchase and manage investment property
Invest in a portfolio of properties
Buying a second home, condo, apartment, etc.
REITs, syndications, private real estate funds
Investing in real estate may be a smart way to diversify your investment portfolio. For physicians, real estate can offer a tangible asset that may appreciate over the long term and protects against inflation.
Unlike other investors, the upfront capital required to start real estate investing is not generally an issue for high-earning physicians.
Income generated from owning or investing in properties is a passive way to build long-term wealth and financial security. Rental properties have the potential to generate a steady income stream that can help your cash flow.
Some tax benefits of real estate investing include deductions for mortgage interest and property depreciation. In certain cases, you can use special tax tools like a 1031 exchange to exchange investment properties and defer your capital gains taxes. You may also want to explore other tax-saving strategies, like accelerated depreciation, which lets you deduct a bigger portion of the property cost the year you purchase it. The exact tax treatment and advantages you can use depend on the type of real estate investment.
The primary disadvantage of investing in real estate is the lack of liquidity compared to stock market investments. REITs offer the most liquidity, but non-traded REITs, syndications, and private funds offer low liquidity.
If you choose to be an active investor, you will have to commit time and effort to acquire and manage your property/properties. Passive investing is easier but still requires some upfront research to select funds.
While real estate typically does appreciate over the long term, it is subject to economic downturns. There are no guarantees, as with any type of investing.
At Earned, we’ve seen firsthand just how popular real estate investing has become among today’s physicians.
If you have exposure to multi-family properties or other real estate investments, our expert advisors at Earned are ready to help assess your risks and identify opportunities.
If you’re a physician wanting to optimize your real estate investments, Earned is ready to hear from you. Contact our team to set up an initial consultation.
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