Investing in real estate can be a smart money move for physicians if it fits into their financial goals.
The “best” way for doctors to invest depends on how much time and money they’re looking to invest.
Here are 5 smart ways we believe that physicians can start investing in real estate.
1. Invest In A REIT
Not all real estate investing involves getting your hands in concrete and drywall; some methods don’t require you to own physical property, which can be a relief for busy professionals.
Real estate investment trusts (REIT) are publicly traded companies that own and manage commercial real estate such as apartment buildings, hospitals, hotels, and warehouses. REITs can be fantastic for physicians with little or no real estate knowledge to get their feet wet in the industry. Some REITs invest in rental properties, and others in debt like private mortgages.
Essentially, a REIT is a long-term investment that pays, mostly non-qualified, dividends. It operates like a mutual fund in the sense that multiple investors pool their funds together to buy shares in real estate and are paid dividends based on the value of their shares.
A REIT can be an excellent real estate investment for a doctor because it doesn’t require physical involvement—once you buy the stock, your set.
They can help diversify your portfolio, with the potential to payout high dividend yields, and are a great option for a liquid investment.
Keep in mind that there are a couple of downsides and risks to consider.
- You’ll have to pay taxes on the dividends (even if it’s reinvested in the fund).
- Watch out for higher than average investment fees.
2. Purchase A Rental Property
Have you ever thought about becoming a landlord? If so, purchasing a rental property could be a great way to get started in the real estate market.
While HGTV may make the process look easy, rental properties aren’t just passive income streams; they require a significant amount of upfront and ongoing capital and sweat equity.
Before you purchase a rental property, you need to understand the rental market. Connect with a professional that can help show you the ropes. If you thought buying a house was a big deal, you’re in for a treat with rental properties!
Once you decide on a property, securing consistent tenants is vital. As you sift through tenant applications, ensure they have a solid record of on-time payment, steady income, high credit report, and references from past landlords. While you can’t be certain a tenant will be a good one until they sign a lease, these extra steps can help weed out any undesirable contenders.
Whether your rental property is out of state or right around the corner, it may be a smart move to hire someone to manage the property for you who has a good network of skilled labor. You’re busy and can’t necessarily fix a leaking sink at 2 in the afternoon.
Maybe you want to purchase a property where your child or children will attend college. The rent would cover your mortgage payment, and it could be a good long-term investment, so when your kids are in college, they will have a nice place to live (but still have to pay some rent!).
MythBusters: Doctors and Rental Property
The prospect of passive income via a rental property is exciting for many physicians, and it’s often discussed as a prime way to build wealth. And while that is possible, many doctors forget how busy they truly are.
They don’t have time to find the best property, secure ideal tenants, fix ongoing maintenance, etc., so they hire property managers and other staff to help them. While this professional assistance may be necessary, it’s another expense to account for in the cash flow plan.
Perhaps the most common myth about rental properties is,
You’ll make money if you can get rent that exceeds the mortgage payment.
But, with any investment, it’s not always that simple.
The rental property must work with contingency plans.
- What if the property remains vacant for 6 months between tenants?
- What happens when the HVAC or hot water heater busts?
- Are you prepared to pay professionals to help you manage the property long-term?
The moral of the story is that you must be prepared for any scenario. Rent payments over the mortgage won’t necessarily make you money.
3. Rent Out A Vacation Property or Second Home
If you’ve stayed in an Airbnb before, you’ve likely stayed in someone’s vacation home. If you have a second property in a great location lying vacant for 9+ months out of the year, you could consider renting the house.
Depending on the market, location, and demand, you can decide if short-term or long-term rentals are more appropriate. Plus, with services like Airbnb, Virbo, and Homeaway, the process is easier than ever.
Before you make a rental listing, check into local laws—rental market laws vary greatly depending on location. Also, if your property is part of an association, by-laws may restrict your ability to rent.
When renting out your home, don’t forget to buy insurance! Many homeowners’ insurance policies don’t cover short-term rentals, so if any damage happens in your home, you would have to cover the costs. If you go this route, consider a short-term rental insurance policy.
Similar to purchasing a rental property, you’ll likely need a site manager to help with the turnover day-to-day tasks.
4. Invest In A Medical Practice
Whether you are a practice owner, own the building of a medical practice, or want to diversify holdings and invest in different medical practices, surgical centers, etc., this could be a good way to add real estate to your portfolio.
As an owner of the medical practice, you’d have opportunities for additional pay. For example, when you buy into the building, you can get a share of that value. On the other hand, if you aren’t buying into the practice but rather investing in it, you could utilize crowdfunding or REITs to add these investments to your portfolio without worrying about construction or maintenance.
Read The Fine Print: A Case Study
Investing in medical buildings can be incredibly complex, and there’s a lot of fine print you should fully comprehend before investing.
We had a Vestia client that invested in the building that housed a large insurance company in Indianapolis. Then, the insurance company (the primary tenant) moved out. Since they had a personal guarantee on the building, they had to pay $10k per month for over 5 years before a new tenant came in!
Many details go into investing in a medical practice, so make sure you have a trusted advisor by your side to help guide you through the process.
5. Build Equity In Your Primary Residence
You might be surprised to hear that you don’t have to look outside your four walls to have a solid real estate investment! Buying the right house can help you build equity and long-term wealth.
Think about the updates you can make to increase the value of your home. Bathroom remodels, and kitchen updates are a couple of great ways to boost the value of your home. But not all functional renovations require a construction team and a chunk of money. A fresh coat of paint or nice landscaping can go a long way!
Know Your Goals Before Investing
No matter what anyone tells you, real estate isn’t a get-rich-quick method. There are many ways doctors can expose their portfolio to this investment, depending on their goals.
Think about why investing in real estate is important to you. Do you have specific goals for your real estate portfolio in the short and long term?
Before you do anything, understand your current cash flow and how it can support this type of investment. Real estate investing can provide passive and nonpassive income, but the upfront costs are usually quite high. Sit down with your financial advisor and be sure that this is the right type of investment for your goals.
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