Doctors Investing In Real Estate: Physician Real Estate Investing With Multifamily Property
This article is part of our guide on passive investing in multifamily via syndication, available here.
Doctors need different investments to create a healthy financial portfolio and maintain financial stability. Commercial real estate and multifamily properties are excellent investment for doctors; it’s less volatile than stocks and offers high exit growth potential and attractive annual returns.
Passive real estate investing in a multifamily property is an excellent option for doctors investing in real estate because these properties provide significant cash flow opportunities that will help them grow their wealth over time. With the proper knowledge and guidance, physician investors can create passive income streams from multifamily properties, allowing them to earn more tax-advantaged dollars, whether they work the same amount of hours at their practice or not.
Here are some key factors to consider before investing in multifamily real estate:
Key Takeaways
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Commercial real estate consists of properties like retail, office, and industrial. Still, the most robust performing commercial real estate sector is multifamily, which is essentially just a rental property with five or more units.
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Some physicians invest by purchasing properties themselves or invest passively as a Limited Partner (LP) by investing in multifamily real estate syndications.
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Active real estate investing requires a ton of knowledge and focus on being able to find deals, secure deals, execute the business plan, and manage the deal on day-to-day. Passive real estate investing allows a real estate investor to take advantage of all the experience and connections the sponsorship group possesses.
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Commercial real estate offers a few tax benefits you don’t get with other investments. The depreciation deduction, through straight-line depreciation or a cost segregation study to accelerate depreciation “paper losses,” can be used to offset any income you make from your investment property.
What is commercial real estate and why should physicians invest in it
Before passive investing in commercial real estate as a physician, you should know that multifamily real estate is very stable and exhibit low volatility, especially when you compare it to stocks. Multifamily commercial real estate offers high growth potential and attractive returns.
Commercial real estate consists of properties like retail, office, and industrial. Still, the most robust performing commercial real estate sector is multifamily, which is essentially just a rental property with five or more units. Some physicians invest by purchasing properties themselves or invest passively as a Limited Partner (LP) by investing in multifamily real estate syndications.
Investing in multifamily real estate can be a great way to diversify your investment portfolio and create stability.
Physician Real Estate Investing: Active vs passive real estate investing
The residential real estate market offers a variety of opportunities to engage in. Active real estate investing requires a ton of knowledge and focus on being able to find deals, secure deals, execute the business plan, and manage the deal on a day-to-day. Meaning not having to be the landlord and taking calls from disgruntled tenants. Passive real estate investing allows a real estate investor to take advantage of all the experience and connections the sponsorship group possesses.
When investing passively as a Limited Partner, the sponsor group, like us here at Willowdale Equity, would take care of bringing on the best property manager from the best property management company for that specific property’s needs.
Benefits of investing in a commercial real estate investment
The most significant advantage of investing in commercial real estate is that it’s less volatile than other real estate investments. It also has high growth potential with attractive returns.
There are several factors to consider before investing in commercial real estate as a physician: the risk tolerance of the investor, what type of investment they want to make, what kind of commercial real estate they want to invest in, etc.
Ignoring these factors can lead to investors making irresponsible decisions about their active real estate investments; their only goal might be high profits without considering the underlying investment’s associated risk.
A few key benefits make commercial real estate an excellent investment for physicians.
- High growth potential: The market for commercial real estate is growing rapidly, so your investment has the potential to grow at a much faster rate than stocks or bonds.
- Less volatile than other types of investments: The multifamily asset class has proven throughout many real estate cycles, including the COVID-19 pandemic, that it is recession resilient.
- Attractive returns: Physicians expect an annual return of 8% + on their commercial real estate investment. That rate is higher than the average stock market return, and many physicians find this attractive.
- You can’t lose on commercial real estate like you can with stocks: Many physicians invest in commercial real estate properties. If the market happens to dip, they’re not going to lose money from their investment because the holding period of the deal will be much more extended than that dip in value. Since private real estate investments are illiquid, it’s harder for real estate investors to sell the asset or sell their individual share, which holds their value and exhibits fewer volatility swings. Unlike the stock market, which is highly liquid, any bad news can force a significant sell-off.
- Tax benefits: Commercial real estate offers a few tax benefits you don’t get with other investments. The depreciation deduction, through straight-line depreciation or a cost segregation study to accelerate depreciation “paper losses,” can be used to offset any income you make from your investment property.
- It’s a tangible asset: Unlike stocks or bonds, real estate is a tangible asset. You can see it and feel it, which can make you better connected to the financial decisions you’re making.
[VIDEO MINI-SERIES] How physicians can start investing thier W-2 to create tax-advantaged passive income.
Doctors Investing In Real Estate: The Types of real estate investing to consider
Commercial real estate has three different types of properties to invest in:
- Income-producing: Properties like multifamily real estate are the most common type of commercial real estate investment for doctors to take advantage of. They can be a great way to diversify your real estate portfolio and create stability in your assets.
- Mixed-use: These properties have multiple uses for the property, such as having retail units and leasing to businesses and residential units leasing to residential tenants.
- Non-income producing: These properties are usually purchased for redevelopment. They can be high-risk investments, but they also have the potential to generate the highest returns.
Which one you choose depends on your goals and financial situation.
One of the best things about commercial real estate is that it’s a tangible asset. You can see it and feel it, which can make you better connected to the financial decisions you’re making. When looking at stocks or bonds, it can be hard to understand how they work and what you’re investing in. With real estate, you can drive by the property, see the tenants, and get a feel for the investment.
Common mistakes made by investors when purchasing a property, and how to avoid them
- Conducting a thorough inspection of prospective properties to ensure they don’t need significant repairs.
- Understanding how different properties affect your income and risk-taking ability. For example, a multifamily property is generally more steady in monthly revenue. Still, it has an accompanying higher risk factor because there’s no guarantee that you’ll be able to lease it out. Rental condominiums, on the other hand, can be high-risk with low return potential because their appeal directly correlates to the city’s population density and the number of new luxury buildings available for live/workspace rental.
- Being open to different types of commercial real estate investments. The two most popular types for doctors to invest in are our multifamily and office spaces; however, depending on your goals and investment preferences, you can diversify your portfolio by investing in other properties like warehouses or retail spaces.
Regardless of what type of commercial real estate you want to invest in, the most important thing is that if you choose to invest alongside a group, ensure that your risk/reward needs are aligned with the sponsor group.
Commercial real estate makes it easy for you to diversify your investment portfolio, provides long-term growth potential, and (in most cases) is an excellent source of monthly revenue. This is a perfect place to start if you’re looking for a way to build wealth and plan for the future.
Risks associated with investing in commercial real estate
A few risks are associated with passive real estate investing in commercial real estate. The most common mistake investors make is not doing their research before investing. Knowing the market inside and out and your financial limitations are essential before investing in any commercial property.
Another risk is that the property may not generate the income you expected. This can happen if the market dips or a particular neighborhood experiences a downturn. Be sure to factor in potential losses when calculating your potential profits.
The final risk is that you may not be able to sell the property when you want to. If the market is unfavorable or there are too many investment properties available for sale, you may have to wait a long time before finding a buyer for your property.
Frequently Asked Questions Investing For Doctors
As a doctor, you can invest your money passively as a Limited Partner (LP) to lower your risk and not have to give up your valuable time to participate in an active role in your investment. A great way to do this would be investing in a real estate syndication as an LP to take part in all the gains throughout the project, as well as taking part in all the tax advantages that come with owning something like multifamily real estate.
Real estate is an excellent investment for doctors as it allows them to take their high-earning W-2 income and put it to work in one of the most secure asset classes. Investing in commercial real estate enables a doctor to offset some of their investment income due to the tax advantages afforded to owners of these types of real estate.
Doctors Investing In Real Estate Conclusion
The benefits of investing in commercial real estate are plentiful. To recap, you can invest your money and time into many rental properties to diversify your portfolio, take advantage of tax advantages that other investments don’t offer, build wealth through appreciation or dividends on the property, and much more. With inflation rising at the rate it is, it’s crucial that, as a high-earning doctor, you find ways to put that money to work into a solid risk-adjusted asset class.
Multifamily real estate values continue to grow as rents continue to increase due to inflation, and larger institutional groups see the asset class as one of the more robust ways to store value. As a result, these large groups continue to pay more for these types of properties on a cap rate basis.
Being able to achieve financial freedom is attainable through these asset classes. Exposure to these investments won’t require you to go through the whole learning curve. You won’t have to run the day-to-day operations as investing in real estate syndications or real estate funds are accessible for high-earners like yourself. Luckily as a high-earning physician, you would likely qualify as an accredited investor and be eligible for most of these private real estate investment offerings.
The Willowdale Equity Investment Club is a private group of investors that are looking to passively grow their capital and share in all the tax benefits through multifamily real estate investments.
