As a physician who has built a career over the years, you may have been able to put away some capital that allows you to invest in assets that will help generate more income for retirement, pay for the kids’ college, or even pay for vacations and the “extras” in life.
Why Real Estate?
With all the options for investment and with companies helping you invest in your 401K, why should you invest in real estate?
1. Multiple ways to increase your wealth
- Cash difference between the amount of your mortgage, taxes, and insurance and the amount of rent you collect. *
- Equity pay down. Your tenant is lowering the amount you owe the bank.
- Appreciation! We don’t count on appreciation but in cities that are growing (cities with jobs, a favorable climate, things to do), you can count on modest appreciation.**
* Yes there will be vacancies, make-readies, and unexpected expenses, but it’s manageable (it’s also the reason we moved onto multifamily apartments, but that will be another topic).
** For all those that will bring up the recession and the loss of housing values….it happened to the stock market too but at least at the end of it, we still had houses that people wanted to stay in and now they are higher than they were before.
2. You can borrow money to buy real estate
- This allows anyone to leverage what money they have to own and control larger assets, or groups of assets, and thus, realizing larger gains.
- Let me walk you through an example: I bought a house for all cash for 100k and five years later, it was worth 150K.
If I had purchased five 100K houses using 20% down for each, I would have still only invested 100K. If those houses appreciated the same 50%… I would now have 250K in appreciation. Now for more fun: equity paydown. I buy them all on 15 year mortgages so that would be approximately another 20K per house. Also let’s not forget I put down 20K on each house so I started with 20K equity in each as well. Adding that all up equals 450K. Sure beats 150K!! I didn’t even factor in positive cash flow on a monthly basis from each property – realistically, I’ve used that for upkeep on the properties. For any of you that are thinking “What if – Insert bad thing here”. How many negative “What Ifs” would you have to add in to remove a 300K difference? A LOT!!
3. Tax benefits
- Deduct expenses for upkeep on my houses AND running the business. I can also deduct depreciation and losses. While this is limited for high income owners depending on how you structure your businesses, this can be quite beneficial. Running a business includes traveling to my properties. If those properties happen to be by a water park, amusement park, or something else of interest to me and my family… well you can’t work all the time. For parents with kids in college or with all the traveling kids sports teams… can you see the possibilities? Don’t get greedy… when you want to qualify for the next property loan, if you aren’t making any money (per your taxes), then the banks can’t loan you more money.
- Delay capital gains when you sell by doing a 1031 Exchange. This allows you to transition from a single family, to a small multifamily, to a large multifamily, taking your gains from appreciation and good management to increase your wealth and cash flow.
- Deductions against another business income. On some of my larger properties where there is more depreciation, we can use that against the other income we make with our side businesses. For example, my wife does extremely well as a physician and with her Rodan and Fields (R+F) skincare business. Depreciation does not help with her W2 income, but it does help with her R+F income, allowing us to keep more of what she works so hard to make.
- While there are others benefits to investing in real estate, I will end with this: real estate is tangible, and if you choose to do so, you can make a difference while providing for your family. I can actually see my property investments and make an impact on its appearance, use, and exit strategy. Since people will always need a place to live, there will always be a demand for your product. If you buy in the right area, provide a clean, safe place to live, and look after your tenants, you will keep tenants that rent. On another note, I want my property (a larger multifamily) to serve as the center for regrowth and enhance the entire community. Yes, that does help my investment, but it helps a lot of others as well and when did all sides doing well become a bad thing?
In the future, we will have a few more blogs specifically regarding single family homes and multifamily investments….so stay tuned!! Please consult your legal and CPA advisors for your unique situation and do not rely on this blog as advice for legal and tax matters.
Blog contributor: Dan Stine
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