In recent years, doctors and health care professionals have started creating additional sources of income outside of working in medicine. One of the prominent trends has been investing in income-generating rental real estate.
But why invest in real estate over alternative ways to bring in more income? There are, I think, six common reasons that many doctors and health care workers are choosing real estate investing over traditional investing methods and other side gigs.
Rental real estate has the potential for extraordinary returns, often much faster compared to saving in a 401k, starting a higher-risk start up, or pursuing a side gig.
That’s because real estate investments can make the investor returns in six ways. These include cashflow (amount of money earned after all expenses), immediate appreciation (amount of discount obtained on purchase price), forced appreciation (increase in value created by making changes to the property), market appreciation, debt paydown, and tax savings. When you add these up, returns often exceed 20-30% year over year. In fact, it is not unusual to see people in my doctor’s investment community getting well over 100% returns on their money in the first year.
Doctors who invest in real estate save money on their taxes by sheltering passive income or even sheltering the W2 income from taxes.
Many physicians choose to be active investors, using something I call the short-term rental tax loophole or by achieving real estate professional status. Both of these tax carve outs allow for sheltering part or even all of a doctor’s W2, 1099, or even clinic income. In the investment community I'm part of, it is not unusual to see doctors saving six figures in taxes using these loopholes year after year.
Easy to Learn
Starting a business normally requires a series of steps including generating an idea, creating a product, finding and educating customers about the product, marketing that product, hiring and training a team, and creating processes to scale.
In contrast, investing in real estate is plug and play. The product (apartment building) already exists, the customer (tenant) is educated and already needs the product, the model for owning and renting property is a proven path to wealth, employees already are trained up (property managers, contractors, etc.) and the systems to scale are already built and being used by investors everywhere.
I see doctors without a business or real estate background reliably gain the knowledge and skills and build their teams and even buy a property within two to three months of starting to learn about real estate investing. That’s a rapid path from learning to implementation compared to most other business options available.
Uncorrelated with the Stock Market
Since doctors are generally advised only to invest in 401(k)s for retirement, a majority if not all of their excess funds are tied up in the stock market. This can create substantial stress, especially when the stock market is not performing well. The opportunity to diversify by investing in tangible properties is attractive to those who want to have their wealth invested in real property that is not tied directly to the financial markets.
Just as there are stock market ups and downs, there are real estate cycles as well. Those investors who are particularly focused on avoiding the real estate market cycles that can disproportionately affect single family homes often choose to invest in small or larger multifamily properties. Others invest in multiple markets and different types of properties to make it less likely that their whole portfolio is affected at any given time.
As doctors have experienced eroding control in their medical practice, most are looking to gain additional control in their financial lives and financial futures. By owning their own properties, they put themselves in the driver’s seat.
When doctors own their own properties, in contrast to being passive investors in the stock market or syndications, they can make decisions fit their lives. They can decide when to buy and sell. They can decide whether to use a property manager or self-manage. And they can choose to harvest multiple sources of value from the property by forcing appreciation, being an active investor, and sheltering W2 income, or other means.
One motivator for doctors to start investing in real estate is to be able to hand down wealth to the next generation. 1031 exchanges are a special vehicle that allow doctors to defer taxes on real estate gains while growing their real estate portfolios, and then hand the properties to their children — often with no taxes due.
In practice, what this looks like is buying a property, increasing its value (through forced appreciation) and then selling it at a profit, but, instead of paying taxes on the gains, rolling all the funds from that first property into a larger property tax-deferred. An investor can do this over and over again throughout their lifetime.
At the time of death, their children then inherit the property at a new step-up in basis (whatever the market value is at that time), and can be in a situation to not have to pay back the previously deferred taxes. This can mean hundreds of thousands and even in some cases millions of dollars of avoided taxes.
I started investing in real estate in 2015 along with my dual physician husband. I started by buying small multifamily properties, and today I own 150+ doors of different types of properties across multiple states.
Since I achieved financial freedom in three years, many doctors and high-income earners have followed in my footsteps to do the same. I believe financially free doctors can change the culture of medicine for the better, and I have seen numerous examples of it already in my community.
If you’re looking to create another source of significant income outside of medicine, why not consider using rental real estate as your vehicle to get there?
Dr. Letizia Alto is a family medicine-trained physician and CEO of Semi-Retired MD, a company aimed at helping doctors and high-income professionals build their own portfolios of income-producing properties. She is also the co-author of Life on Your Terms: Why Doctors Use Real Estate Investments to Set Themselves Free and How You Can Too and host of the Doctors Building Wealth podcast.
Animation by Jennifer Bogartz