Why Dentists Should Consider Investing in Real Estate
July 20, 2022
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Dentists often make a good living, and many assume they don't have to supplement their income, but it's always a good idea. If you want to increase your net worth, have additional income streams, or need more financial security, here are the reasons why dentists should consider investing in real estate.
Why Dentists Should Consider Investing in Real Estate
Dentists often have a large amount of capital to invest. So why should they consider investing in real estate with many other investment opportunities at their fingertips?
Multiple Income Streams
Millionaires have an average of 7 income streams, and real estate investing is often one of them. So having 'backup income' is never a bad idea. As we saw in 2020, you never know what could change in our lives.
Owning rental properties that pay you monthly rental income is a great way to increase your cash flow. You can use the funds to supplement your income, save for retirement, or invest in other opportunities for even more long-term growth.
If owning a property investment yourself isn't something you want, you can invest indirectly in real estate with real estate investment trusts. This allows you to earn returns from real estate without the burden of managing it yourself.
Lower Tax Burden
Owning a successful dental office can be lucrative but also expensive during tax time. If you have a high income, you're in a high tax bracket, which means you'll see less of your money.
When you invest in real estate properties, you get many tax breaks. First, the IRS considers real estate transactions and income passive income. This means you don't pay withholding taxes as you do on any W-2 income, aka earned income. But you can also deduct certain operating expenses, such as travel expenses, cost of repairs, real estate taxes, mortgage interest, and insurance.
The tax benefits and deductions can lower your total tax burden, giving you a higher cash flow.
Increase Net Worth
Real estate typically appreciates, which increases your net worth with little to no effort from you. When you purchase real estate and hold onto it for several years can earn you appreciation. Many dentists also reinvest their rental income into their homes to increase their values even further.
Even if you invest in real estate indirectly, you still earn profits from the property you invested in, which can increase your net worth.
Both Passive and Active Real Estate Investments
If you want to be a real estate investor but aren't sure about taking on the physical aspect of managing a property, you can invest passively in real estate.
This is an excellent way for dentists to diversify their income. You can buy a rental property outright and invest capital in real estate investment trusts that manage properties for you, paying you a part of the profits.
Many dentists wonder, is real estate a good investment?
Like any investment, there are risks, aka downsides. However, knowing what's at stake and what to consider can help determine if real estate investing suits you.
Real estate investors need a lot of capital. As a dentist, you might have the money handy, but are you willing to part with it? As a business owner, you are responsible for all aspects of your dental practice, including handling emergency repairs and issues.
To invest in real estate, you'll need a minimum of a 20% down payment, 6 - 12 months of monthly mortgage payments in liquid reserves, and enough money to cover the closing costs. Since real estate investing is a long-term investment, your money could be tied up for quite a while.
Once you take real estate ownership, you are legally responsible for anything on the property. So whether someone gets hurt on the property or a tenant claims unfair treatment and takes you to court, dentists take a financial risk when getting into real estate business.
As a dentist, you are probably already busy running your dental practice. Adding property management to your plate can be a significant burden. Landlords are on call 24/7 since you are responsible for maintaining a safe place for your tenants to live.
If you're looking for a passive income opportunity, you can hire a property manager to handle the property, but that decreases the profits.
Real Estate Investing for Dentists
As we mentioned earlier, there are several ways for dentists to invest in real estate, using both active and passive income opportunities.
Active investments require some of your time and effort. Depending on the chosen method, dentists may hire professionals to manage the property, but the costs decrease the bottom line.
Buying rental property is the fastest way to earn cash flow. You buy a property that's ready to live in and rent it out to tenants. You are responsible for the maintenance and repairs on the property, as well as paying the real estate taxes and homeowner's insurance.
You're also responsible for screening and choosing tenants, collecting rent, and managing leases when they expire.
If you don't want to buy and hold real estate, you can buy undervalued properties, fix them, and sell them. This is called real estate flipping. It takes a lot of physical labor, and you should have a strong network of real estate professionals, including contractors and appraisers, to help you.
Ideally, real estate investors flip properties within six months to make the most profit.
Passive investments are real estate investments you can make that don't require any work from you. Then, once you invest your funds, you sit back and watch your fund grow (hopefully).
A real estate investment trust is an investment in a real estate company that buys commercial property. The real estate company buys the properties, manages them, collects rent, and sells them after a few years.
Real estate companies must pay at least 90% of their profits back to investors like yourself. This allows you to invest in real estate without owning any physical property yourself.
Real estate investment groups are like REITs, but they are less regulated. REIGs are groups of investors that get together to invest in real estate, usually commercial properties. Some real estate groups buy and hold real estate, and others fix and flip properties for a profit. Each real estate group is set up differently. For example, some charge membership fees, and some have strict requirements to belong to the group, such as a particular net worth.
Crowdfunding is a similar concept. Dentists can invest in real estate with other investors. You own a prorated amount of the property and earn profits (or experience losses) according to your investment.
You don't have to be an accredited investor to invest in crowdfunding. Many crowdfunding platforms have investment requirements as low as $10.
Dentists Investing in Real Estate FAQ
Liquidation vs Income Property- What's the Difference?
An income property is a property you own to earn income. For example, if you own an office building and rent it out, it's an income property. You could also own a single-family home and rent it to tenants.
Liquidation refers to a property you own and occupy, whether residential or commercial. For example, if you need money, you might liquidate the property to get the money you have tied up in the property. This should be a last resort, though.
Which Type of Real Estate Investment Is Best for Dentists?
The best real estate investment for dentists depends on how much time you have and how much effort you want to put forth. For example, if buy-and-hold real estate investing interests you, buying a property you can rent out can be the best real estate investment for you.
But, if you prefer a more hands-off approach, you may want to consider a real estate investment trust (REIT) or real estate investment group (REIG). You'll still have a chance at a good return on your investment, but without the labor and stress involved.
Do Dental Professionals Need Experience for Real Estate Investment?
Dentists don't need experience to invest in real estate. Anyone looking for an additional income stream can invest in real estate. There are passive income and active income opportunities. Work with a real estate professional who can help you decide if you should invest in residential real estate, commercial real estate, or stick with passive income opportunities, like real estate investment trusts.
The Bottom Line: Is Real Estate Investing the Best Choice for a Dentist?
There are many reasons why dentists should consider investing in real estate. It can provide those in the dentistry field supplemental income, financial security, increase their net worth, and help them achieve financial independence.
Think about investing in investment properties that you either buy and hold or fix and flip. The opportunities for dentists to invest in real estate are endless. Learn more by signing up and visiting our blog.
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