The Pros and Cons of Real Estate Investing for Doctors
July 20, 2022
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Doctors are among the highest-paid individuals in any profession, but that doesn't mean doctors shouldn't invest. On the contrary, diversifying your capital can help you increase your net worth even further.
Many doctors consider investing in real estate, but what are the pros and cons of real estate investing for doctors?
What Is Real Estate Investing
Real estate investing can occur in many different ways. For example, investing in your own home, a rental home, or other real estate asset classes can help you earn money from real estate.
Real estate investors are anyone who invests some of their capital in real estate properties or real estate funds. Residential real estate investing can help doctors and other high-income earners diversify their income and grow their net worth.
How Do You Invest in Real Estate?
Depending on your financial goals, doctors have many types of real estate investments. But, first, you must decide are you looking for active or passive real estate investments?
Active real estate investing means you actively participate in the investment. Common examples include rental properties or fix and flip properties. If you buy a rental property, you act as a landlord, choosing tenants, collecting rent, and maintaining the property. If you fix and flip properties, you find undervalued properties, fix them up and sell them for a profit.
Passive real estate investing means you invest in real estate, but you don't have to do any work. Instead, you invest in real estate companies with other investors, letting the real estate company do the work. Common examples include real estate investment trusts, real estate investment groups, and ETFs with a real estate focus.
The Pros and Cons of Real Estate Investing for Doctors
As a doctor, you might think you don't have to worry about real estate investing. You have a high enough income and don't have to worry about it. But, anyone in any profession should diversify their income.
So why invest in real estate? If you're thinking about real estate investing, here are the benefits of investing in real estate along with the downsides.
Investing in Real Estate Pros
According to the IRS, real estate investing income is passive income. This means it's not subject to withholding taxes like your W-2 earnings. Your tax liabilities are based on your tax brackets, but you can deduct business expenses to further lower your tax liability. Bring on the tax benefits!
Control for Active Investments
If you invest directly in real estate properties, you are in control. You choose which properties to buy, how to manage them, whether you keep or sell them, and how much you charge. This differs from investing in stock shares or bonds of real estate companies. These indirect investments give the real estate companies all the control.
Real estate historically appreciates. This is one of the top real estate advantages. You don't have to do anything for the property to appreciate. It's based on the market values and the sales price of other homes in the area. However, owning real estate also allows you to renovate or improve the property, increasing its value even more.
Costs of Ownership Deductions
The IRS allows real estate investors to deduct the cost of ownership for many rental properties. In addition, you may be eligible to deduct expenses, such as travel to and from properties, the cost of maintenance and repairs, mortgage interest, property taxes, insurance, and losses.
Depreciation vs Taxable Income
You can use depreciation to reduce your taxable income even further. The IRS allows investors to depreciate properties over 27.5 years. You divide the cost basis by 27.5 and can take this noncash deduction each year you own the home to reduce your taxable net income.
If you operate your real estate business as a sole proprietor, LLC, or S-corp, you can deduct 20% of your business profits from your income taxes.
Options Below Market Price
One of the best strategies to earn a fast profit is to find properties selling below market price. This allows for instant equity in the home whether you buy and hold or fix and flip the property. With equity in the home, you have instant capital gains. You can increase your earnings with rental income or improve the property value even further, selling it for a profit.
On average, real estate has an average annual return of around 10% over the long term. Combining these returns with the rental income earned if you buy and hold real estate, you can enjoy higher cash flow and capital gains.
Real estate historically appreciates faster than inflation. This is the opposite of how most other investments perform during high inflationary periods. Therefore, a well-diversified portfolio during inflation is one of the best strategies to keep your net worth high.
Investing in Real Estate Cons
Owning real estate puts you at risk for a variety of liabilities, from the risk of someone getting hurt on the property to tenants vacating the property early and not paying their rent.
When you invest in real estate, you tie up your funds. Unless you're fixing and flipping properties, you might tie up your cash for years, depending on how long you hold onto the property. If you need money in a pinch, it could be difficult to liquidate your funds as it can take months to sell a house, depending on the state of the real estate market.
Research and Time
Unlike investing in the stock market, you can't just pick an asset class and invest. It takes time to research properties, look at them, decide you want to buy them, and make an offer. If you aren't well-versed in the types of real estate investments, you may also need the help of a real estate professional to make the right real estate investing decisions.
Upfront Capital Needed
Most residential real estate investments require a lot of capital upfront. Most lenders require a 20% - 30% down payment for most investment opportunities.
Maintenance and Upkeep for Rentals
If you buy and hold properties, you're in charge of the maintenance and repair for rentals. So even if you hire a property manager to handle the property for you, you're still responsible for the cost of maintenance and repairs, which decreases your profits.
No matter how carefully you screen tenants, there's always the chance of having troublesome tenants in your rental property. This can lead to financial issues and the physical and mental stress of dealing with unruly tenants.
Real Estate Investing Tools for Doctors
Real estate investing for doctors is most successful when you use the right tools. Here are a few helpful tools to help you with your real estate investing goals.
- Property search tools
- The internet is a wealth of information when looking for investment properties. Sites like Zillow, Roofstock Marketplace, and Auction.com are great places to start.
- Market analysis tools
- Knowing how much a home is worth helps you form the right offer and tell if a home is worth investing in too. Zillow and Rentometer.com are great sites to get this information.
- Property management tools
- Managing your rental property is a lot of work, but with sites like Stress and PayYourRent, it's easier to manage rental properties without feeling in over your head in paperwork.
Long-Term Investing Strategies
Real estate investing for doctors is best used as one of your long-term investment strategies. Here are a few ways to take advantage of it:
- Buy and hold rental properties
- Invest in real estate investment trusts, taking advantage of commercial real estate investing opportunities
- Invest in real estate crowdfunding, investing in commercial real estate with other real estate investors
Investment in Real Estate FAQ
Is Investing in Real Estate Worth It?
Investing in real estate is a great way to have a diversified portfolio. Doctors and other high-income earners should have ways to diversify their investments and total earnings. Real estate investing is one way to do this.
Stock Market vs Real Estate: Which Is the Better Investment for Doctors?
There's no cut and dry answer regarding whether the stock market or real estate is a better investment for doctors. Diversifying your capital can help increase your earnings and avoid a total loss. Investing in the stock market and real estate gives doctors the best of both worlds.
Pros and Cons of Real Estate for Doctors: The Bottom Line
Knowing the pros and cons of real estate investing for doctors is the key to successfully diversifying your portfolio. Whether you're looking for financial freedom, to diversify your net worth, or invest in something exciting like commercial properties, investing in real estate can be a good option. Learn more by signing up and visiting our blog.
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