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Why Invest in Real Estate? A Physician Investor’s Perspective.


May 20, 2020

Harsha Moole, M.D., MBBS


Why Invest in Real Estate? A Physician Investor’s Perspective.

 

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” – Robert G. Allen

 

A Physician Investor’s Dilemma: I have $50,000 USD to Invest. What Type of Real Estate Do I Buy with It? Is Real Estate a Good Investment?

  • Physicians in the USA do make a decent living in exchange for hundreds of hours they dedicate to the healthcare community. 
  • We (not everyone) are usually recognized as lavish spenders on lifestyle related expenses. There are a few physicians however, who are keen on investing, in order to grow their assets and net worth. 

 

Mock Situation – Why Invest in Real Estate?

  • Why invest in real estate? Let us assume I have $50,000 USD and I do not feel like spending this money on liabilities (e.g. cars, watches, trips, and etc.) I want to invest this money somewhere, buy assets, and grow my net worth.
  • Usual options are to invest the money in either the stock market, real estate, collectables, or cryptocurrencies, and etc. 
  • Why Not Stock Market?
    • I already have all my retirement money (self-directed 401k and other retirement accounts) in the stock market. I feel like the stock market is at an all-time high. Hence, I do not want any further exposure and/or investment into the stock market. I want to diversify my portfolio. 
  • Why Not Collectibles and Cryptocurrencies?
    • Well, I am not feeling lucky. Also, I have minimal understanding of these assets, and how they are valued. I want my investments to be reasonably safe. After all, this is my hard earned money. Not interested. No, thank you. 
  • That leaves us with real estate investment being a time-tested dependable investment option. Now it’s time to answer frequently asked questions: ‘Why invest in real estate?’, ‘What are the benefits of investing in real estate?’ and ‘Why is real estate a good investment?’.

 

What Type of Real Estate Do I Buy? Active Investments vs. Passive Investments

There are multiple ways you can invest in real estate properties. Real estate investment can broadly be categorized into two types based on the level of your involvement–Active Investments vs. Passive Investments. What are good real estate investments?

 

Active Real Estate Investments

  • Single Family Homes (SFH) – Investor buys a SFH by himself/herself
  • Commercial properties – Investor buys a small commercial property by himself/ herself

 

Passive Real Estate Investments

  • Syndication Investments – A group of investors (one of them is called a ‘real estate sponsor’ who creates and manages the project) pool their money and buy a commercial property and/or take up a property development. Sponsor manages the property. Other investors are passively investing and own a part of the property.
  • REITs (Real Estate Investment Trusts) – Wall Street investment firms buy and sell large multi-million dollar properties. Investors just own a stock in these humongous companies, but they do not own a physical piece of property. This is similar to owning stock in any other tech company on Wall Street. 

 

Typical Doctor’s Lifestyle and Time Commitments

  • Why invest in real estate? In order to understand which type of real estate investments are a better fit for physicians, it is important to understand a physician’s typical commitments. 
  • A typical physician spends more than 50 to 60 hours per week at work, sometimes more. Remainder of the time is dedicated to the family and friends, relaxing, and travel. 
  • Essentially, there is not much time left to be actively managing an investment (of course there are exceptions). You’d rather spend that time playing with your kids, or traveling or whatever it is that makes you feel good. 
  • A typical physician just has enough time to do some basic research on investments and make some phone calls. No more, no less. 

 

Time to Make a Selection – Benefits of Investing in Real Estate for a Physician Investor

Active Investments

  • When you buy a SFH or small commercial property, you are the sole owner of a property. You get to keep all the income and you are the only person paying for any property-related expenses. You get to enjoy real estate tax benefits. 
  • This also means that you are signing up for labor intensive property management, spending a lot of time managing the property despite having a property manager. 
  • There is always a feeling of carrying heavy weight on your shoulders, always that gnawing feeling in the brain space that can add up to your stress levels. 
  • Hence, I usually try to stay away from these sort of investments that require my on-going active supervision. 
  • The only time these deals make sense if when you can buy a property in a buyers market, and if there is a value add opportunity that can help you build some sweat equity. 

Syndication Investments

  • A group of investors pool their money and buy a relative large commercial real estate project managed and sourced by a real estate sponsor. Real estate sponsor is a person who finds the project, does all the heavy lifting, renovates it, manages it, and everything else. My role in syndication investments is being a passive investor. 
  • Syndication investments in my opinion are a ‘partially’ passive investment. Initial due diligence is required prior to investing in a syndication investment. 
  • Initial work that I need to do before I invest: 
    • Sponsor-related: I vet the real estate sponsor. I check if the real estate sponsor has a good track record, evaluate the real estate sponsor’s prior projects, talk to previous investors that worked with this real estate sponsor. 
    • Property-related: I evaluate the location of the property, the purpose of the property, and underwriting of the operating agreement and/or Private Placement Memorandum (PPM). I make sure the numbers projected by the real estate sponsor make sense and that he has an experienced real estate professional look at the entire project to make sure there are no red flags, and then I hire a real estate attorney to review the agreement. 
  • After this initial due diligence is done, syndication investments are very much a passive investment. You make good real estate profits, and another advantage is that there are real estate tax benefits with syndication investments (depreciation is passed on to investors, prorated to the individual equity ownership). 

REITs

  • This is Wall Street or institutional firm run fund that buys, manages, and sells multi-million dollar real estate properties. You are not physically owning a property, it is more like buying a stock that Wall Street is controlling, not you. 
  • They have more overhead fee compared to syndications. 
  • You do not usually know the specific details of operations. 
  • A thoroughly researched and carefully selected syndication investment probably pays you more than REITs. 
  • REITs do not offer real estate tax benefits. Dividends are taxed as ordinary income. No depreciation benefits. 
  • You have no control over what REIT does with purchasing or selling properties, and etc. Your investment philosophy may not align with that of the REITs. 
  • REITs experience volatility related to market influencing factors. It has happened in the past that the REITs are influenced by stock market fluctuations as opposed to the value of the hard assets (Figure 1). 
  • It is easier to liquidate and pull your money out from REITs as opposed to the other real estate investments. 

Real Estate Profits

  • The amount of returns you make on each of these real estate investment vehicles, as expected, depends on multiple factors. There are just too many variables to take into account. So a simple head to head comparison is impossible. 
  • You have to look at them individually to their merit, and make a decision. I am not going to sit here and give a blank statement saying one type of investment makes more than the other. If it were that easy, everyone including myself would have already invested in that real estate asset. 
  • As physician entrepreneurs, we have to remember that the real estate returns and/or profits should not be the only criteria that makes you invest in one type of real estate vs. another. Our time constraints, our limited real estate related knowledge and/or skill set, and our risk tolerance should all be taken into account when making this decision. 

 

Conclusion – Why Invest in Real Estate? A Physician Investor’s Perspective.

  • Overall, I have a busy work schedule just like thousands of other physicians. I would like to own a piece of property, but I do not want the hassle of managing it. 
  • I want real estate returns from it, but I also want real estate tax benefits from depreciation. I believe that I have just enough time to perform my due diligence on picking the right real estate sponsor, and the right property, but after that I want to be a completely passive investor. 
  • That leaves me with ‘syndication investments’ as the most appropriate real estate investment vehicle taking into account my work-life balance. 
  • Find more information about Real Estate Syndication investments in a series of blog posts that I wrote – Part 1 to Part 9 in ABCs of Real Estate Syndications for Physician Investors. 

 

Table 1: Comparison of Real Estate Investments

SFH 
Syndications 
REITs
Active Management by Investor
Yes
No
No
Passive Investment
No
Partial (Needs initial due diligence)
Yes
Tax Benefits/ Depreciation
Yes
Yes
No
Own a Real Piece of Property
Yes
Yes
No
Ownership Alignment
Yes
Yes
No
Stock Market Volatility Effects
Some
Some
Most
Easy Liquidity
No
No
Yes
Overhead Fees
Some
More
Most
Your Control Over Investment
Most
More
None

 

Figure 1.

Why Invest in Real Estate?

Hence, Real Estate Syndication investments are ideal for physician investors. Here at PhysicianEstate, we welcome all physician entrepreneurs to learn about commercial real estate investments, rental property investments, and wealth generation. We encourage all physicians to eventually become real estate physician investors. We know a great deal about Who – What – Why – How. 

Stay in touch with us by signing up for our newsletter. The newsletter will keep you up to speed on the current real estate investments we are looking at, provide physicians with investment opportunities, and much more.  

Legal Disclaimer: This is not investment advice. I am not a legal and/or investment advisor. This is my personal blog, and all information found here, including any ideas, opinions, views, predictions, forecasts, commentaries, suggestions, or stock picks, expressed or implied herein, are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. These are my views, it is not a production of my employer, nor is it affiliated with any broker/dealer or registered investment advisor. While the information provided is believed to be accurate, it may include errors or inaccuracies. To the maximum extent permitted by law, PhysicianEstate disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses. You should consult with an attorney or other professional to determine what may be best for your individual needs. Your use of the information on the website or materials linked from the Web is at your own risk.

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Authored by Harsha Moole, M.D., MBBS

Hey there! I hope you enjoyed reading this blog. PhysicianEstate is my brain child and passion project. I run this platform to empower entrepreneurially motivated physicians to make financially educated investment decisions and discuss asset protection strategies. Lots of important but free content here and here! If you have any questions or if you are interested in partnering with me, let’s connect! hmoole@physicianestate.com

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