Even on a doctor’s salary, you’ll need to do more than just your medical work to build wealth. There are a variety of ways to do so, including by starting a side gig or saving – but one of the most popular ways to grow personal wealth is through real estate investing.

Real estate investing is the act of purchasing, managing, and selling – or renting of – a piece of real estate for profit. There are several benefits to this venture, including generating tax breaks and earning passive income. Moreover, it leads to financial freedom and higher net worth.

Benefits aside, real estate investing can be intimidating for first timers. Let’s break it down:

What doctors should know about real estate investing

Types of real estate investing

When deciding which route to take, you’ll need to choose between two types of real estate investing: active or passive.

Active real estate investing

Active real estate investing is any form of real estate investment in which the investor is actively involved in several of the operations (hence the term active). This type of hands-on approach includes:

• Buy and hold
• Buy and sell
• Buy, fix, and sell
• Buy, rent, and hold

Investors who choose this style should have a keen eye for detail and have a firm grasp on what will be required of them as they manage their investment. They should also have a clear idea on their timeline for holding or selling.

This approach is more flexible than passive investing in that it allows an investor to adjust and personalize their desired level of control. Active real estate investors could buy, rent, and self-manage a property – or they could buy, hire a management company, and get a profit/loss statement each month. 

Passive real estate investing

Whereas active investing is a hands-on approach, passive real estate investing is almost completely hands-off and typically takes less effort to maintain. Passive investors simply hand their money to another person or group who does the investing and managing for them.

There are a few different ways to approach this style of real estate investing, including real estate investment trusts (REITs), crowdfunding opportunities, remote ownership, and real estate funds. The most common forms are: 

• Syndication: Several individuals buy and invest in one property
• Funds: Public real estate securities (longer-term investments which provide value through appreciation)

Benefits of investing in real estate for physicians

Now that we have a firmer grasp on the types of real estate investment opportunities available, it’s time to talk about the benefits they have for physicians.

Passive income and a higher cash flow

If you’ve ever wanted to earn extra income, real estate investing might be for you. Most investment properties earn money year-round, which puts more cash in your pockets. 

The average income of a real estate investor ranges between $70,000 to $124,000 per year:

• Rental property investing: $27,500 to $121,000 per year
• Home flipping: $62,900 per flipped home (minus rehab costs)
• Short-term rentals: $35,000 to $61,000 per year
• Wholesaling: $21,500 to $98,500 per year

When done right, real estate investments will literally earn you money while you sleep.

Tax benefits

Investment properties are considered business expenses, which means that they can be deducted accordingly, thus reducing your overall tax burden. This includes any costs related to maintenance, repairs, and salaries for anyone involved (such as a property manager).

Better yet, those who collect rent are considered landlords. Landlords, who are considered small business owners, are allowed to take advantage of the pass-through deduction. 

A pass-through deduction allows business owners to deduct 20% of their net business income from pass-through entities. These include LLCs, sole proprietorships, and partnerships.

How much will you be able to deduct? The calculation will come from the amount that is the lesser of:

• 20% of the qualified business income plus 20% qualified real estate investment trust dividends and publicly traded partnership income OR
• 20% of taxable income minus net capital gains

Of course, there are deduction phaseout levels to keep in mind: $315,000 or less for those filing jointly and $157,700 for any other filing status.

Appreciation

Home appreciation is something that every owner hopes for, as it means that a home or investment property has increased in value over a certain period of time. A higher value means a higher profit when selling or, for those who act as landlords, a higher rent.

Appreciation isn’t guaranteed, though, and real estate investors will always run the risk of depreciation. However, most properties do appreciate over time. Compare the median home price in 2022 of over $440,000 to the $154,700 median in 2012, and you’ve got a hefty profit for anyone who bought and sold in that timeframe.

Endless options, more control

Unlike other types of investments, real estate offers more options than you might know what to do with – in a good way!

Consider investments such as stocks and bonds. Those successes are entirely dependent upon things you can’t control, and your only option is to hold or sell them.

Real estate, on the other hand, allows you to choose from flipping, renting, selling, refinancing, and more. 

3 things to look for in an investment property

There are several things to look for in a potential investment property, but here are a few of the most important.

A house that isn’t the most expensive in the neighborhood. This allows for serious growth potential in terms of value. Buying low and selling high – in other words, spending as little as necessary to make as much as possible – is the entire goal of this sort of investment.

A turnkey home. Doctors are busy, so it’s best to find an investment property that doesn’t need much work to get tenants into it as quickly as possible. The faster you can make a move with your investment property, the faster you’ll see a higher cash flow.

Location, location, location. Before buying, do your research and do it thoroughly. Take note of the property value trends in the area you’re considering and only invest if they’ve increased.

Don’t forget to feel out the area for more than just property value, either. What is the area like? What type of people live there, and are they the type of tenants you’d like to see? For instance, suburbs will lend themselves to families while downtown areas could attract young professionals. Researching the area may include looking nationally for a good place to invest. Do your homework to see what areas of the country may be lucrative for investments, as you might find greater opportunities in areas that are not necessarily your home state.

Do stay open-minded when it comes to considering where you’d like to invest, especially if you don’t plan to live in the property yourself. This will allow you a greater number of options and, in all likelihood, more potential growth in value.

Types of properties to invest in

Finally, it’s time to consider the type of property that best suits your needs.

Condos or single-family homes are typically a good option for first-time investors, as they’re relatively low maintenance. However, it’s important to keep in mind that if you want fast appreciation, a single-family home may be a better bet, as condos take longer to appreciate.

Already established rental properties are another great option. While you will need to put some of your own money into this investment for things like repairs or updates, any rent you collect can be put toward what you paid for the property. Once it’s paid off, you could either continue collecting rent or sell it for a profit.

While you could certainly sell an investment property for a profit almost immediately, why not purchase one you want to spend some time in? Not only would investing in a property in a place that you love give you a second home, but renting it during times you can’t be there would also drive passive income. Make sure to understand the local laws regarding short term rentals. While some cities have very little to no requirements to get a short term rental up and running, other cities require a long-term tenant for a certain duration prior to being able to rent it out short term. 

Finally, your own home is an investment – think of it as a buy-and-hold investment. Not only will you be building equity while paying a mortgage, but you’ll also eventually sell it for a profit, with the potential to free up cash for other investments along the way through refinancing.

Whatever approach you decide to take when it comes to real estate investing, it’s likely going to be a good investment thanks to passive income streams and appreciation. If you’re ready to get started, make sure your finances are in order and reach out to a trusted real estate expert.

This material is for informational purposes only and is not intended to provide financial, legal, tax, nor any other professional recommendations or advice.