Real estate investing has always been a hot topic in the doctor’s lounge. Naturally, real estate is a tangible asset that is more easily understood than stock certificates and market securities. Bragging about owning 50 doors (commercial real estate slang for 50 units) sounds a lot sexier than saying your mid-cap index fund grew 4%. It also seems like even the younger doctors I know are interested in real estate income, even though they might be at least a quarter million dollars deep in student loan debt.
The beauty with investing is that you can do whatever you want, whenever you want. Just don’t lose your skin in the process. Here are five key points that beginner real estate investors need to be aware of.
You have to be motivated and disciplined
With any endeavor, you have to be motivated to achieve the end result and disciplined enough to stay the course. If you are just starting out with real estate investing, the learning curve is steep. If your primary job consumes 55 hours a week you still have to carve out time to figure out the real estate investments, even with crowdfunding or syndications. Don’t let anyone else lead you to believe that money will just roll into your bank account automatically. If you don’t put in the time, you will pay dearly.
You will spend money
It takes money to make money. This certainly holds true when investing in property. It’s just that real estate allows you to leverage your money to potentially earn a multiple. However, there are costs in real estate that are often glossed over. Your tax situation will certainly be more complicated than receiving income from a single W2. Out of state investments have taxes to be dealt with, there are depreciation schedules to manage, and investment expenses have to be accounted for. None of this is rocket science, but you either have to pay your accountant to handle it, or take the time to do it yourself. Any real estate income is taxed at your marginal rate, which can mean over 50% for high earning individuals like doctors. Your audit risk will likely be higher as your tax return becomes more complex.
Your investment is locked up for a certain amount of time
Just like many forms of investing, your principal investments are locked up for a certain amount of time. One perk of real estate is that there is often cash flow in the form of rent that hits your bank account that you can use for your living expenses, but the bulk of your initial sum is still tied up. Sometimes syndications will allow you to refinance the deal and pull out some cash, but that still often comes after five years in the deal. If you are the sole owner of a property, expect that your initial investment be tied up until you sell.
Your kids might be the real beneficiaries of your work
Any sort of investment has a time horizon. When you invest in a physical property, you hope that there will be some increased valuation on the back end. The tax man will still want his share of the profits when you do cash in your profits. This includes all of the tax benefits you’ve gotten during the decades of depreciation. You can certainly delay some of the repayment if you are lucky enough to time a 1031 exchange, but that means that you are still in the real estate game. The real winner is your daughter who inherits your real estate empire. It’s great if your daughter deserves it, otherwise…
Investment risk is real
There are regular residential homes in the Bay Area that sold for $1 million profit during the housing shortage in 2021. If you benefited from this, you were mostly lucky. Most real estate deals aren’t get-rich-quick schemes. Many aren’t even going to appreciate that much in value, especially if the local economy is depressed. As an investor you can’t predict the future, only make an educated decision on the likelihood of success. What this means is that you could potentially have a huge mortgage payment but not enough tenants to cover the operating costs. You could potentially sell your property decades later below your initial investment after taking into account inflation.
You can become very wealthy from real estate. There are plenty of doctors who are so successful with real estate that their investment income overshadows what they do during their “day” job. But you can also fall flat on your face. If you are just starting out in the game, be sure you know what you are getting into so you don’t get in over your head.
What tips do you seasoned real estate investors have for those starting out?