Real Estate Investment Strategies For Doctors
Buy and Hold
With the stock market at all-time highs, many investors look to other avenues to diversify their portfolios. One of the major ways to do that is through real estate. Doctors are no different in looking to real estate as a way to put their money to work in the smartest way possible. However, doctors are a unique class of investor, for a couple reasons.
First of all, they work a ridiculous number of hours for a high salary. So it just doesn’t make sense for a doctor to follow active real estate strategies like “flipping” houses or strange strategies like turning containers into short-term rentals. While these things might make sense for someone working in real estate full time, most doctors will tend to favor more passive options.
Second, because of their high salaries, most doctors are accredited investors (someone with a net worth over $1 million or who makes over $200,000 per year in income), which gives them access to investment options most investors aren’t eligible for.
Given these unique characteristics of doctor investors, what are the main strategies for doctors to get involved with real estate?
By far the most popular strategy, “buy and hold” simply refers to buying an asset and holding onto it. There are over 15 million mom and pop landlords
in the United States and many of them are doctors. The investor following this strategy will earn returns through appreciation, depreciation, cash flow and amortization, although it may take years to realize these gains. Doctors who recoil at the thought of unclogging toilets or worry about how to evict a tenant
can rest easy by hiring a property manager to handle these messy details.
Once a doctor is ready to sell an asset, he can use seller financing as a strategy. This is simply selling a piece of real estate and providing the loan for the buyer. Instead of paying a bank for a 15-year or 30-year mortgage, the buyer pays the doctor.
This strategy provides the doctor the cash flow he would normally get from “buy and hold” with none of the risk or responsibility of being the owner of a property. An added advantage is that if the seller can’t make the payment, the doctor will take back ownership of the property (keeping the down payment of course).
Hard money lending
A doctor who has a lot of cash on hand but wants a higher guaranteed return than a CD might consider hard money lending. With hard money lending, the investor lends cash to other real estate businesses (usually fix and flippers) at a very high rate. Doctors will usually earn between 11-18%
on their money and get the principal back within 6-12 months.
In the past decade, online marketplaces (such as RealtyShares
) have sprung up which allow doctors to invest small amounts of money in different investment projects. This option is similar to hard money lending but allows the doctor to diversify the investment across multiple rehab projects.
Funds: Public and Private
There are many funds available that allow investors to invest in real estate without having to leave their desk. Established options include Real Estate Investment Trusts (REIT) and real estate mutual funds, both of which a doctor can easily get into through a stock broker. Doctors can also invest in private funds, such as limited partnerships (LPs), in which many private investors will invest as passive partners to buy an apartment building or other large real asset.
Debt (Tax Liens & Notes)
The final major investment type for doctors is debt. A person (or entity) who holds a lien on real estate can sell the lien. Banks do this all the time. Tax liens and notes function just like corporate bonds, except that they are backed by real estate instead of a company’s assets. The investor will get a fixed rate of return over a certain amount of years, until the loan is finally due.
Factors Doctors Should Consider When Evaluating Real Estate Investments
Even though doctors are unique as investors, they need to consider many of the same things that normal investors consider. For example,
- Risk tolerance. What is the doctor’s risk tolerance? Some doctors see extra money as “monopoly money” and are willing to throw it into exciting (but highly risky) investments. Other doctors are more frugal with their hard-earned money and not keen to see it fly away.
- Time horizon. A doctor should consider the time horizon of an investment. Even though some investments might offer great returns, many will lock up the doctor’s investment money for years.
- Liquidity Needed. Doctors should also consider how quickly they’d need their money back if they needed to liquidate. Many investments are simple to convert back into cash. Others not so much.
- Time available. Finally, doctors should be realistic about how much time they are willing and able to put into researching investment options. Some real estate investment options are just as easy to evaluate as a CD or bond, with a fixed and guaranteed return. Other real estate investments require hours of research in order to make a wise decision.
Each of the passive real estate strategies mentioned above differ in terms of riskiness, time horizon, liquidity, and expertise required. Each offers unique value to accredited investors like doctors. I’ve barely scratched the surface on each option, but if any of these sound interesting to you, I highly recommend doing some more research into any of these topics. And don’t forget to consult your tax advisor to study the tax ramifications of your favorite investment strategy!
Andrew Allen is a real estate investor based in Austin, Texas. His company, Barker Hill Realty, follows the “buy and hold” strategy for residential and commercial real estate around Central Texas. You can connect with him on LinkedIn.