Getting Started With Real Estate Investing – The Definitive Guide
Physicians and real estate investing seem to go hand-in-hand. Many of those who practice medicine are able to find passive income through the world of real estate investing.
Here at Financial Residency, we discuss the topic of real estate investing quite a bit. Not only do I personally have experience with it, but I find myself walking through the process with many of my clients.
There is a ton of information available for those of you who want to get started – much of it is right here on the FR blog. But getting started can be the hardest (and most overwhelming) part. We’ve put together this guide to help you get your thoughts organized and wrap your brain around the idea of real estate investing.
Is real estate investing for every physician? Of course not. It’s like so many other ideas with starting a business, where one idea might work for someone but not everyone. But if you’re curious if real estate investing is an avenue for additional income, then I encourage you to keep reading.
Why Consider Real Estate Investing
Like I mentioned, real estate investing isn’t for everyone, but there are tons of people out there who’ve been able to use it to supplement their income and grow their retirement accounts. But what makes this type of investing so popular among physicians?
I’ll admit, I’m a little more passionate about investing in real estate compared to other money nerds like me. I could make a long list of reasons to consider it, but here are a few of the positives I see for doctors when they’re considering adding real estate to their portfolio:
- You can choose the type of real estate investing which suits your personality
- You can create passive income
- You can be “Hands On” or “Hands Off” with your investment
- You can receive tax breaks
- You can achieve financial independence sooner
Many people might mistakenly believe real estate investing takes up too much time. While there are certain aspects which do take more time than others, once you get started, it can eventually become a passive income stream for you.
That being said, real estate investing is not all sunshine and rainbows. There are multiple challenges you face when you’re a landlord or trying to manage from a distance. Trust me, you’ll spend a chunk of time dealing with lots of issues. But even with these challenges, real estate can still be a worthwhile endeavor.
When to Consider Real Estate Investing
Let’s talk about something which is almost as important as choosing what to invest in – and that’s when to invest in real estate. You may assume anytime’s the right time to start making money. But truthfully, you need to make sure your own house is in order before you make the leap to investor.
What do I mean by this? First, you need to have your financial goals defined and a path to achieve them. Let’s make sure you’re on the right track before putting a substantial amount towards something like real estate. Ask yourself the following questions:
Have I paid off my student loans or have a strategic plan in place to get them paid down?
Am I maxing out my retirement contributions?
Do I have an IRA I’m contributing to?
Is my emergency or savings fund fully loaded?
Once you’ve answered yes to these questions, then I believe it’s a good time to consider real estate investing.
Do Your Homework
It may be tempting to jump right in and throw caution to the wind with real estate. I’ve seen my fair share of doctors who want to start investing with multiple properties right out of the gate, without ever having invested before.
And it’s true. Until you experience real estate firsthand, you won’t know what it’s like on day-to-day. However, this doesn’t mean you should jump in head first, without doing your homework.
Doing your homework is not as hard as you might think – some of you may find yourself enjoying the process. Researching involves listening to podcasts, reading books and blogs, and joining Facebook groups for those focused on real estate investing. You’ll need to talk to people who have the experience, especially in the specific area you’re interested in pursuing.
Another great resource is to find a mentor. Find someone who’s willing to tell you the good, the bad, and the ugly about your ideas and questions related to real estate.
The point is, it helps to know what you’re getting into first.
My personal recommendation is first you learn how to evaluate deals, and then buy one property to get started. If you’ve never invested in real estate before, then you need to do your research. If you take on too much, too soon, then you can quickly get in way over your head.
Real Estate Investing Terminology
In the same way medicine has its own terminology, you’ll find it to be true with real estate. As you start to do your research and talk to people, you’ll begin to hear different terminology. Here are a few of the more common terms you’ll come across, specifically with investing:
In real estate, there are two different types of ownership: direct ownership and indirect ownership. Direct ownership means you are directly responsible for the management of that property.
Indirect ownership is when you own the property but pay to have another company manage the property for you. Indirect ownership is the preferred method for many physicians because it alleviates
Passive investing refers to the type of investing which doesn’t require your daily participation. Once you make your investment you turn over the decision making to someone else. You receive a regular pay out from the investment without any additional work after your initial research. Passive investing is great for those who have money to invest, but little time or expertise to deal with real estate.
Unlike passive investing, active investing means you are the one making the decisions. You’re in control of all the ideas such as what properties to buy or sell, what to renovate, and who to hire .
Active investing requires much more hands on involvement and can be quite time consuming. But the payoff can be more lucrative for you. This is perfect for those who aren’t afraid to get their hands dirty and get into the nitty-gritty details of real estate.
Crowdfunding utilizes social media outlets to bring in multiple investors. The investors will use small amounts of money which results in large sums of money.
Real Estate Syndications
Real estate syndication simply means investing with a group of people. Many physicians use this route to invest in the commercial side of real estate and multi-family units.
Triple Net Lease
Triple Net Lease can also be referred to as an NNN. It’s a lease agreement where the tenant (the lessee) will be the one responsible for all costs related to the lease. The tenant will also be responsible for the rental fee each month.
This type of lease requires the lessee to pay the net amount for three types of costs, including net real estate taxes on the leased asset, building insurance and net common area maintenance.
MLS – Multiple Listing Service
The Multiple Listing Service, or MLS for short, is the electronic database used to list properties for sale. It’s the service which allows brokers to connect potential homebuyers with sellers. If you want to sell a property, it will most likely have to be listed in the MLS.
Common Forms of Real Estate Investing for Physicians
Now that you know if and when you might start investing, plus a few of the terms you’ll start to hear, we should talk about common ways physicians can invest in real estate. Real estate is similar to practicing medicine in some respects – there are multiple specialties and then specialties within specialties. And as you might have guessed, each specialty has its own pros and cons.
For years now we’ve been working with Dr. Peter Kim, Founder of Curbside Real Estate and Passive Income MD to learn as much as possible about real estate investing. He provides a great summary of the various forms of real estate investing.
As you’re reading through these various avenues for real estate investing, it’s a good idea to start taking note of which forms interest you the most. Some fall under the passive investing, others are considered active investing. Here are a few types of properties for you to consider.
Rental properties come in all shapes and sizes. Single-family homes are the most common, and maybe the most simple, form of real estate investment.
Duplex and Triplex Quads also fall under the rental property category. Single-family homes and duplex/triplex quads are options where you might not need a property management company. You may be able to handle the demands of a tenant(s) on your own.
Rental properties can also be multi-family and apartment complexes. These are investment options to consider if you want to generate a large cash flow each month and can work with a property management company.
Investing in retail means choosing properties such as a CVS or Walgreens, or strip malls. This is a popular option for physicians, according to Dr.Kim, because it’s hands off for the investors. You can invest in retail with a triple-net lease, where all property management is handled for you.
Mixed Lease Properties
Mixed lease properties are properties with retail on the bottom floor with the top floor being utilized for residence. It’s an opportunity to earn money from more than one tenant but within the same building.
Industrial Real Estate
Industrial real estate includes investing in warehouses or storage spaces. Storage spaces are used not only for the general public, but also for businesses. Businesses need storage space too. Warehouses and storage spaces are good for physicians because you don’t have to get involved with the day-to-day issues or tenants. Plus these do well even in an economic downturn.
Mobile Home Parks
If you’re looking for another investment option which can be lucrative during an economic downturn, then a mobile home park is another avenue. You can manage the park yourself or choose to invest in funds to buy the mobile home park.
Owning land can be very profitable. Developers are looking for land and when that happens, you can hit it big.
According to Dr. Kim, physicians like to invest in land near hospitals or rapidly growing areas because ultimately buyers or developers come along and want to buy that land.
Fix and Flips
A fix and flip is where you buy a property, put money into renovating it, and then sell the property to make a profit (ideally). Despite what you see on HGTV, it takes a lot of time and renovation know-how to make money off a flip. This is perfect for those investors who like to be active in their projects and take a hands on approach to their investment.
Real Estate Investment Options Without Direct Involvement
In addition to the traditional types of real estate investment, you can also choose ones which don’t need your direct involvement in renting properties. Here is a list of options for you to consider with real estate investing.
Real Estate Investment Trusts
Real estate investment trusts, also known as REITs, are one of the options for investing without being directly involved. According to Dr. Kim, these are like mutual funds for rental property or real estate. REITs fall into two categories: public or private trusts.
Public real estate investment trusts are traded on the stock market. You just put your money in and you (hopefully) get some type of return. The private real estate investment trusts are not publicly traded.
You choose the company you want to invest with, and they will do the heavy lifting. You’ll see companies investing in different types of properties such as retail, hospitals, hotels just to name a few.
Tax liens are another investment platform. When people don’t pay their taxes, the government can place a lien on the property and will then auction off the property. What you may not realize is, investors come in and take ownership of these liens and can turn them into rental properties.
Although tax liens can be lucrative, it’s wise to partner with someone who has been through the process of investing in these. Tax liens can be a complex process so it’s best to utilize someone’s help.
Notes and Non-Performing Notes
Another real estate investing strategy is to focus on notes, which are basically mortgages. The notes are owned by private equity companies. It works similar to an IOU.
You purchase the mortgage and then over time, you are paid interest in addition to the principle.
Notes are broken up into two categories: performing and no-performing. Performing notes refers to when people are actively paying back the notes. Non-performing notes are the ones where people have stopped paying. One advantage to non-performing notes is that you can usually buy them again for pennies on the dollar, and then have people start paying on them again.
First Trust Deeds and Second Trust Deeds
First trust deeds and second trust deeds are another type of investment route. This is where you lend money to someone to invest in a rental property. You are basically securing your money to the property. This allows you to charge a percentage on the money you’ve loaned them. Your percentage rate is usually higher than one secured through a bank.
The person you loaned the money to owns the property cash flow; however, if they were to walk away, you can come and take the property.
Another similar strategy is referred to as hard money lending. This is the same concept, but with a shorter term. This is used primarily with developers and “fix and flippers.” This gives them an opportunity to borrow quick cash from you, use it for their project, make the money, and get out. Of course they have to pay you back when it’s complete. These loans usually last around 6 months up to a year and a half.
How to Discover Your Real Estate Strategy
If you read the list above which contains the more popular real estate ventures, then you might be feeling completely overwhelmed by now. How are you supposed to decide which type you want to pursue? Fortunately, the answer to this question can be found by, well...by asking more questions.
Dr. Cathy Carroll, who is our Real Estate Strategy expert here at FR (and also happens to be a brilliant MD and CFA) has put together a way to narrow down your strategy. She suggests you ask 5 questions before getting started with real estate investing.
The Questions You Need to Ask Before Investing in Real Estate
Question #1 – Are You a Control Freak?
Question #2 – Do You Have Much Free Time?
Question #3 – Do You Like Humans?
Question #4 – Are You Comfortable With Taking a Risk?
Question #5 – Do You Like Real Estate?
It may seem like this is a simple question, but you should ask yourself if you really, really like the thought of real estate. Like any other venture worth doing, if you can’t enjoy the thought of real estate, then it’s best to try something else.
By answering these 5 questions, you’ll get a better understanding if you’re an active or a passive real estate investor, and ultimately which property you are better suited for. Dr. Carroll has put together a super simple quiz to help you decipher your real estate investment personality, which you can find here.
Single-Family Rentals – The Easiest Way to Start Investing
We’ve discussed quite a few ways to invest in real estate, but I want to spend some time focused on single-family rentals. I believe the best way to get started in real estate investing as a physician. Even though the learning curve can be steep, it’s a great strategy for the long-haul.
Here’s what you should remember when starting with single-family rentals -the process of investing in order to build your wealth will take time. You shouldn’t expect to get rich overnight. Instead, it’s a slow and steady build to wealth. Think of it as another way to diversify your portfolio as you’re working toward financial independence.
How to Make Single-Family Investing Work For You
If you’ve decided you want to focus on the single-family investing track, there are a few other choices you’ll need to make. These choices can play a big part in your success as a real estate investor.
Using a Real Estate Agent
I’m a huge proponent of working with a licensed real estate agent. They will set your property through the Multiple Listing Service to get you started. Later on, when you’re established, you can branch out and learn how to get off-market deals while investing in single-family real estate. But until then, an agent can be instrumental in helping you find properties.
You’ll want to choose an investor-friendly real estate agent. This can take time to find the right person, who’s not only familiar with investments, but can also help you understand the ROI you can expect.
Choosing the Right Property
There’s a simple mantra to remember as you begin investing: the money is made when you buy the property.
It seems obvious, but many people forget the purchase price is what makes a great real estate deal. Not only does it affect your profit, but also your taxes and your rate of return.
Real estate is a business of supply and demand. As markets appreciate it makes it harder to find deals. However, there is no need to stretch because the markets move in cycles, and what goes around will eventually come back around.
When you’re new to investing – especially in single-family real estate – you will need to establish standards for your property. This is to ensure you have a steady cash flow in the form of rent every month.
In addition to having a steady renter who pays their rent on-time each month, you want to pay attention to the physical attributes of a property too.
You should choose a home which is well-maintained. It should be in a location where there is strong employment, good schools and neighbors who take pride in their homes. Always buy a home in a good school district, if at all possible. Demand for good schools will help you maintain quality renters for your property.
When buying a property, you’ll want to have lots of inspections performed. An inspection will tell you if the property and maintenance have been regularly taken care of. You’ll know what kind of headaches you might have in your future, and what you could be facing in repairs.
The 1% Rule for Buying Rental Properties
There are a few guidelines, or “gut checks,” you can use throughout the process of choosing the right real estate investment. Here are a few questions to ask yourself as you’re deciding which option to choose.
I refer to this process as the 1% rule.
The first thing to do is to start asking the right questions, then the 1% rule will make sense for most locations.
Consider the property that you are looking to buy, and ask the following questions:
What is the asking price?
How much monthly rent will you be able to charge? The correct answer should be 1% of the price you will pay for the property.
Of course, there are markets that will be the exception to this quick guideline, but it’s a great initial way to evaluate if a property is a good deal for you.
Hiring a Property Manager
If the thought of managing a single-family property makes your head want to explode, then consider hiring someone to manage it for you. This will let you concentrate on your busy medical career and your family.
How do you know who will be a good property manager? First, start with someone you feel comfortable with and can easily talk to. Ask your mentor or Facebook group who they use in the same area and their experiences.
Pay attention to the property manager and if they’re timely in calling you back. Chances are, they’ll be quick to respond to a tenant. Ask what training they have and if they know the Landlord Tenant Laws for the state your rental is located.
A big question to ask is about their fee structure. Make sure they don’t charge fees for the months your property isn’t rented – it’s up to the property managers to find qualified renters.
Don’t be afraid to ask a ton of questions! It may be awkward at first, but soon you’ll know how to hire the right property management team for your real estate investments.
Choosing a great real estate agent, picking the right property, and hiring a property management company may seem overwhelming. But look at it as setting up your business! The more research and work you do in the front-end, can mean greater profits in the long-term.
Less Known Ways to Approach Real Estate Investing
I wanted to provide an overview of real estate investment strategies so you can begin identifying which ones appeal to you. And just when you thought we couldn’t give you any more ideas, guess what? There’s more for you to consider.
In addition to the rental properties, the syndications, and the crowdfunding sites, there are other strategies with real estate investing. These ideas aren’t as common as the others, but they’re ones I’ve personally had experience with in the past.
One real estate investment strategy you could use is the all-cash plan. It’s as simple as it sounds – you never go into debt for any of your real estate investments. I refer to this real estate investment strategy as the all-cash plan.
This is a great method for those of you who have access to real estate in less-expensive parts of the country. And done correctly, it can help leap you forward to financial independence.
For example, let’s say you saved $110,000 and bought a property for $80,000 dollars, then you rent it out for $1000 per month. You’ll have operating costs you have to pay, such as taxes, insurance, and maintenance. But since you aren’t carrying any debt on the property then you’ll keep all of the net operating income. It’s a straightforward plan which can yield an amazing profit.
Most of us who’ve paid down debt have heard of the Debt Snowball strategy. It’s the concept of listing all of your debts from smallest to largest, and then paying the smallest debt off first. The idea is the momentum you get from achieving the small payoffs will fuel you into paying off the larger debts.
There’s a similar strategy in real estate investing too.
Let’s say you purchase multiple properties. With the snowball method you begin paying more toward one of those properties at a time, ideally the one you owe the least amount on. You only pay the minimum on the other properties. This becomes the snowball method, where one gets paid off quicker than the rest.
But then the magic begins to happen. You’ll eventually pay one of the mortgages off, then another. You could potentially pay them all off before the projected 15 years and reap the benefits.
Buy Three, Sell Two
If you’re looking for a more aggressive, short-term strategy for your rental properties, then consider the Buy Three, Sell Two method. Yes, I made up this term. But this is a great strategy for those of you who want to test your risk tolerance on a somewhat safer, high-level plan.
The way this method works is you buy three rental properties (or more than you need), you hold them, then you eventually sell two properties. You use the money from the two properties to pay off the third one.
It’s one of my personal favorite real estate investing strategies because it’s one I’ve used in my own business. My wife and I used this exact strategy to pay off our medical school debt. It’s a strategy which involves high risk-tolerance on your part, but can provide a big pay off if it’s done correctly.
If you need a plan which helps you target tax strategies, then consider the trade-up plan. Warning – it’s also one of the most aggressive real estate investment strategies to consider. This strategy is a good fit for someone who feels comfortable going on all-in with their investments.
The premise is you buy low and sell high, usually with a rental property. The rental property is typically a multi-unit building or commercial property that is undervalued. It’s a property which needs a major face-lift and time to implement the changes.
The hard part of this investment strategy is the complicated tax. It falls under the process of a 1031 tax-free exchange. You’ll need to hire someone to guide you through the process.
Once you go through the 1031 process, you can buy another property and trade up. This uses part of the tax code which allows people to sell one property, and then not pay any tax on the sale. You have to follow the rules and replace the property with a new property.
Each trade-up can bring a new level of profit because you’re using the gains from the previous property.
Again, it involves a lot of risk but can have a big payoff and give you tax advantages.
What if you used your primary residence as one of your real estate investment strategies?
Let’s say you buy a property that needs minor remodeling and updated curb appeal. You decide to live in the property while you make the improvements.
If you look at the current tax code, you’ll find that by living on the property for two of the last five years, you’ll be exempt from paying capital gains taxes. This is a great strategy if you’re willing to stay and fix-up the house, but not let it become your dream home.
Imagine if you did this several times in a row, with several properties. You’ll be on your way to a tidy profit!
As you can see, there are several well-known and lesser-known ways to get involved in real estate investing. You can also choose to try more than one strategy or property. With so many choices, you can see why real estate investing is growing among physicians.
Paying for Your Real Estate Investments
There’s more than one way to pay for a real estate investment. As a physician, you have access to other options that many people don’t have.
There are many benefits to paying cash for a property or investment. Even if your cash is limited, you still have options.
For instance, if you have $50K in cash to get started, then you could consider joint venture real estate investing, buying (and holding) a single-family house, or you could try a fix and flip. You could also look into the real estate syndications which allow you to start investing with $50K.
Physician Mortgage Loans
As a physician, one of your best advantages is having access to physician mortgage loans. If you don’t have one for your primary residence, then you might be able to use one for your real estate investing strategies. Here’s what you should know regarding physician mortgage loans.
By far one of the biggest advantages to using a doctor loan is the no down payment option. And if you’ve ever worked with a bank with one of these loans, then you know they love physician mortgages. Banks know physicians are high-earning professionals with a steady job outlook. In their view, physicians are great borrowers and highly dependable. What’s not to love?
The physician mortgages hold multiple benefits for you too, not just the banks. You won’t have to pay the PMI as a borrower. If the loan is for your primary property, you can borrow up to $750k with zero percent down.
Talk to your physician mortgage loan lender about the options for investment properties. Your real estate investing venture may be right around the corner with the help of a doctor loan.
Real Estate Investing For Financial Independence
As you can see, there are so many ways you can use your income as a physician to begin earning passive income. While nothing is guaranteed, real estate investing can help you achieve the financial goals you’ve created for yourself – such as early retirement or reduced hours practicing.
I’m a perfect example of using real estate strategies to achieve major milestones. Whatever your goals are, real estate may be the way to get there sooner than later.
Hopefully by now you see there’s more than one way to invest in real estate – with certain strategies being better suited to certain personalities. What do you think? Do you see real estate investing as part of your plan to improve your portfolio?