Investing in real estate offers a multitude of ways to generate income, not to mention the opportunity to earn some of the best returns on investment available. With your physician income providing you with the funds to get started, investing in real estate can set you on a path to reducing your clinical hours or even retiring early. However, do a quick Google search of “real estate investing” and you’ll see dozens of ways to invest in real estate. There is a myriad of ways to make money in real estate. For the beginning real estate investor, the options can be overwhelming. Where do you start?
Let’s supposed you’ve diligently saved $50,000 with your RVUs, bonuses, profit sharing, and extra shifts. Of course, you’ve already built your emergency fund and maxed out your tax-advantaged investments like a 401k or 403b. Now you’re ready to take the first step into the world of real estate investing. What is the best way to start investing in real estate with $50,000?
As physicians, there are certain options that are better suited to your skillset and limited time than others. Take a moment to learn about your lifestyle, schedule, and goals to find the best solution for you and your family’s financial future before you start investing.
First, real estate beginners need to choose between active and passive investing. Let’s quickly highlight the difference between passive and active investing.
Passive investing is a way to invest in real estate that does not require your daily participation. You make an investment, after doing your due diligence, then turn over all decision making to someone else. You get a regular payout from the investment without any additional work after your initial research. Passive investing is best for those with money but little time, passion or expertise.
Active investing, on the other hand, means you are running the show. Everything depends on you. You make the decisions, like what properties to buy or sell, and how to renovate. This is a labor-intensive form of investing although it can be a lucrative way to earn money for those looking for income outside of medicine. Active investing is best for those who want to get their hands dirty and learn the nitty gritty details of real estate in order to maximize profits.
With $50,000, there are four primary ways to get started investing in real estate: syndications, flipping, by and hold single family, or a joint venture with someone to buy a larger building. Can you start investing today with less? Yes, you can invest in real estate with little to no money down. But the old adage “You get what you pay for” applies. The reality is investing smaller amounts usually ensures that you are investing in less lucrative options, like REITs or crowdfunding. If you’re going to dive into the real estate business, the best investments require a moderate amount of cash.
Let’s take a deep dive into the 4 best ways to start investing in real estate with $50,000.
A syndication is the pooling of multiple investors money together to purchase a larger piece of real estate than you could all afford alone. In this type of investing, you provide the syndicator with your capital and receive income payouts, either monthly or quarterly. Real estate syndications are the ultimate in passive income, with you making the initial investment, and the syndicator doing the day-to-day work. Picture your real estate investments making money while you see patients, and someone else worries about the broken toilet in unit 6.
No one will call you about a leaky sink, and someone with the experience and know-how will be vetting all the potential tenants for you, arranging contractors as needed, and ensuring your investment is well managed. The syndicator will also find better deals than you can alone, thanks to their network of investors, brokers, and agents. Finding a great off-market deal is a feat a beginner is unlikely to manage, without a significant commitment to networking.
You will not have to control the day-to-day decisions about the property in syndication, which for some can be a negative thing. For others, this is a huge asset. An investment in a syndication is an illiquid investment, meaning once you invest your money, you are in it for the time specified in your original agreement. The taxation of syndications can be complicated, but you do still benefit from the syndicators used of depreciation to lower your tax burden.
Investing in a syndication is best if you are looking for steady cash flow from your investment and have a long (> 5 years) time horizon and can tolerate illiquidity. Syndications offer a real estate investment with a high return and almost no time commitment, after your initial due diligence. This makes them a stellar option for those who want to get into real estate, but don’t have the time or knowledge base needed. Because they are traditionally a lucrative investment and therefore desirable, most syndicators have a minimum investment: anywhere from $25,000 to over $250,000. $50,000 will allow you to participate in many syndications.
Fix and Flip
Flipping a house is a popular option, thanks to certain television channels, and there is the potential to reap a high return here as well. Flipping does not have the steady cash flows of a syndication, but may pay out larger amounts when you finally sell.
With flipping, you will have ultimate control. Every decision and responsibility falls to you. You will need to find the best option when searching for properties, arrange financing, purchase the property, personally guarantee the loan, plan the renovations, hire contractors or do the work yourself, and eventually hire a realtor to sell.
There is a huge time commitment and steep learning curve with flipping a house. You will need to have renovation skills and time, or the ability to source and manage reliable contractors. There are holding costs to consider, depending on how long the renovation lasts and how long it takes to sell. And timing is everything – the longer the flip takes, the more money you lose on interest and utilities. Of course, the market can go up or down while you renovating, so your projected profit is just – a projection.
You also risk losing more than you invest if you uncover repairs that need to be done but were not prepared for, and this happens frequently so most flippers advise that you have a contingency budget of 20%. Even then, it is easy to go from a gain to a loss because you never know exactly what you will discover as you start investing. Also, consider that your returns will be taxed as ordinary income and not capital gains if you own the real estate for less than 12 months.
Flipping is best for those who want to dive into real estate investing head first – you’ll need around $50,000 for the down payment, renovations and a reserve for surprise expenses. However, if you can survive or even thrive on the drama and stress, flipping can create an opportunity to grow your wealth quickly and supercharge your real estate portfolio. But it’s not for the faint of heart.
Buy and Hold Single-Family
With $50,000, you can easily find a single-family home to purchase and rent. You may even be able to afford even 2 or 3 houses with $50,000 down. For those in a high cost of living area, like California or New York, a $50,000 down payment may seem absurd. In much of the United States however, the average home price is well under $150,000 so $50,000 goes a long way for a down payment. The Southwest and Midwest still have multiple markets where you can purchase a home in that price range and still meet the 1% rule.
Purchasing and renting single-family home generates cash flow, though it won’t always be steady. If you buy only one or two houses, when a tenant moves out, you will need a month to repaint, clean, and find new tenants. That is a month without rent but the mortgage still needs to get paid. This option has more favorable taxation than flipping though, thanks to depreciation. Similar to fixing and flipping, you make all decisions, including what to purchase, and to whom you will rent the home. You’ll also have the benefit of the tenant creating equity for you, as they pay down the mortgage on the house each month.
Buying and renting out a single-family home can be time-consuming. Not only will you need to find a great real estate deal, you still have to get the house ready for rent then find a tenant and handle repairs. You can hire a property manager to do this of course, but they will take anywhere from 8-10% of the rent. There is also the risk that you will lose more than you invest if a tenant trashes the house or you incur a large capital expense, as well as liability risk if a tenant or contractor sues. The mortgage you carry on the home will affect your personal credit as well. However, once you establish a larger portfolio of single-family homes, the fluctuations in rental income due to vacancies smoothies out and you can negotiate lower property management fees.
Buy and hold single-family houses are best for those who are willing to put in the time to learn a neighborhood well, have a long term time horizon and want and slow but steady way to grow wealth, while generating a moderate amount of cash flow.
Joint Venture (JV) Real Estate Investing
Suppose you want to invest in something more ambitious that you can afford alone. You have $50,000 but have your eyes on a multi-family building. $50,000 won’t quite cut it if you are operating solo in most markets. In this scenario, you would partner with another real estate investor to buy a larger building. This is slightly similar to syndication in that you are pooling resources with someone, however, it is far from hands-off investing. A joint venture (JV) will require your active participation.
You and your partner will layout your responsibilities upfront. You can share expertise and capital, allowing you to accomplish more faster than you would on your own while benefiting from the economies of scale in a larger investment. This option creates a more stable cash flow than owning a single-family home yourself or flipping since you are able to collect rent from multiple units rather than a single home, while still enjoying the benefits of depreciation on your taxes. Your tenants will still be building equity for you and your partner, meaning you can continue to invest more in real estate, either together or separately.
Partner investing is time-consuming though – but you share the load. You not only have to search for the best deal, secure financing, purchase the property and manage it, you also must collaborate with a partner on all of these aspects. Depending on both of your schedules, this can get tricky, especially if you are working with another physician. Your partner may not have the same goals as you, so hashing these out and setting them in stone before any money is spent is essential for a positive investing experience. Though no one really wants to consider it, there is always the potential risk that your partner may cheat you, or walk away from the deal, leaving you to clean up the mess alone. As in single-family home investing, the mortgage may appear on your personal credit, as smaller multi-family residences usually require recourse loans that you must personally guarantee.
JV investing is best for those who want to get a fast start in real estate investing and are ready to invest their time and capital with a partner to grow wealth with a trusted partner.
Before you make any decisions on what to do with that hard-earned $50,000, carefully consider how much free time you have. Hour after hour, day after day, as a physician, we carry a high mental load, and our work often follows up home. To come home at the end of a shift and be required to make more decisions about houses, renovations, ongoing projects, tenant maintenance issues, setting aside time to interview potential tenants, and collaborate with partners, will take up more headspace and time. Even if you find a challenging avocation outside of medicine energizing, it does still require time to invest actively, not passively.
Consider where you are at right now, as well as where you will be throughout the lifetime of your investment. Do you have a family, or will you want to start one? Do you have enough time to maintaining your friendships? What are your other personal goals and responsibilities? How much attention can you spare from those areas of your life? These are important considerations before committing to any project, but especially the investment options that are more time-intensive, like flipping.
As you can see, there are many ways to grow your wealth and income with real estate investing. For most physicians, a hands off investment is the most practical option, although there are plenty of physician flippers out there. Generating income from syndications, for example, would allow you to invest in real estate while eschewing the time commitments, liability, and wealth of knowledge needed to invest actively. Fixing and flipping a property would be more suited to someone with a part-time or flexible job, or even a doctor ready to move on from medicine. Although active investing can times appear to be the fun, shiny option, or and one with the highest income potential, generating a solid, consistent income from a passive investment is the real golden ticket for most physicians in the early or middle of their careers.
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