When Should Doctors Begin Investing in Real Estate?

With the newly found freedom of my discretionary income, I have spent more time thinking about how to better invest.  For anyone gravitating towards personal finance and physician finance content, discussions around intelligent investing in stocks and bonds are relatively commonplace.  However, we are often inundated by recommendations to invest in real estate.  Personally, I have found that real estate is not as ubiquitous as other forms of investing among our peers.  I understand the incentive, sure.  We are a collective profession of high-earning and driven individuals.  It seems natural that, as we look to build our wealth, we will inevitably stumble upon the many forms of real estate investing and weigh their merits.

I had never genuinely considered real estate investing (in its many forms) until I finished paying off most of our debts.  For those who have not read our recent posts, we paid off my wife’s debt, which has been a critical financial milestone.  With a significant portion of our income now free from the shackles of educational debt, we can entertain new ways to invest our earnings and grow our wealth.  Like so many of you, I have little background in real estate investing.  I am seriously considering it however, so I figured I would do some self-education and explore when should doctors being investing in real estate?

Real Estate as an Asset

This will likely not shock anyone, but real estate is very much an asset.  As we navigate the world of assets and liabilities, assets make us money; liabilities take our money.  Relatively simple concept.  Stocks, bonds, and real estate are some of the most commonly known assets to the average American.  Liabilities include depreciating vehicles and the many forms of debt.  When considering diversifying your portfolio, those looking to add more protection to their wealth will sometimes incorporate assets beyond stocks and bonds.  Real estate is often the next logical step. 

When determining if real estate should earn a place in your personal portfolio, consider a few statistics from Investopedia in an article titled Has Real Estate or the Stock Market Performed Better Historically?  This article highlights some important concepts regarding the risks and benefits of real estate as an investment. 

For starters, you can get rich investing in both stocks and/or real estate!  Historically, the stock market has outperformed real estate.  Remember that.  Individuals still pursue real estate over stocks, or in parallel, because the stock market is historically more volatile than real estate, making real estate a safer investment during economically uncertain times.  Lastly, stocks have no tangible value, but property ownership (real estate) does. 

So, what is the takeaway here?  Statistically, investments in stocks are still, historically speaking, the best investment long-term.  For those looking for tangible assets that can better withstand market volatility, real estate is a safer investment and largely still a great one.  How, then, can a busy physician incorporate real estate investing into their lives?  What types of real estate investments exist?

Types of Real Estate Investments

Great question!  Fortunately, we have already published some great articles on this exact topic.  One is a recent post titled Active vs. Passive Real Estate Investing: What’s Right for Physicians?  The second article is a classic that discusses how real estate investing can expedite your financial freedom!  For time’s sake, I will not detail every real estate investment available. That would take way too long.  I want to briefly highlight the pros and cons of active and passive real estate investing.  This can help you determine which type of investment best suits you and your availability. 

Active Real Estate Investing

Largely stealing from many of our prior articles above, active real estate investing is just like it sounds.  Active.  Active real estate investing requires a hands-on approach, engaging the investor in many ways.  Doctors looking to actively manage real estate will be front and center.  This can involve (but is not limited to) property research, contract negotiation, purchase, and subsequent management. 

The benefits of being actively involved in your real estate investments include having more control over the day-to-day decisions that impact a property.  There is potential for higher returns as you limit the involvement of others, and you can leverage your own market expertise (assuming you do your research).  Lastly, investors can actively deduct expenses related to property taxes, maintenance, and management fees depending on the investment.

The drawback to actively managing our own real estate properties is that there is often more risk.  If you ‘go it alone,’ there is more opportunity for significant losses due to market volatility and poor investment decisions.  Actively managing properties often comes at a higher cost, too.  Finally, active management is a much more time-consuming process.  In a world where busy physicians are looking to supplement their income and diversify their investments, taking an active approach to real estate will require your precious time. 

Passive Real Estate Investing

Let’s switch gears and talk about passive real estate investments.  Compared to active real estate investments, passive investments require considerably less direct involvement from the investor.  This results from much of the hands-on portion of management being turned over to a middleman.  This is often a property management company for individuals still looking to own the property outright or an investment firm if you are leaning towards crowdfunding, real estate investment trusts (REITs), and other passive investing strategies. 

The obvious benefits include lower direct risk to the individual as professionals often diversify and manage these investments.  A lower upfront cost is often needed as well, making this a more accessible option to individuals looking for early exposure.  A passive approach to real estate investing offers more diversification as you can spread investments across various asset classes, reducing the impact of any single property’s poor performance.  Lastly, it simply requires less time.  This is largely why many doctors initially start with passive real estate investments.  As a profession, we don’t have the time or expertise to manage a property ourselves!

There are some drawbacks to passive real estate investments.  Though one benefit is that the risk is spread across multiple individuals, it also means there are often ‘more cooks in the kitchen.’  This means that you have less control as an investor, and further, the potential returns are statistically lower as more parties take their piece of the pie.  Lastly, passive investments have limited ability to react to changes in the market and thus lack the ability to aggressively seize emerging opportunities. 

Understand the Commitment

Though the above review of active and passive real estate investments only scratches the surface, you can see how there are some big considerations for each.  Determining how they will directly influence your decision to incorporate real estate into your investment portfolio is a personal decision. 

In my opinion, when it comes to real estate investing, there are two overarching considerations: the time commitment and the upfront cost.  Let’s briefly explore each of these. 

Time

When I think about the decision to invest in real estate, I anxiously recall my own home-buying experience.  It was months of evening trips looking at houses, discussing intricate details, the pros and cons of each experience, and ultimately placing offers that would later lose out to others.  Granted, this was during the COVID housing scrabble, but you get it. 

I had to juggle my professional career while still tending to my expecting wife while still finding the energy and enthusiasm to house hunt.  It felt like endless nights and weekends of driving around neighborhoods, meeting my realtor, and ultimately deciding on a property that didn’t fit our needs.  If I pursue actively managing a real estate property, the search process alone sounds exhausting, much less the subsequent maintenance. 

Clearly, there are other avenues and passive real estate investing has much more appeal to the busy professional, but that, too, still requires upfront costs.  From a time perspective, some research must go into decisions to invest in one platform over another.  However, largely, following some upfront research, my understanding is that once you provide your capital, it becomes a ‘set it and forget it’ experience until a later payout date.  This sounds much more appealing when I am in my early career, juggling two toddlers and a newborn on the way.  However, I do love being handy and can see myself enjoying property management later in life, but not at this point. 

Money

The second commitment I alluded to above is largely that of cost.  Thinking about active investing again often includes saving for the downpayment of a property or potentially saving the expense entirely so that all cash flow following purchase is profit.  However, the decision to stow away between $50,000 and $400,000 (or more) sounds anxiety-provoking to me.  Sure, you could house it in an investment account and put that money to work, but largely, you risk exposure to market volatility. 

From a passive perspective, there is largely still an upfront cost to be expected, but if you are not purchasing a property outright, these barriers of entry are often lower.  Further, many other options like crowdfunding often share this risk amongst many investors, lowering potential returns but also lowering risk as well.  Either way, you are spending money upfront.  

Ultimately, the decision sounds like you are spending a lot of money and time up front to reap a larger reward later, or you are spending less time and potentially less money to have someone else do most things for you.  This may provide a false sense of security but involves less time commitment.  This may be worth what you lose in gains compared to active management.  Anxiety is taxing, too, and in our profession, the less stress we self-inflict in our lives, the better. 

Tax Benefits

It is important to highlight that some tax benefits come with real estate investing.  Though many could explain the differences in detail, the gist is that passive real estate investors can only deduct normal costs (not business costs) associated with their rental property. 

According to Morningstar, passive investors may deduct passive losses against passive gains.  Active real estate investors may deduct up to $25,000 of passive losses if their Modified Adjusted Gross Income (MAGI) is less than $100,000.  When their MAGI exceeds $100,000, the tax break is cut by 50%.  If the MAGI exceeds $150,000, the active investor (taxpayer) cannot take any passive losses.  Active real estate investment losses greater than $25,000 can be carried over to the following year.

All of this said, as a real estate investor, you have tax advantages, largely more for active investors than passive investors. Keep it in context: If you are a physician making physician-level incomes and simultaneously running a real estate side gig, this is a good problem to have…

When NOT to Invest in Real Estate

So, now that we have reviewed this information, let’s discuss the decision to break away from the norm of stock and bond abundance in your investment portfolio and pursue real estate investing. Though everyone’s financial journey is different, as is their risk tolerance, I do think there are some times when you should NOT invest in real estate. Many may disagree with my recommendations, but hey, to each their own. 

I would argue that if you are in the throes of your medical education and training, i.e., a medical student, resident, or fellow, AND you are actively accumulating student debt or still paying it down, then it may not be a great time to explore the world of real estate investing…yet.  Focus on your education, become a good physician, and solidify your financial footing before pursuing alternative investments.  Yes, you should still prioritize your retirement savings, but I hesitate to encourage much deviation from the generic recommendation of ‘live below your means, save, pay off debt, max out retirement.’  Complete those tasks first, then consider real estate. 

Further, if you are a profoundly busy clinician with an even busier household (spouse, kids, etc.) and cannot stand the thought of another time-consuming venture, I would say active investing is unlikely to fulfill your fantasies.  This busy physician should focus on their financial goals, and if real estate is a potential part of their financial plan, then passive real estate investment opportunities or hiring a management company will be more digestible. 

I don’t think busy physicians should burden themselves with real estate unless they either carve out time for it or pursue it passively.  There are a plethora of physicians who transition to real estate (see The Darwinian Doctor, The Prudent Plastic Surgeon, Passive Income MD, and Semi-Retired MD), but these are largely individuals who have made their money, used this cashflow to increase their property ownership, while simultaneously decreasing their clinical burdens.  You can only build an effective real estate empire if you have the time and money to devote to it.  Most full-time doctors I know lack one or the other (at least early in their careers). 

When Should Doctors Begin Investing in Real Estate?

So, when should doctors begin investing in real estate?  I have created this long-winded post to end on a somewhat high note.  See, much like many of you reading this, I have not decided to pursue real estate investing yet, but now, more than ever, it feels like a good time to consider it. 

I am the ‘every physician.’  What I mean is that I have completed my training, I have a few years as an attending under my belt, and I have used this initial time and income to tackle the biggest goals.  My wife and I have paid off all our debts (that are not being actively reimbursed).  We have no credit card debt, no automobile debt, and our mortgage is affordable. 

Though we have a third child on the way (and I am scrabbling to factor that into our financial plan), it genuinely feels like a good time to consider real estate investing.  We have freed up discretionary income, live below our means, save for our children’s education, max out our retirements, and our emergency fund is full.  This is what I would recommend to doctors looking to explore real estate. 

Get your financial affairs in order, guard against disaster, have your emergency fund full, and eliminate your debts (unless you are pursuing PSLF). Then, you will feel financially emboldened by your intelligent choices to take some risk and explore potentially lucrative opportunities. 

Remember, real estate investments are not for everyone.  We each have our own story to tell, and the decision to complicate that more with real estate is not one to be made lightly.  However, for the right doctor, adding real estate to your arsenal of money-making tools is not a bad idea!  A real opportunity exists to accelerate your path toward financial freedom with it.  Think about it. 

Additional Resources

If you are interested in learning more about types of active or passive income investments, or wish to speak with vetted professionals, make sure to check out The Motivated M.D.’s Recommended Real Estate Investments page. Though you will find platforms I have an affiliate relationship with, I only recommend them because I have personally interacted with them and feel they genuinely offer investments worthy of your time. As always…

Stay motivated!

The Motivated M.D.

Standard Disclaimer: None of the information on this website is meant as individualized financial or medical advice.  These posts may contain affiliate links.