According to the Bureau of Labor Statistics, physicians in the U.S. earn an average of $229,300 per year. And while this is significantly higher than most people in other professions, a $229k salary alone won’t necessarily make you “rich.” If you want to build wealth on a physician’s salary, you’ll need to know where and how to invest.
One investment vehicle that many high-income earners use as a way to build wealth is real estate. Real estate investing can be a complicated business. Still, as long as you do your due diligence, you can turn even a single piece of property into a wealth-building investment. Resulting in financial freedom and increasing your net worth.
From tax benefits to earning passive income, here’s a glimpse into why doctors should consider real estate investing.
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There Are Many Ways to Invest in Real Estate
There are several ways to invest in real estate, and they don’t all require you to purchase apartment complexes and work as a part-time landlord. That is certainly one way to do it, but there are various other avenues that you can pursue, depending on how much money and time you’re looking to invest.
Invest in Your Primary Home
When most people talk about “investment properties,” they’re usually referring to properties or buildings they don’t live in themselves. But your first and foremost real estate investment should usually always be in your primary home.
Renting a property comes with the freedom to move when you choose and not have to pay for costly repairs when things go wrong. But the only people who build wealth from renters are landlords.
For young medical professionals just starting their careers, it can be tempting to rent until you decide when and where you want to settle down. But it’s always better to own your own home, pay your mortgage every month, and build equity.
Invest in a Second Home or Vacation Home
Is there a specific place you love to vacation on the weekends or travel to every summer?
If your first mortgage is winding down, or you can afford to take on a second mortgage payment, consider investing in a vacation home.
Depending on where you choose to buy, you may be able to rent your secondary home by the week or month. This way you earn passive income when you’re not using the property yourself.
Invest in a Property for an Adult Child
Do you have an adult child who’s considering purchasing a first home with little or no money down?
If an adult child is considering securing a mortgage with PMI, you may want to step in and buy a property for them.
Investing in a single-family home for an adult child is a great way to build your real estate portfolio. Without having to deal with tenants that you don’t know.
We’ve seen many physician-parents buy a home for their adult child — with a caveat: that the child will make the monthly mortgage payments and eventually own the home. However, some physician-parents maintain a landlord-tenant relationship with their child. In this case, upon the sale of the house, the equity in it becomes the parent’s profit.
Invest in a Rental Property
Apartment buildings don’t have to be large complexes that house dozens of individual tenants. Rental properties can be as small as a multifamily home that you rent to two or three individual tenants.
It will take some legwork to maintain a rental property. At the very least, you’ll need to hire a property manager and a maintenance crew.
But the more rents you can collect each month as payment toward the property’s price, the sooner you can pay the place off and sell it for a profit. A profit that you can then, in turn, put into another piece of real estate or another type of investment.
Related: The Pros and Cons of Paying Off Your Mortgage Early.
The Tax Benefits of Investing in Real Estate
As a high-income earner, physicians aren’t privy to many tax deductions. And that’s simply because you make too much in the eyes of the IRS. But owning real estate can help ease your tax burden in a few different ways.
Deduct Business Expenses
Just like business expenses for a home office or private practice, you can deduct business expenses on your rental properties and real estate investments.
The cost of maintenance fees, repairs, and the salaries you pay for property managers are all considered business expenses. All of which can reduce your overall tax burden to the IRS.
Take Advantage of the Pass-Through Deduction
You may also be able to reduce your tax liability by taking advantage of the pass-through deduction.
The pass-through deduction allows small business owners to deduct up to 20% of their business profits at tax time. To take this deduction, you must be a sole proprietor of the business. Landlords can be classified as small business owners if they collect rent.
Claim Professional Real Estate Status
Unfortunately, not all rental properties generate income. Between the high cost of a mortgage, lack of tenants, property taxes, insurance, and costly repairs, there may be years when you suffer a loss. (Particularly in the first few years of owning property.)
And if that happens, having one spouse claim “professional real estate status” can actually reduce your tax liability significantly.
In order to be eligible for professional real estate status, you have to show that you worked 750 hours throughout the year on your rental property. Or on multiple rental properties if you own more than one.
This includes the time spent collecting rent, showing units to new tenants, billing, orchestrating maintenance men or doing repairs, etc. If you are a physician with a spouse who doesn’t already have a full-time job, your spouse can handle these tasks and claim professional real estate status.
In this scenario, you can deduct the losses from your rental property from your physician’s salary if you’re married filing jointly. This can actually reduce your tax burden and even put you into a lower tax bracket.
The nature of the investment game is always to incur gains, not losses. But should losses occur, this is one way to ease the burden.
More info: 5 Ways for Doctors to Save on Taxes.
More Reasons to Invest in Real Estate
There’s no guarantee that any investment of any type will generate a net profit. But real estate isn’t like most other investments. There are a variety of reasons to consider putting some of your earnings into a real estate investment.
Appreciation
While there is always the chance of depreciation on a property, most properties appreciate in value over time. In the year 2000, the average U.S. home price was $126,000. In 2023, the average sales price was $487,000.
Earn Passive Income
Collecting rent from real estate investments is a great way to earn passive income. This means you don’t have to be actively involved in any day-to-day activities to earn that income.
Passive income, like all income, is taxable. But the more passive income you earn, the more you’ll have to put into other investments, such as stocks and bonds.
More Cash Flow
Collecting rents from a rental property is a great way to boost your personal finances and increase your cash flow. But we don’t recommend putting that money in the bank and watching it grow by a meager <1% percent as of 2023.
Unless you want to pay the dreaded inflation tax, the best option is to convert your collected rents into other investments. Such as stocks, bonds, or more real estate.
The Basics of Investing in Real Estate
The real estate market is always evolving. A good real estate agent will know the current market trends and provide insight into what properties may be of better value than others. But that’s not always the case.
Realtors make their living by earning a percentage of every property they sell. Whether you’re interested in buying residential real estate or commercial real estate, it’s in your best interest to know and understand the basic principles of how to make a real estate investment worthwhile.
Buy Low, Sell High
It goes without saying that the goal of a real estate purchase is to invest as little as possible and reap the greatest gains.
Real estate experts often say, “don’t buy the most expensive house on the block.” And that’s because if it’s an investment, you’ll want to leave yourself some room for growth in value in order to see those upward gains.
Look for a Turnkey Operation
As a physician, there’s a good chance you don’t have the time for home repairs, landscaping, painting, or gutting and remodeling kitchens. If that is a passion of yours and you want to get your hands dirty doing the labor, be sure not to bite off more than you can chew.
If your goal is to buy an investment property and immediately get tenants in to pay rent, look for a turnkey property. Something move-in-ready that doesn’t need much (or any) extra work. The bigger the property and the more rental units you intend to own, the more important this becomes.
Buy in a Desirable Location
Between gentrification, lifestyle changes, and climate preference changes, locations that weren’t historically desirable may be on their way to becoming more desirable — and vice versa.
There’s no crystal ball to indicate what zip codes and neighborhoods will increase in value. Yet, you can still make more informed decisions by knowing the historical data trends of how property values in your location have increased or decreased in recent years.
Keep in mind that what’s desirable to you may be undesirable to someone else. If you’re investing in a rental property that you don’t intend to live in yourself, being open-minded will afford you greater opportunities to buy low and sell high.
Learning all there is to know about real estate is, in itself, a full-time job. But there are many incredible resources available for new real estate investors, particularly physicians with already hectic schedules.
Real Estate Is Just One Way to Build Wealth
Real estate is just one of many ways to build wealth as a high-earning physician. But it cannot be your only focus. There are three other strategies that all physicians should adopt in order to protect and increase their income stream. Both now and in retirement.
Invest in Disability Insurance
Every physician should have disability insurance. Should you become injured or too ill to work, disability insurance will pay you a portion of your lost income. It’s the single best way to ensure that you will maintain a steady stream of revenue if you cannot work due to a medical disability.
Invest in the Stock Market
The average ten-year return on stock investments is 9.2%. And while these numbers can and do fluctuate from year to year, 9.2% on average is a healthy, reliable return rate over the long term. The more time you have to invest, the more critical it is to invest in the stock market.
So before you put all your cash into buying real estate, make sure you have an excellent financial planner on your side. Build and maintain a diversified portfolio. Include stocks, bonds, and commodities, and you’re likely to see approximately 10% in gains over ten years.
Invest in a Retirement Savings Account
When you sign a physician contract for employment with a new healthcare group or hospital, be sure to opt-in for contributions to a retirement savings account. Whether your employer offers a 401k, a 457 b, or some other retirement savings plan, contribute the maximum amount allowed by law every tax year.
Consider the benefits of maxing out your annual contribution limits before you start putting money into the stock market and real estate opportunities.
For more information on retirement savings accounts, see our Complete Guide to Physician Retirement Planning.
For physicians and high-income earners, real estate is a great way to invest your money and build wealth over time. If you’re ready to start planning for retirement, shopping for a disability insurance policy, or creating a tax plan, contact Physicians Thrive now.
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