Physician Finances: Real Estate Investing for Physicians
By. Cameron Hamilton, CFP®, CPWA®, MBA
Partner, Director of Financial Planning
I have a few physicians in my family, and their experience lets me confidently declare that physicians are the top profession people like to approach with investment opportunities. They have higher than average earnings, intelligence, and debt. The first two make them good candidates to invest, and the third sometimes makes them desperate to seek out alpha, a way to out-earn the market.
Many real estate investors do beat the market over time in two ways, buying at the right price and controlling costs. Unfortunately, 90%+ of physicians are not equipped to accomplish these two goals. Buying at the right price often means buying at the right time in the market cycle, and that does not always match when the physician has excess funds to deploy. Controlling costs means limiting the outflow associated with property managers, handymen, and remodelers. In other words- putting in some sweat equity. If you think you can be in the minority of physicians to achieve these, I encourage you to follow @1happylandlord on Instagram for great tips and philosophy on long-term owner-management.
If I were a physician, I would be in the 90%. Yes, I can do minor home repairs, but I also prioritize my kids’ soccer games, among the dozen opportunities and obligations that land on my calendar. If you are more like me, here are three tips gleaned from working with physician real estate investors.
Bottle It Up
Real estate investment is best approached as a sidecar to your financial picture. It is okay to own properties that are not immediately cash flowing. You have the benefit of having excess cash flow that can backstop the long-term equity building process. But don’t over-extend yourself with volume and leverage to the extent that the real estate demands encroach on your family’s cash flow. It’s a tough situation when you have $20K set aside for a blow-out family vacation and two rental properties have HVAC systems kick the bucket.
Understand the Tax Benefits
In our experience, more than half of physician real estate investors are drawn initially to the tax benefits. Real estate is a business and affords opportunities to introduce business expenses. I wonder if the doctor I met using a Cybertruck to dump bushes from his rental property at the city compost pad is reading this article?! You can also depreciate the properties you own, but if you are passive investors, you cannot use losses to offset your physician wages. Finally, there are an army of Instagram “experts” waxing poetic about cost segregation studies and huge deductions; this typically is only a fit for commercial property well beyond the residential rental properties most physicians own.
Have a Long-Term Plan
The nature of the real estate tax code leads every investor to the same destination: owning appreciated, paid-off property that has been fully depreciated. For most physicians, this means selling a property creates 20% Fed capital gains tax and 25% Fed depreciation recapture, creating a huge disincentive to ever exit the real estate investment ecosystem.
There are two good ways to avoid this tax hit: die and leave the properties to your kids with a stepped-up basis, or 1031 exchange into something more passive. Before you start in the real estate game, it’s good to consider these long-term outcomes and make sure one is a good fit for your family.
Overall, our advice on real estate investing is the same as most other components of a financial plan, pieces like retirement plan, insurance, estate/trust planning- know what you own and make a good decision that fits your family. If you need help with that thought process, we always welcome inquiries at info@ballastplan.com.
About Ballast
Ballast, an employee-owned financial planning and investment management firm based in Lexington, KY, specializes in providing tailored services to high-income earners, high-net-worth clients, and individuals/businesses with complex financial situations. Our team of fiduciaries proactively anticipates and solves your needs by taking the time to understand your goals, passions, and what truly matters to you and your legacy. Ballast is built for financial security, by financial experts. You work hard every day. Let us take on some of the work for you.
Disclosure
Ballast, Inc. is a registered investment adviser with the SEC. Registration with the SEC does not indicate that the adviser has achieved a particular level of skill or ability, nor is it an endorsement by the SEC. All investment strategies have the potential for profit and loss. Ballast, Inc. is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Any specific strategy or market/economic commentary may or may not be appropriate for your individual situation, may not have discussed all material implications of implementing said strategy, and may be reliant on data provided by outside resources. Prior to implementing any strategy or investment decision discussed in a Ballast commentary, please consult with the appropriate professionals to confirm thoroughness of the strategy presented and the appropriateness of said strategy for your individual situation.