Real estate has a reputation for being a profitable albeit complex investment if done correctly. Investing in real estate has historically been an attractive asset class for those willing to take on more risk within this market segment.
There are several real estate investment methods available where Physicians, Veterinarians and Residents can invest. Each has its own unique benefits and drawbacks. Let’s take a look at it.
1- Real Estate Mutual Funds and ETFs
There are hundreds of mutual funds and ETFs whose underlying holdings are real estate based. These funds may directly own Real Estate Investment Trusts (REITs) or companies that deal solely with real estate. They can provide a level of diversification and liquidity which supplies an investor with exposure to the real estate market without putting too much exposure in any one property or property manager.
2- REITs
Publicly-traded REITs are another option for those doctors who would prefer not to be involved in the purchase and upkeep of properties. The majority of REITs are Equity REITS where they own and operate income-producing real estate. Additionally, some REITs may offer higher dividend yields than some other investments. While they could present a diversification opportunity for a portfolio, they tend to be narrower in their focus than an index-based mutual fund.
As with mutual funds, there are no direct tax benefits from property depreciation. The restrictions regarding liquidity can also be more expensive from a fee-perspective to the owner than divesting a mutual fund. Another risk associated with REITs is that they are interest-rate-sensitive, which can result in higher volatility when interest rates change.
Publicly-traded REIT share prices can also fluctuate wildly based on regional, national and stock market influences and trends. REITs are a complex product and investors should research the appropriateness based on their individual circumstances prior to investing.
3- Private Equity
In addition to REIT’s, it’s possible to further diversify a real estate portfolio by investing in a private-equity real estate fund. There are multiple private-equity funds to choose from varying philosophies and degrees of risk. A conservative fund would typically involve lower risk equity investments in stable U.S. properties using relatively little leverage. A more aggressive fund would typically involve high risk equity investments in U.S. or international properties while using higher leverage.
Private-equity funds are traditionally only open to accredited investors and are not offered to the general public. They do not offer the liquidity and transparency of publicly-traded REITs. The fees and expenses incurred from private-equity real estate funds can be higher than one would normally expect with conventional investments such as mutual funds.
One challenge of the private equity real estate fund model is that investing strategy could be in response to capital flows rather than market conditions, with liquidating assets at predetermined fund termination dates for closed-end funds being a primary example. There are also scenarios where an asset could be sold to meet redemption demands in open-ended funds, which may result in less strategic decision making on acquisitions and divestitures. Be prepared to invest for at least 10 years before being able to realistically evaluate the success of the investment.
4- Direct Ownership
Any physician investor also has the option to independently secure a property in their own name by paying in cash or obtaining a loan to purchase the asset. Buying real estate within an LLC may also offer increased asset protection. This could be a rental home or a building occupied by the LLC.
Physician who prefer to have direct ownership and control of their assets might find this strategy advantageous. However, the increased autonomy comes with a cost. A large repair or vacancy could potentially erode monthly or even annual profits. The task of researching properties and the maintenance and upkeep once purchased can easily take up a greater amount of time than anticipated. Many physicians who go that route may erode their investment returns by outsourcing these responsibilities to a property manager.
To match the diversification offered by many REITs, an individual would need to own multiple properties. A drawback of this strategy is that a lot of cash will be tied up in assets that are illiquid. Another risk is the loss of money on the property or assuming full liability for any incident that occurs on the property past the limits of insurance coverage.
Risk is inherent with real estate, as with any investment. It may offer an opportunity to supplement and / or diversify income. Leveraging tax deductions and other asset protection strategies can increase the likelihood of having a steady income stream from real estate investments. As with any investment, carefully consider the associated risks and your own financial situation before investing
5- Tax Liens
We all have to pay taxes as a homeowner. Well, if you do not pay them, the government can place a lien on the property, which is a legal claim for the taxes owed on the property. If those taxes go unpaid, then whoever owns the lien will take the property. These tax liens often get auctioned off and savvy physician investors take ownership of these liens. It’s then possible to finally acquire the property at a tremendous discount.
Plus: The potential for huge gains.
Minus: Understanding the due diligence on how to invest wisely in tax liens takes a good amount of knowledge and experience.
6- Notes
Investing in notes is like being the bank and having the borrower pay you monthly interest and principal. I was surprised to find that all home loans are in the form of private notes. There’s a humongous market out there and there are people who specialize in buying non-performing notes, meaning that the borrower is late on payments. The owner of the note may be willing to dump it at a huge discount and give the opportunity to the buyer of the note to try to get the borrower to pay again or take ownership of the property.
Plus: For a performing note, it can be an easy check every month.
Minus: Again, this form of real estate investing can get quite complicated, particularly with non-performing notes, and I believe it is not for the faint of heart.
7- Hard Money Lending
This is very similar to holding a note where you act as the bank or lender and the borrower pays you back to a certain amount of interest every month. The distinction here is usually the term of the loan and the interest rate. It tends to be for a shorter term like 6 to 18 months and at a significantly higher interest rate, often 8-15%.
Who is borrowing in this case? A good deal of the time it’s fix and flippers who cannot get conventional lending but need the short-term cash to buy and try to turn to property around for a sale. This is typically what you see mentioned as “Debt” investing on real estate crowdfunding platforms.
Plus: Potential for significant, steady, passive returns.
Minus: May have a deal with foreclosures if borrower defaults.
8- Fix & Flip
This is what you see on HGTV all the time. You’ve seen those shows where a good-looking couple finds and buys a fixer-upper, renovates it, and sells it for a nice profit. They make it look so easy! While it can be a lucrative business, realize it’s not nearly as easy as they make it out to be. You’re definitely at the mercy of supply and demand and the state of the housing market by the time you’re finished with your project.
MaraiD Realty & Partners™ is changing the way doctors like you are investing in real estate by providing end-to-end investment services for them. Not only will we help you find properties that are in line with your financial goals, we will also provide property management and take care of all the steps in between.
If you have any question just contact Dr. Mary Rodriguez by phone 786-267-7222 or by email: DrMary@MaraidRealty.com. She and her Realtors Partners™ work every day helping busy physicians like you to invest in Real Estate.
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