Is it the right time for you to invest in real estate?
For about a year, I have been keeping an eye on the local real estate market. Good old Portland, the prices are going up, up and up. Of the many different real estate investment strategies, residential rental income makes the most sense to me. Currently, 2017, the entry point into this niche investment is a bit constricted.
In this post, I want to talk about when in a physician’s career it makes sense to invest in real estate. Risk tolerance and specific net-worth-desire factors in greatly but we can discuss a few specific points.
Choosing your investment strategy
When it comes to real estate, there are an incredible number of investment strategies which you could adopt. The likelihood of choosing one over the other probably will have to do with what you are familiar with and what makes the most sense to you.
The ones I have researched were:
- industrial commercial real estate
- retail real estate
- residential rental income
- house flipping
- short term rentals
- small apartment complex
I won’t get into the details of each of these, it’s something for another post. Hopefully, over the next few years, I’ll dabble in enough real estate to get the hang for what suits me best.
Industrial spaces can be really nice because they are completely hands-off. I rented one for my auto mechanic shop and every last fucking thing is on the tenant – which is great, I never had to worry about the owner coming and inspecting the space.
Residential rental income makes a lot of sense to me. I am young enough that I could essentially borrow $500k to buy a house and have a tenant pay it off for me in the next 20-30 years.
Flipping isn’t my style. I don’t care to work with a construction crew and oversee a renovation and I have zero desire to make 1,001 runs to Home Depot. I have a personal problem as well with the quality of flips that I am seeing – it’s not in line with my values.
Choose what makes sense To You
Just like paper assets or a business venture, it’s got to make sense to you! If you can’t sleep well at night wondering whether this venture is the right one for you then you will doubt yourself into failure.
It’s like dating, yea maybe I should have gotten a clue that her recent DUI, the pot addiction, and the shroom/molly intake wasn’t in line with my criteria for a good partner – live and learn people, live… and learn!
We’ve all been renters, it’s not hard to figure out the residential rental angle. We weren’t willing to rent in an unsafe neighborhood and we weren’t willing to rent a unit which had noisy neighbors.
We would have paid more for a unit with a nice view, one with a washer/dryer and a parking space.
My old CPA started buying single-family rental income properties. Then moved to buying small apartment complexes. He then decided to develop his own property by buying land and having a 4-unit apartment complex built on it. A gradual transition like his would make more sense than diving right into property development.
What financial stage are you in?
2 factors seem to keep coming up when it comes to advising would-be real estate investors. First, what’s your risk tolerance and second, what stage in your wealth building are you in?
Zero or negative net worth
This is the status of most residents. With a couple thousand worth of student loans, it’s hard to impress a bank to want to lend you money for such an investment opportunity.
Also, your time and money are best spent paying down your student loans and saving up a cash cushion.
Learning to budget effectively in order to pay down debt and create a savings is a huge precursor to entrepreneurial success.
$200k-500k Net worth
In this stage, you have likely paid off the majority of your student loans and have proven to yourself that you know how to save and invest effectively.
This might be a good time to consider investing in your first real estate investment using the smallest down payment possible.
However, this is far too little of a net worth for you to go buying multiple units and being heavily extended in mortgage debt, putting your household’s net worth at risk should the economy tank.
There is an interesting shift in the mentality of a physician who has reached a net worth of $500k. Often at this level, there is still some personal home mortgage but nothing financial seems out of reach.
$750k-$1million Net Worth
The reason I am using these numbers of around $1 million is because the math of a 3-6% ROI, as we see with securities investments, would allow this sum to grow quite rapidly – avalanching towards an ever-growing net worth.
“The first million is the hardest, after that it just keeps growing!”
With this investment floor, you would have the luxury of taking a little more risk and either extending yourself more with rental income properties or putting down a couple hundred thousand dollars to buy a property outright.
I know this part is common sense but it warrants a few words. It doesn’t make sense to me to start looking for any kind of real estate investment if you just moved to a new area, if you are about to move, if you are going through a divorce, if you have young kids in the house which demand your attention, or if you have a job which you aren’t really fond of.
Investing in real estate requires time for you to manage the property or at least take the time to learn everything the property management company knows so that you can make the right decisions.
By no means is real estate passive. Feel free to chime in if your personal experience has proven otherwise but there is a lot of upfront work needed to make any real estate investment hands-off or at least less time intensive.
If your household is matching any of the criteria above, I think it would be better to save your money on the side and deploy it into real estate when the dust settles.
Finding a mentor
I am a huge fan of finding a mentor to see you through a new venture. I can’t tell you how many times my life has been simplified because I was fortunate enough to fall with the right mentor.
If you can find someone who is already successfully running a real estate empire then you will propel your learning and drastically reduce the number of mistakes, save a ton of money and frustration.
You might think that someone with experience would have no incentive to help you out, to take you under their wing. Wrong. I think humans, for the most part, are very giving and if they can find someone who genuinely wants to learn and isn’t a drain on their time then they will give back.
What’s the worst that could happen?
A little bit of well-placed pessimism – or let’s call it caution – can help you decide whether you are in the right time/place for you to dive into real estate.
What if you got sued by a tenant? Getting sued isn’t a big deal but it requires time and it may tax your savings.
What if your building burnt down or sustained major damage? In this wonderful scenario, one of your tenants bubbled the hydrogen chloride gas through the meth precursor mixture way too quickly and instead of creating crystal meth they blew up your fucking building, bummer! Can you handle the headache of dealing with cops and insurance companies and sit on the sidelines with no rental income?
Extended unoccupancy. This can happen if the economy takes a dive. You might either have a tough time finding a tenant or the amount a renter is willing to pay would be absurdly low.
Evicting a tenant. My buddy’s dad had to deal with this in a house he owned in Cali. It’s not like the good old days when you could just send your cousins over with a bat and a chain to review the rental agreement with the renters…. no, now it’s all about “laws” and “civil behavior”… geez.