Why Doctors Dream Of Investing In Real Estate – The Facts Of Real Estate Investing
Real estate investing is a popular investment choice for those with high incomes. Dentists, doctors and lawyers tend to be drawn to this form of extra income. It is viewed as a low-effort method of generating more income or maybe even building a self-running empire in the future.
I am trying to choose my words carefully. Real estate investing is a really broad category. Many are familiar with buying a rental property like a single family home and renting it out. Others are more familiar with commercial real estate. But there are all sorts of little niche real estate investment options and in that category you will find REITs, home flipping and mortgage lending.
Docs like real estate investments because it makes sense to them and because they can afford to feed money into it as they are building their real estate portfolio. You buy a home either with money down or with cash and then you rent it out. You hold onto it until it’s paid off and then either keep it as an investment and generate rental income from it or turn around and sell it for a profit.
Some docs are confused about their own private residence and so view it as an investment. If you bought a house that you live in it’s really not correct to think of it as an ‘investment’, it is a consumable item. You are consuming the rent of that real estate. Sure you can think of paying rent to yourself but you are also paying to fix things in the property, you are paying for taxes and property insurance.
If Dr. Mo bought a house for $500,000 and in 10 years sold it for $680,000 did he profit from that sale? The simple math says he could have profited nearly $180k. But there is a lot more to it. If inflation struts along at 3% every year then the same house should cost $674k in 10 years…. which means the value of it only increased by only $6,000 in 10 years.
When owning a home you spend money on property taxes and property insurance. You spend money fixing things and you spend money furnishing it. Even if you keep some of your furniture it’s sensible to consider their depreciation.
When you sell you also are paying for realtor fees and there are tons of other fees that you are stuck with when selling real estate in America. On top of this one has to consider taxes as well. Profits on a real estate transaction are subject to taxation.
Could you profit if you sold the house for $700k? Nope. $750k? Possibly. That might be the break-even point after accounting for all the items mentioned above.
Real estate investing is profitable in as much as a side gig or picking up extra shifts is profitable. What I mean by this is that real estate investing takes time, effort and expertise. All of this you can acquire over some time but it’s not inherent in us. You will need to make mistakes along the way and you will have competition.
Those who are making a profit and investing successfully in real estate may be on cruise control when you meet them. But they had their headaches, their failures and their days of frustration. Making money in real estate isn’t like putting money in a CD or index fund. It requires active management and oversight either by yourself or a property manager.
Then again, investing in boring index funds will net you 3-4% of profits a year averaged out over a long period of time. While those who invest in rental properties report rates of return in the 8-10%. More successful real estate investors claim numbers closer to 20%.
Real estate investing is not a passive income, it is more like a part-time job. So you have to take into account the time you put into such a venture. If you can make $60 per hour after tax by working extra shifts in the urgent care then you could make $3,600 extra per month of net income by putting in 2 hours per day. And 2 hours per day is what you are likely to put in on average into starting your real estate business.
The difference is that once your real estate business is on cruise control it will require a lot less effort and a lot less time. How long does it take for you to automate things and be in cruise mode? From what I have researched anywhere from 2-5 years. It will be faster if you take advantage of all the research that’s out there. However, your employment income will still be the same approximate ratio of hours to dollars.
One of the highest regarded books on the topic free of any commercial bias is from John T Reed. He sells the book directly from his website, definitely worth the $30. “How To Get Started In Real Estate Investment”
If you are more the seminar type I highly recommend those put on by John Schaub. He has a great reputation in the industry, he isn’t going to try to sell you on get-rich-quick schemes and he has a ton of personal success in the industry that is lecturing you on.
Do you have any interest in real estate investing?
How much time and effort are you willing to put into it and what returns do you expect?