Why physicians are attracted to real estate investments

The grass is always greener on the other side.  Humans are like that. For reasons that we can never consistently define, any situation other than the one that we are in has potential to be better.  I guess we just like to compare ourselves to others and assume that there is a better life over the horizon.  That doctors wish to get themselves in a better situation is nothing new. This mentality involving our own financial situation is painstakingly prevalent in the hospital, especially for those feeling the squeeze of healthcare’s devolution.

Everyone likes to hear about the next great investment, especially the one that brings in foolproof cash flow.  In the spirit of jesting our colleagues, conversations involving some amazing breakthrough are almost always initiated by anesthesia, both in the operating room and in the doctor’s lounge.  We love blaming anesthesia for everything, especially if there is any inkling that they had the foresight to pick a more lucrative and lifestyle friendly career than everyone else.

Many of these anecdotes involve real estate investments, whether involving secondary rental income, medical spas, pain centers, crowdfunded commercial properties, or even car dealerships. Frankly, it all sounds good.  You wire over a chunk of cash somewhere, and every quarter your bank account enjoys a nice infusion of positive numbers.

Real estate can be a great investment modality

If real estate investing weren’t lucrative, the ultra-rich barons who pay 8% effective income tax wouldn’t exist.  One of the advantages of property investments, in general, is that you can leverage some serious funds compared to your initial bankroll, sort of like buying Microsoft stock twenty years ago borrowing simultaneously from a loan shark and on margin.  With adequate insight, homework, and a little luck, one can piece together some decent returns and cash flow from real estate to keep your living expenses afloat. Passive Income, MD has done just that–he has the remarkable ability to leverage his interest and expertise in activities that generate income.

There is clearly a psychological appeal of owning a physical entity, whether it is a building or simply a parking lot.  For some people, having this entity generate cash flow produces a meaningful association that rings income.  If we are employed by a hospital, our income arrives as a paycheck at set intervals. We do the work during a time interval, and are compensated for our time.  There is a clear relationship between work and compensation.  Investments through the stock market, on the other hand, mostly generate potential income through appreciation.  There are certainly dividends that are distributed, but the bulk of growth comes through appreciation of the stock.  Unless you decide to sell the investment, all of your profits remain theoretical.  Not so with owning something physical.

If you own a medical office, you can collect rent from your tenants in addition to appreciation of the property. If structured properly, you can truly have an income stream that can replace your day job and allow you to receive the big payout when you do decide sell the property or leave it to your heirs.

Real estate can be a great way to lose a lot of money

Remember that just because there are doctors who have struck pay dirt in the real estate world doesn’t mean that you will.  The 280 score on your USMLE Step 1 only translates to a high level of clinical synthesis.  You still have to put in the time to succeed.  Sometimes success involves luck.  I have known physicians who extensively researched and purchased land intended to be divided up into residential subdivisions, only to find that urban development decided to expand in the opposite direction.  I have known physicians who haphazardly purchased run-down homes thirty years ago in the most undesirable neighborhoods in New York, contribute nothing to improve the properties, and still see the values more than double!

With the rising popularity of crowdfunding, we are now faced with opportunities to shine or to fall flat on our face.  The good news is that many of the crowdfunding companies have distilled the data down to concise presentations and prospectuses—review the projections, decide if that is worth it for you, and wire the money over and relax!

Different strokes for different folks

If you compare the rate of real estate appreciation to the stock market using the rule of 72, the real estate investment will never win. For instance, one would expect a stock market investment to double in nine years if the market grew by 8% a year. Good luck finding a home that will double in value in the same amount of time! The value in real estate in this situation is that you can leverage a bigger investment than what you can likely pay for outright in cash, generate income flow, and potentially have certain tax advantages. Don’t forget that there is plenty of homework to do throughout the entire process.

The next time your anesthesia team brags about their next great extracurricular financial venture, don’t discount their success. Chances are that they have actually done their homework. You just have to decide whether taking the leap into their ancillary ventures will work for you.

“Smart Money, MD” is an ophthalmologist who blogs at the self-titled site, Smart Money MD.

Image credit: Shutterstock.com

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