Doctors can invest in real estate in many ways, some of which you might already be doing. You may, for instance, invest in a vacation home, buy a home for a dependent, buy a permanent dwelling to develop an equity, or buy a rental property.
Owning rental property is likely the best choice out of these to provide recurrent income and develop wealth over time.
Benefits of real estate investment for physicians
Both passive and active investment strategies have advantages and disadvantages, as does real estate investing. Here are some advantages and disadvantages for doctors who invest in real estate.
Create passive income: The Internal Revenue Service (IRS) makes a distinction between earned W-2 income and passive real estate income.
Federal, state, FICA, FUTA, and SUTA withholdings are required from earned income. On the other hand, real estate-related passive income is typically not subject to withholding and is taxed according to a taxpayer’s tax bracket.
Interestingly, the income is still considered passive even if a doctor actively invests in real estate by visiting a rental property once or twice a year and meeting with the property manager.
Gain from appreciation: According to the Federal Reserve, the median sales price of homes sold in the United States has climbed by about 239% over the past 20 years. Assuming the home is well-maintained and that the 40-year trend of growing home values continues, a doctor could benefit from equity appreciation by purchasing and holding SFR property over the long term.
Deduct ownership expenses from rental income: You can write off the expenses associated with owning and managing a rental property. Most of the time, the tenant’s monthly rent payment will cover the mortgage and running costs, leaving money at the end of each period.
Property management and leasing fees, repairs and maintenance, pest control and landscaping, homeowner association (HOA) dues and landlord insurance, mortgage interest, and property taxes are typical operating expenses for rental properties.
Deductible business expenses: Generally, you can write off travel and other costs associated with a rental property. Examples of deductible business expenses include continuing education, reasonable travel, and hotel costs incurred while visiting a rental property once or twice a year, and fees for financial and legal preparation.
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Reduce taxable net income by using depreciation: Depreciation is a noncash deduction used to lower taxable net income. Residential investment property depreciates over a 27.5-year period. Depreciation expenses of $9,091 could be deducted annually from pretax net income if an SFR home had a cost basis of $250,000 (home purchase price + capitalized closing costs, less the land value).
Claim a pass-through deduction: Doctors may be able to deduct up to 20% of their net business income from their income taxes if they receive qualified business income (QBI) from a pass-through business, such as an S-corporation, limited liability company (LLC), or sole proprietorship for real estate. The pass-through deduction began to apply when the Tax Cuts and Jobs Act (TCJA) was implemented in 2018, and unless Congress extends the deduction, it will stop at the end of 2025.
Disadvantages of real estate investment for physicians
The stock market, like any other investment, has advantages and downsides that could exist. Before investing in real estate, keep the following in mind:
The down payment on a loan for an investment property is often 20% or more of the property’s purchase price, making real estate investing a capital-intensive endeavor. Consider closing fees, future capital expenditures like replacing a roof, and retaining up to six months’ worth of running bills and mortgage payments in a reserve account in addition to a sizeable down payment.
Even investing in real estate passively takes time and expertise: It takes an understanding of things like fair market rentals, landlord-tenant legislation, making repairs to maintain a home safe and habitable for a renter, and performing periodic inspections to own and manage a rental property. These are a few factors that influence the hiring of local, qualified property management by busy professionals.
Real estate is an illiquid investment that cannot be sold quickly or easily, which is why many investors want to buy and keep the rental property for an extended period of time. After an offer is accepted and there are more buyers than sellers, it can still take 30 days or more to finish escrow.
Liability risks: Landlords have the danger of being sued by a tenant, visitor, or contractor who gets hurt on the property, just like in the medical field, where a patient might sue a doctor. A real estate investor might reduce possible exposure by owning real estate in an LLC, getting landlord insurance, and, if landlord-tenant regulations let it, requiring tenants to get renters insurance.