One of the favorite side gigs discussed by doctors in our online physician communities is real estate investing. There’s are several great reasons why physicians invest in real estate, as it is able to cover a lot of the reasons why physicians want side gigs, including cashflow, tax benefits, and the potential for large returns. Although investing in syndications, short-term rentals, and mid-term rentals has become quite popular over the last few years, the most popular type of real estate investing for most doctors is actually ownership of rental properties that are rented out as long term rental properties.
In this strategy, a property is bought with the intention of holding the property for many years and renting it out to tenants. This is the classic buy and hold philosophy, and comes with many benefits, which we will discuss below. We’ll also discuss how to get started investing in long term rentals as a doctor.
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Learn more about active real estate investing throughout our website
A lot of physicians stay away from rental properties because of the perceived time commitment. This course is taught by a general surgeon who actively managed 64 units while he was working full time and had a family, and who was able to achieve financial freedom through real estate. He walks you through his methods in four weeks titled Emergencies and Maintenance, Turnover, New Tenants and Money, and Evictions, Taxes, and Accounting. He also gives you access to all of his spreadsheets and forms for your personal modification and use. The course is significantly cheaper than most real estate courses and there is a satisfaction guarantee. Incorporating a few of these tips will save you far more than the cost of the course.
BiggerPockets offers several boot camps which, though not specifically tailored to physicians, have excellent content and resources associated with them. Some of these are offered year round whereas others have special enrollment periods. Through our affiliate link, you can take 20% off of a Pro Membership with our discount code SIDEGIGS, which will give you access to better pricing on the courses as well! You can also use this to find local investor agents who can help you find your first property.
What Classifies as a Long Term Rental?
The IRS classifies long-term rental properties as properties that are rented out for an average of over 7 days, but more classically, we think of long-term rentals as properties that are rented out for a much more significant amount of time, such as one year.
What Are the Benefits of Having Long Term Rentals as a Physician?
There are several benefits to investing in long-term rentals. They include:
Cashflow from the Monthly Rental Income
Hopefully, provided that you buy a property that is cash flowing, the properties you own provide a net positive cashflow that you can use as income to help support your monthly expenses. We have many physicians on the communities that actually own enough rental properties that generate enough income that they no longer need to work, although one of the benefits of this financial independence is that you can then decide to work on your own terms.
Building Equity in a Property Through Leverage and Someone Else’s Payments
Assuming that you can afford the down payment, this strategy usually assumes that the rent from the tenant can cover the monthly mortgage expense, therefore paying down the mortgage and allowing you to own a greater percentage of the property every month without putting down additional dollars of your own. This is a way of leveraging debt, where you take on a mortgage but make a disproportionate return for each of your dollars invested compared to owning a property outright. You usually have to put down about 25% on a rental property, so you can see how you could buy 4 similar properties instead of buying 1 property in cash, and leverage your tenant’s mortgage payments to eventually own 4 properties outright for the same amount of invested capital.
The Potential for Significant Appreciation of the Real Estate Itself
Historically, most properties increase in value over time, although of course this will depend on the market and the property itself. But many real estate investors find that in addition to the other benefits discussed above, they end up being able to sell their properties at a profit later, which allow them to make a whole new layer of profit.
You can also do something called ‘forcing appreciation,’ which means that you can renovate the property yourself to increase its value. This could be things like renovating the property so that it would sell for more later or actually adding onto the property with additional square footage, or even adding revenue streams onto the property such as vending machines or laundry machines. Some examples include adding bathrooms or upgrading the current fixtures and materials to stainless steel so you can actually rent the property for more later. All of these things will increase the overall value of the property at the time of sale.
If you’re very lucky and buy a property in a “path of progress” you could see your property values double in a very short period time.
Relatively Low Maintenance Compared with Other Forms of Active Real Estate Investing
Compared with short-term rentals and mid-term rentals and other forms of active real estate investing such as flipping homes, the ability to be pretty hands off with a long-term rental exists as there is typically less of an active business of advertising and cleaning the properties. Since you don’t have tenants coming and going, your long-term tenants are more likely to treat the property as their own house and care for it better. It doesn’t have to be much more work than you spend maintaining your own personal home, and if you really want it to be hands off, you can use a property management company who both finds and screens tenants as well as deals with any issues that come up on the property - i.e. you won’t be the one getting the phone call in the middle of the night if a toilet is clogged or if the air conditioner stops working.
If you’re worried about what it means to have tenants and maintain your property, one of our members created a very reasonably priced course on having a long-term rental that includes things like forms and templates for leases, maintenance checklists, and more.
Tax Benefits and Deductions, Including Depreciation
There are very few outlets for saving money in taxes that rival real estate investing. The IRS allows you to “depreciate” your property over a set number of years, thus allowing you to actually claim paper losses against the property’s income, even if the property value is actually increasing. On top of this, the money paid towards the mortgage can be applied to the interest payments, which are tax deductible on an investment property. You can also take deductions from the business side of running these properties, whether that’s maintenance issues, paying for expenses related to marketing the property and maintaining the property, and otherwise. See our article on 1099 related tax deductions, many of which can be applied to your real estate investment.
If you really want to level up, there are also options to elect real estate professional status, which is a tax status that allows you to take “losses” (again, possibly only on paper) against your primary income as a physician. We’ll cover this more in a separate article, but it’s discussed in some detail on our article about investing in real estate.
Additionally, when you sell the property, you can 1031 exchange the property so that you don’t pay capital gains on the profits, and just roll them into your next investment property. You can do this indefinitely, and your heirs can actually inherit the property with a step up in basis, which means that your tax burden would essentially be erased.
Getting Started with a Long-Term Rental Property Investment
For some physicians, the transition to being a landlord is unintentional - they bought a property during training or had a starter home which they decide not to sell and rent instead, or they inherit a property from a family member. For others, the pathway to owning rental properties is much more deliberate and intentional. Here are the steps that need to be considered (the order can change!):
Deciding What Kind of Property You Want to Buy
You can own long-term rentals of many types - you could purchase a condo or apartment in a building (but make sure you check the bylaws to ensure you are allowed to rent), you could buy a single family home, a duplex, or even a large building with multiple housing units. Part of this will depend on your level of experience and the amount of working capital you have dedicated to buying this property. We recommend starting small and then working your way up to larger properties if you aren’t experienced, as it’s good to learn from any potential mistakes as you go instead of finding out that you jumped in head first on a property that wasn’t a good investment.
Deciding Where you Want to Buy a Property
As you’ve probably heard, real estate is location, location, location. Choosing a market is often the first big decision that people make, as the kind of property may be determined by finances and experience. Where to invest is a very personal decision. Some people prefer (especially when starting out) to buy a property that is close to where they live so that they can see the property and easily deal with maintenance issues as they likely know vendors such as plumbers and HVAC professionals in the area. They may also know the local market better and have more confidence that a property in a certain area will be easy to rent out (for example, if you know there’s an area where graduate students or residents and fellows tend to rent, you may want to buy there).However, as you become more experienced with real estate investing, you’ll often realize that your work is pretty similar regardless of whether you’re renting nearby or far away, and for this reason, you may choose to open up your choice of market. Physicians living in high cost of living areas may also start by investing remotely because of the barrier to entry with high prices in their area. Remember, a big part of the strategy of real estate investing is leveraging debt, so you want to put down the least amount of money for the highest cash on cash return that you can get on each dollar invested.
Even if you don’t know a particular market, that’s okay. This is where the real estate investor agent comes into play. Getting connected with an investor agent in the market you decide on is critical to finding properties. These agents are different than real estate agents that help you buy your primary home, as those properties are much more of an emotional purchase than an investment property, which should be based on the numbers. Investor agents will source potential properties for you as well as run numbers for you (which you should then corroborate on your own by running a cash on cash analysis). They can also help connect you with local vendors and property managers if you need them.
Things that you should consider when picking a good property include finding neighborhoods where people want to live, and with a tenant base that will pay their rent and otherwise be relatively low maintenance. Everyone’s definition of what this entails will be different, but some things to consider are whether the neighborhoods are in desirable school districts, whether they have good transportation options and amenities such as access to groceries and activities, and where there are high rates of employment.
Most physicians do not buy homes similar to the ones that they live in as investment properties. Remember that the more expensive the property, the more likely it is to have things that break that result in expensive repairs, higher property taxes, mortgages that aren’t as attractive in cash on cash calculators, and also the first to depreciate in value in a down market.
While you could choose to buy your property in cash, remember that one of the nice things about real estate investing is the ability to leverage debt to buy more properties and generate returns on more investments. However, in an environment where interest rates are high, many people may consider putting down more money in cash to make their cashflow calculators more attractive as cash flowing assets.
The other option is to use a mortgage, much like you would with your primary home. This offers you the ability to leverage debt to put down less money or to invest in more properties. The downside, of course, is that your mortgage is a monthly liability that needs to be paid, so if your property isn’t cash flowing because of a necessary major repair or tenant vacancy, that money will need to come out of your pocket to make sure the bank is happy.
Being a Landlord
As we alluded to earlier, this can be as hands off or active as you want it to be. Obviously, the way to make the greatest money from the property is to do everything yourself, but we find that a lot of physicians are happy to sacrifice some income from the property in able to make this a relatively passive stream of income. This requires hiring a property management company, which for long-term rentals generally charges approximately 10% of the rent. Not only will they answer the phone calls from the tenants on acute issues, they can actually make all the arrangements for regular maintenance, find and screen new tenants, handle issues with the tenants, and handle payments, including dealing with tenants that are not paying their rent. They can also help you navigate the paperwork and state and local laws. You will require homeowner’s insurance and will likely want landlord insurance as well. Many physicians choose to require that their renters also have renters insurance. You can learn more about the day to day of being a landlord through The Doctor's Course to Automating Your Real Estate Investments by one of our members.
Hopefully, this gives you a good idea of how to get started! Feel free to ask questions on our online doctor communities if you have more questions - literally thousands of our members own real estate properties and many are so helpful with guidance based on their experiences!