The Executive Suite: Passive real estate investing is ideal for physicians

How can a successful physician with countless demands from patients, employees, physician groups, etc. create a work-life balance? How can you create the financial independence, wealth and prosperity without dedicating 15-hours a day, working multiple jobs, and offering additional products, services and treatments?

Based on my 20+ years of neurosurgery experience, when combined with my 30+ years of real estate experience, I prescribe passive real estate investments to my fellow physicians to achieve financial independence, wealth and prosperity.

Building wealth through real estate

Every investor has one goal: wealth creation! If that’s what you want too, real estate is your best bet.

The overall process is quite simple. If you acquire a rental property by putting up a small amount of money as your down payment, and the bank puts up the rest, then the rental income from the property should provide net cash flow that pays for all related expenses. You become the rightful owner of a valuable piece of real estate whose value appreciates significantly over time, yet the senior debt will have been reduced because of your principal payments.

This concept is so straightforward that we can summarize it into a simple formula:

principal reduction + property value appreciation = long-term wealth creation

Here’s something else you have to keep in mind: Each year, rental rates tend to go up by approximately 2 to 3 percent, depending on inflation, supply and demand, etc. So, your property’s value is likely to increase each year because of the expanding net cash flow.

Now, the exciting thing is that by year five, you will typically find that your equity has more than doubled (equity is the difference between the property’s value and the mortgage balance you owe the banks).

If you’re wondering why the value of your investment will increase that fast, it is because while your property’s value will likely rise, the balance on your mortgage will be reduced because the rental income you are receiving covers everything including the interest and principal on the mortgage.

Another attractive benefit to real estate investing is that it can provide an ever-rising passive income. In other words, hire the professionals to provide property management, collect rent, pay bills, etc. This form of income is attractive because it doesn’t keep you from practicing medicine. The money keeps rolling in, even if you’re sleeping. This is not to be confused with what my father told me as a kid, “Never invest in anything that eats while you sleep!” Therefore, investing in racehorses, llamas, and chinchilla farms is off limits!

Real estate is not subject to the vagaries, emotions, and political whims

As you probably already know, there are many ways of building a passive income source. Some people invest in the stock market, US Treasuries, automated businesses, while others lease or license intellectual property, and still others create online businesses. These are all great strategies.

However, as a medical practitioner who is probably very busy helping people, it is vital that you choose investment options that don’t demand too much active participation. In my experience, there are very few available passive income opportunities that allow your income to increase over time the way real estate does. Rents generally go up to keep pace with inflation, and in particularly bullish economic times or because of other macro-economic and supply-and-demand factors, rental income can even double in a short time.

I don’t invest in cars, antiques, art, or collectibles as that is merely a hobby and does not bring me a sense of happiness. Yes, I do have investments in stocks, commodities, and bonds, but for the little guy like me, I feel like I am always playing at a disadvantage. Larger investors with wealth managers and investment bankers have access to far more information and investment opportunities that are not available to regular investors. As an equity investor, you must be smart, well diversified, and strategic.

The pros and cons of real estate investing

Like most other investment opportunities, real estate investing has some risk—life itself is risky. The primary risk attached to real estate investing is that there are no guarantees. Besides this main risk, what other risks are there, and how can you safeguard your investment against value decline?

General market risk are factors like the rise and fall of the general economy, fluctuating interest rates, recessions in correlated markets, natural disasters, and other market risks that are all outside your control. The only way to guard against total annihilation by such risks is to hedge your bets by diversifing your portfolio holdings. Do not put all your investment eggs in one real estate basket.

Asset level risk has more to do with the sensitivity of consumer demand associated with a certain property type. The demand for hospitality, retail, and office space has been adversely affected due to COVID-19. However, properties that have stable demand all year have little risk. For instance, multifamily residential properties are usually in demand, even during bad economic times, making their risk significantly lower.

Liquidity risk is another form of risk peculiar to real estate. Finding buyers is not always easy, especially during market downturns, and most often it takes experienced brokers and real estate agents to find willing buyers during such times. So, any investment in real estate should have a longer-term investment horizon.

When you borrow money from a bank to finance the purchase of real estate, you are leveraging. Virtually everyone in real estate operates with leverage. As you invest, you should watch out for the leverage you take on. A lot of leverage can magnify your returns, but it can also be risky. If you allow yourself to go in over your head with debt, you risk losing your initial investment and getting into an unending cycle of debt.

Remember, you do not have to keep working hard, paying huge taxes, and letting what you have left sitting in the bank doing nothing. That is a risky way of operating that could set you back financially in a few decades to come. It is a lot safer to park your money in real estate, an asset I became familiar with when I was a 15-year-old boy, where it will allow you to build wealth and retire rich.

If you diligently apply this knowledge, you could one day retire with a seven or eight-figure net worth, or perhaps more. Who in the world would not want a luxury like that?