A Viable Alternate Investment Class for Physicians?
By Dennis Bethel MD www.nesteggrx.com
I’ve worked as an Emergency Medicine Physician for over a decade now.
Most of that time, I’ve also been investing in real estate.
Real estate has been good to me and I’ve been asked to share my story with this ME-P
RESIDENTIAL REAL ESTATE
Not long after graduating from residency in 2002, I began investing in real estate. I watched my father-in-law make some money in residential real estate (1 – 4 units), read some books, and jumped in feet first. I purchased and rented out single family homes, a triplex, and multiple four-plexes (quads). What I didn’t realize at the time was that I made two critical errors.
My First Mistake
The first mistake was that I purchased residential real estate when I should have gone bigger and purchased commercial multifamily. I had limited resources and I thought bigger properties were out of my reach. At that time, I had not heard of fractional investing.
My Second Mistake
The second error, that is inherent to residential real estate, is that I became a landlord. At times I managed properties and at other times I employed a property manager and limited myself to managing the manager. Regardless, I was putting in a significant amount of time at my unintended second career as a landlord without the desired compensation.
Since there are no economies of scale with residential real estate the cash flow is small and unpredictable. I was on the long, hard path to financial freedom. The rents from my properties would someday replace my income as a physician, however, that wasn’t going to happen until I paid off the mortgages completely. Until then it was going to be too inconsistent and I would have to ride several market cycles including the very painful down-turns.
THE MOVE TO COMMERCIAL REAL ESTATE
Unfortunately, chronic understaffing in the ER coupled with increased regulation and the rigors of shift-work had begun to catch up to me. I was beginning to feel the effects of burnout. I began to question whether I could make it 30 years. I began to see earned-income as a trap in which you trade your valuable time for heavily-taxed income.
Then some devastating news, my wife tested positive for the BRCA (breast cancer) gene mutation. That was a game changer. I could no longer rest on my laurels, slowly burning out waiting for a comfortable retirement. The future was uncertain, and I needed to ensure our wealth. Come what may, I was determined that she would get the best health care money could buy.
I knew real estate was an incredible wealth building investment vehicle and my path to financial freedom. In fact, 90% of the Forbes 400 (wealthiest people in the US) either made or retain their wealth in real estate. While I was doing far better than my colleagues who invested in the stock market, I knew that I could do better.
My New Mission
I made it my mission to become an expert in real estate. I read even more books as well as attended numerous conferences and seminars. I invested heavily in my education, took advanced real estate investing classes, retained mentors, and developed networks. I also grew my experience, buying and selling more properties.
I learned that although real estate won’t make you rich overnight, it needn’t take 30 years either. I needed to transition out of residential real estate and go bigger into commercial multifamily. I ultimately landed on multifamily, because shelter is a basic need. People will give up their luxuries long before they give up the roof over their head. The difference is that I now look for properties that are between 80 – 250 units. These types of properties afford the investor true economies of scale that provide for predictable multisource income. I invest in these properties fractionally, pooling my money with other like-minded investors.
Real estate is the only investment I know of in which the investor makes his or her money in four different ways.
- Cash Flow (monthly, quarterly, or yearly distributions of net profits)
- Appreciation (increasing value of the property as net operating income increases)
- Tax Benefits (can result in little to no taxes on income and gains)
- Principal Pay Down (Increased equity as the loan gets paid down by the residents)
Multisource income is an incredible benefit of multifamily commercial real estate investing. In fact, in all of my commercial properties, I have been able to obtain double-digit returns year after year. Making money and compounding those gains is what investing is all about.
While all investments have risk, the safety profile of multifamily commercial real estate is impressive. Let’s compare it to business. We’ve all heard that 9 out of every 10 businesses fail. These failures are not just limited to small business. Every year, many big businesses fail as well. Names like Circuit City, Hostess, Borders, and Mervyns just to name a few. Many other, well known, national brands teeter on the brink of insolvency.
In contrast, the commercial multifamily properties I invest in meet current Fannie Mae underwriting standards. Nationally these properties have a paltry 1% – 2% foreclosure rate. That rate is even lower in the best markets. In the hands of a quality syndicator, in thriving markets, utilizing proven property management these properties are FAR safer than stocks for capital preservation, equity growth, and current income.
Additional safety measures include the use of non-recourse lending, the ability to insure against loss, and the use of sole purpose entity structures to eliminate any liability risk.
Switching from residential real estate to commercial has enabled me to provide for my family and has allowed me to work only part-time in the emergency department. A few years ago, I walked into the physician lounge and overheard a conversation between two colleagues. Both around 20 years my senior, were lamenting their inability to retire. They had each invested heavily in the stock market without any diversification into real estate. They bemoaned the fact that they had each worked 25 – 30 years in medicine and were nowhere close to retirement. They wondered how I could afford to work so many fewer shifts than them with two young boys to raise.
This interaction was eye-opening. I was grateful for the decisions I had made but saddened by the fate of my 60 year old colleagues. I’ve watched far too many of them push back retirement as the stock market and economic cycles ruined their plans.
I knew I could help. I have recently started an educational website intended to demystify the subject of real estate investing. My mission is to help physicians and other health care workers find financial freedom through real estate investing and education.
We also provide quality real estate investments for busy professionals looking to diversify a portion of their portfolio out of the stock market and into commercial multifamily real estate without having to become a landlord. We do this by helping like-minded professionals pool their resources together to buy quality multimillion dollar assets as fractional investors.
I invite you to visit my website at www.nesteggrx.com and explore the content to learn more about real estate and see if it might be right for you.
NOTE: This ME-P is NOT a personal or professional endorsement.
Physician’s Acquiring Real-Estate
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Filed under: Alternative Investments, Investing, Op-Editorials | Tagged: Alternative Investments, commercial real estate, Commercial Real Estate Education and Investing, Dennis Bethel MD | 5 Comments »