Real Estate Investing for Doctors

Discover real estate investing for doctors and specifically how a busy physician from Arizona purchased a 20 unit multifamily property with almost $800,000 in upside using creative financing.

Why Doctors Make Great Real Estate Investors

High Stable Income: Most doctors have high, stable income that it isn’t subject to macroeconomics. Typically, the best time to buy real estate is during economic downturns but most high income earners are not making as much money during those market cycles. However, physicians thrive even during tough times so they can take advantage of the best deals at the perfect times. Lenders recognize the income consistency of medical professionals and offers them more favorable financing terms. And property sellers perceive doctors as reliable and trustworthy so negotiating creative financing terms is much easier.

Self Disciplined: Earning a medical doctorate degree and becoming a skilled doctor requires incredible self-discipline and dedication to complete the years of required education and training. This same determination and discipline is extremely helpful in becoming a successful real estate investor.

Ability to Plan and Monitor: Doctors plan and monitor their patient health and this habit is very effective with real estate investing as well.

Best Way for Doctors to Invest in Real Estate

What is the best way for doctors to invest in real estate?

2 Major Drawbacks of Passive Investing

Doctors work, on average, 54.2 hours per week, and some work as much as 100 hours some weeks! With such an incredibly busy schedule, leading medical professionals are often attracted to passive real estate investing (either by buying Real Estate Investment Trusts (REITs) or funding other real estate investor’s deals) because of the lack of time commitment. While passive investing requires very little time, it has two major drawbacks that can undermine the very purpose of investing.
1. Low Returns: The biggest problem with passive investing is low returns. Why would low returns be such an issue? Inflation! Inflation over the past few years has eroded the vast majority of gains made from low return passive investments. And while the media would have us believe that inflation is dropping, the reality is that inflation will always persist because it’s fundamental to our monetary system. Generating low returns is not a viable option in today’s high inflation world.
2. No Control: Another major issue with passive investing is not having any control over the performance or direction of the investment. Even if you know how to improve the investment, there is nothing you can really do about it because you have no authority to make any changes. As a passive investor, you are putting all of your trust in someone else’s choices to improve your financial life, which is always much riskier than maintaining control over your money.

3 Strengths of Active Investing

1. Monthly Income/Equity Growth: This is why I prefer active real estate investing, especially for doctors. As an active investor you purchase the real estate yourself which gives you control over the management and the performance of your asset. And with commercial real estate, not only do you benefit from the monthly cash flow, but as you increase your NOI, you force the appreciation and build equity.

2. Tax Benefits: Equity growth isn’t the only benefit of active investing in commercial real estate. It also provides huge tax benefits to you as a high-income earning doctor. And as you build your real estate portfolio, if your spouse doesn’t work, they can become the real estate professional. Once they are classified as a real estate professional, your tax write-offs are unlimited and they go directly toward your income. All these benefits of active investing in commercial real estate will set you up to retire with a stable income, more freedom in your schedule, a family legacy that can be passed down, or even allow you to transition to multifamily investing full-time. To learn more about the amazing tax benefits of commercial real estate investing, watch my video How to Reduce Taxes with Commercial Real Estate.

With that kind of work schedule how can they find the time to actively invest in real estate? As you will see below, overcoming this obstacle is not as difficult as it may seem.

3. Knowledge
Doctors focus on specialized knowledge in their field. In the same way, commercial real estate investing requires specific skills and knowledge. There are the five key elements of a commercial deal that doctors need to know to become successful real estate investors:

• Knowing how to analyze and evaluate property
• Conducting the physical, legal, and financial due diligence
• Structuring the financing (creative or conventional)
• Managing property management
• Bookkeeping

How do you overcome the obstacles of time and knowledge? The answer is found in an interview with one of our Protégé Students, Dr Elena. She just closed on her first multifamily deal, a 20-unit apartment with $800,000 in upside potential!

Meet Dr. Elena

Dr. Elena is an optometrist in Arizona. And because Elena owns and operates her own practice, if she doesn’t work, she doesn’t get paid. This has led her to look for ways to have an income when she’s not seeing patients. After considering other investment options like stocks, cryptocurrency, and single family investing, she realized they couldn’t provide her the level of profitability she was looking for. This lead her to multifamily real estate investing because it is the most stable, profitable, and in demand investment asset. And even though she lives in Arizona, she decided to start investing in the New Mexico, the first state she lived in when she immigrated to America.

Property Details

20-Unit Apartment Complex

Purchase Price: $1,295,000

Dr. Elena’s active investing began when she found the property off-market using the proprietary methods we teach in our Protege Program. Working directly with the seller, she was able to immediately discover the seller’s motivation. He told her upfront that he preferred to carry the loan so he could continue to benefit from the passive income without the responsibilities as owner. This was great for Elena because it allowed her to negotiate reasonable lending terms. The current high interest rate of a conventional loan would have killed the deal because the debt service would have eliminated the cash flow.

Lending Terms

• 5 Year Seller Carry First Mortgage (the seller is the bank)
• 10% down payment (she ended up getting credits for some of the repairs on the property, so she actually put down 8.5%)
• 6% interest only for the first 2 years and then 6.5% interest only for the remaining 3 years
• She must exit and pay him off at the end of year five

Because Elena had learned how to structure a deal with seller financing through our mentorship, she was able to negotiate amazing terms. Banks require at least 25% down and a 7-8% interest rate, so negotiating a 10% down payment and 6% interest rate is incredible! When you have a willing seller and a willing buyer, incredible things can happen.

5 Year Value-Add Plan

Dr. Elena has a very disciplined, structured value-add plan for the next five years. Some of the rents were extremely low because the tenants had been there for over 10 years, and they were the seller’s friends. In the next 2-years, she plans to raise the rents and increase the cash flow by $2000/month. The property doesn’t require a lot of work because the seller renovated the interior of the units. However, the exterior of the building needs upgrading to give it curb appeal and reflect the higher rents.

Ratio Utility Billing System (RUBS): Elena will use this powerful value-add strategy to help manage expenses and increase cash flow. A portion of the building only has one meter, so to begin billing the tenants for utility costs she needs to put gas and electrical meters in for those units.

Value Increase

After implementing these value-add strategies and increasing the Net Operating Income (NOI), we anticipate the property will be worth $1.9 million.

Exit Strategy

At year 5 if interest rates are still high, the seller is open to continue carrying the loan. And because the economy is unpredictable, we have mapped out three possible exit strategies for this deal.

Refinance into a Long-term Loan: By the end of year five, Dr. Filatova plans to refinance into a long-term loan, pay off the seller and then hold the property long-term. This is her preferred exit strategy and with an After Repair Value (ARV) of $1.9 million she will be in a good position.

Cash Out Refinance: Another option she has is to refinance, pull some of the cash out to purchase another property, and then refinance into a long-term loan. If the property appraises for $1.9 million by the end of year five, the bank will lend her 75% of the value, which is $1.425 million. Out of that LTV loan, Elena must pay off the seller the $1.165,500 that she owes him. After paying off the seller, her cash out proceeds will be $259,000 and she can use this money to purchase another investment property. So, she’s pulling out double of what she put in ($129,000 down payment) and then holding on to the property.

1031 Exchange: Elena can also sell the property and buy a more expensive multifamily or medical office building using a 1031 Exchange. If she was to sell the property for $1.9 million and she owes $1.165 million, her proceeds at closing are $734,000 (not including closing costs and commission). She can take her $734,000 and use it as a down payment for a $2.93 million property and do a 1031 exchange whereby she defers capital gains taxes and further builds her portfolio.

How Dr. Filatova Overcame the Obstacles

Finding The Time And Learning The Business: Many doctors invest in real estate, but they often shy away from active investing in commercial real estate because they think they don’t have the time to learn the business and manage the asset. When Dr. Filatova decided to actively invest in multifamily real estate, she knew she needed help to be successful. She doesn’t have time to waste learning all the lessons of commercial real estate the hard way.

With a mentor guiding her through the process, she is gaining all the knowledge and skills needed to structure a commercial deal. And because she is disciplined and excellent at planning, she was able to use these strengths to overcome any obstacles. Elena is learning the business and finding the time. And even though owning her own practice gives her some flexibility, she is discovering that by active and smart investing in multifamily commercial real estate, as her income grows she is gaining more control of her time.

Asset Management: Since Dr Elena is busy running her practice and she is investing long distance, she has hired a local property management company to deal with the day-to-day operations of her multifamily property. Even with her busy schedule, she is communicating closely with the property management company, and coordinating with the property manager to ensure everything is accomplished according to plan.

Every Successful Multifamily Real Estate Investor Has a Mentor

Dr. Elena closed on her first multifamily real estate deal on the eve of the 15^th anniversary of immigrating to America. She arrived with very little but with determination and hard work, she has a successful medical practice and cash flowing commercial real estate. If she can do it, you can do it too! If you are inspired by Elena’s story, apply to our Protege Program here: https://www.commercialpropertyadvisors.com/protege-program/