Apartment Investing 101 for Doctors
By now, you probably know that I love to invest passively in real estate, but I also have a passion for sharing how to do it here with you each week.
Why? Well, why not? It seems that people continue holding onto their scarcity mindset after their education/training is completed. I know I did many years after graduating dental school followed by a surgery residency.
What are we taught in school? That there's only a limited number of spots in order to match, right? This means that it's all for one and one for all.
Back then, most of us were reluctant to share old tests or notes while studying or heaven forbid tutoring those that needed help.
It was all about "ourselves" to match those coveted, limited number of openings. But things have changed.
We now should realize that a scarcity mentality will NEVER allow us to enjoy real wealth.
Related article: Scarcity vs Abundance Mindset - Which Do You Have?
If you believe that there's only a certain amount of money available to make, then you'll never get to the next level.
For instance, if someone makes $200,000 a year and want to increase their income, then normally they'd set their goal too small such as, "I make $200K a year but would love to start making $250K at some point."
What about going from $200K to $2 million a year instead?
I can hear the excuses now, "$2 million dollars a year, are you crazy? I can NEVER make that kind of money!"
You're right. If you don't believe then you'll never allow your mind to open up to the possibilities that are around us each day.
Listen, I was the same way until I learned that our self-talk (instead of what other people say) is what keeps us from success.
I'm constantly trying to instill this with our boys. They CAN do whatever they set their mind to even though the public would say otherwise.
Now, if you want to continue working until you HAVE to physically stop then that's your prerogative.
As Bobby Brown once sang, "I don't need permission / Make my own decisions / That's my prerogative."
But if you want OPTIONS that allow you to keep working (only if you want to) after reaching financial independence in ten years or less then let's get into how to do just that.
7 Reasons Doctors Should Get Into Apartment Investing
Who doesn’t want an additional income stream, right?
More and more overworked doctors and high-income professionals are searching for ways to add extra passive income without taking a second job.
Cash flow is something that author Robert Kiyosaki talks about quite frequently in his books such as:
Cashflow in real estate is sometimes called CoC or cash-on-cash return.
It refers to the return on the capital that you’ve invested into a property.
Cash on cash return = net operating income (NOI)/total cash investment
NOI = annual rental income – operating expenses
Whenever someone is wanting to invest in apartment syndications, usually the cash flow is referred to the profits remaining after paying the operating expenses and debt service.
In other words, it’s what you’re going to have left in your pocket after all expenses and debt is paid each month.
In our passive multifamily investments, the cashflow comes in the form of either quarterly or monthly distributions (checks) whether I treat patients or not.
As you can see, this is a big factor into why so many doctors are getting into apartment investing.
#2 Amazing Tax Benefits
One of the most overlooked reasons why doctors should consider apartment investing has to do with all of the amazing tax benefits it provides.
Related article: Depreciation - The #1 Tax Break For Doctors
One of the most powerful wealth building tools the IRS gives us is something called Depreciation.
It's a reduction in the value of an asset with the passage of time, due in particular to wear and tear.
Even though commercial real estate usually appreciates in value, the IRS allows you to depreciate its value called a paper or phantom loss.
They allow you to subtract the losses against the income which will REDUCE your tax burden.
Appreciation is the increase in the value of an investment property over time. It’s an important variable which plays a key role in defining the profit from a property for a real estate investor.
Whenever someone is considering investing in apartment complexes, they should pay attention to what improvements are being performed in order to increase the future value.
Most of the apartment investing we've personally been involved in has been value-add properties. These are also what our Passive Investors Circle members typically invest in too.
Making improvements to property causes forced appreciation such as:
- parking lot repairs/replacements
- addition of new facilities (i.e. swimming pool, playground, etc.)
- addition of new services such as a laundry room, covered parking, internet, cable/satellite, etc.
By making these improvements, rents can be raised over the normal 5-7 year hold period before selling at a higher price.
Income producing real estate, especially apartments, increase in value either because you physically improve the property, increase the rents, or reduce the expenses (or all of the above).
#4 Lower Risk
When I first became interested in real estate investing, I naturally gravitated to the only type of investing I'd been exposed to, single family homes.
But the more I learned (especially from Grant Cardone), the more I realized the higher risk of investing in single family homes vs apartment investing.
With a multi-unit investment like an apartment building, there are multiple units that can be used to offset a loss in rents from vacancy.
If 15% of the units are vacant, 85% are still producing income which allows you to cover costs.
If you have to let your tenant go for damaging your single family home, then you're on the hook for the payments until you can get it repaired and rented again. No thanks.
More units = less risk
#5 Economy of Scale
My neighbor owns an occupational therapy clinic. We're constantly discussing real estate investing but he's an active investor whereas I'm not.
He currently owns 7 single family homes and one of the issues that he's facing is lack of scalability.
Typically property expenses relating to an apartment complex is much less than someone with a portfolio of single family homes because there are multiple units under one roof.
There's something called economy of scale which is the spreading of fixed costs over an increased number of units, such as in an apartment building.
Property taxes, insurance, and management fees are generally fixed and the cost to replace the roof of a single family home or an 8-unit small apartment building under one roof are relatively the same.
As the number of rental units increases, income is increased while reducing your cost, making it more cost-effective than multiple single-family rentals.
So my friend may have to replace several single family roofs vs only one if he'd owned an apartment complex.
#6 Favorable Returns
When I first became interested in real estate investing, my first stop was looking into purchasing a handful of single family homes. Now that I'm more educated about apartment investing, I've learned that investors will generate larger cash flow in multifamily compared to a single-family home.
Dave Ramsey says, "CASH is king" but I say that "CASHFLOW is king" and is the cornerstone of multifamily investing.
I've been investing in index funds since I began practicing in 2005. I've not been able to come close to the returns that I've gotten from apartment investing.
Where else can you double your money every 5-6 years?
#7 You Can Keep Your Day Job
One of the reasons we decided on focusing on apartment investing is that I didn't have to spend extra hours after work dealing with hassles landlords put up with.
We go through years of training and our time is better served focusing on what we know best, treating patients.
Passive apartment investing with a sponsor will allow you to continue focusing on your career while collecting quarterly distribution checks.
And if you invest passively with a sponsor, they will manage all aspects of operations while you simply collect the distributions. Whew!
Related Podcast: Tom Wheelwright (Robert Kiyosaki's CPA) and I discuss how high earning professionals can passively invest in real estate without becoming a landlord.
Ready To Start Investing In Cash Flowing Real Estate?
If you're ready to learn more about passive income create through my own personal experience and invest with the operators I personally invest with, join the Passive Investors Circle today.