I purchased my first rental property about 2 years after my fellowship training and since then I have purchased multiple other properties. Using rental property as a means to create passive income had been something that was always on my mind during medical school and residency. This post goes over how I came to buy rental properties and what I wish I had known before buying my first property. If you have ever thought of using rental properties as an investment, this post is for you! Also, at the end of the post I will show you the resources I wish I had back then.
Are Rental Properties Right for You?
I agree that rental properties are a great source of passive income with significant tax savings for high-income professionals. In addition, if done correctly they can allow you to spend more time on your personal life and with your loved ones by using that passive income to reduce your clinical time. However, that doesn’t necessarily mean everyone should have a rental property. Here are things you should think about BEFORE considering rental properties:
Does Real Estate Interest you?
Though rental properties can be a passive investment, you do you have to “actively” learn and research the in’s and out’s of how real estate taxes work. If you love looking for deals, learning about some basic tax laws and deductions, real estate investment could be the right fit for you. However, if you have no interest in learning about real estate and looking for “deals,” maybe rental properties aren’t the best investment choice.
Do Rental Properties Fit into Your Current Investment Portfolio?
Before investing in rental properties, you need to figure out what type of investment portfolio you plan to have. What percent do you want in real estate, stocks, bonds, cash,
Paying off Debt vs Buying Rental Property?
Personally, my wife and I paid off our student loans prior to investing in any rental properties. We were able to pay off all of our debt just one year out of training. This was a personal choice because we knew that paying down our debt was a sure-fire way to increase our net worth with no risk. Also, it put us into the habit of living below our means and having a significant savings rate. Once we paid off our debt, we did not increase our cost of living, but instead used the savings towards our first rental property. When you have minimal debt, it is much easier to get an investor’s loan because your debt to income ratio is much lower. However, if you have a very low interest rate on your loans or if you are relying on PSLF for loan forgiveness then paying off your loans first may not be the ideal situation for you.
Are You Willing to Invest in Rental Properties Out of State?
I live in California which I believe is a terrible state to invest in rental properties as a new investor. The rental rate versus the cost of the property is fairly low compared to other states such as Washington, Texas, and Florida. Also, the average cost of property in California is much higher than other states so there is a significantly higher cost of entry. The first properties I purchased were out of state single-family homes that ranged from $130,000 to $150,000 with monthly rents approximately $1400-$1700.
4 Ways Rental Properties Make you Money
Most novice real estate investors just think real estate investing is just how much you make off your tenants after mortgage is paid each month, i.e. cash flow. There are many other ways listed below on how Rental Properties can benefit you financially (especially as high-income professionals).
This is the simplest concept to understand. Over time, property generally appreciates in value. However, I would not rely on this as your primary way to make money off of rental properties because you have little control over the overall appreciation of the city or neighborhood.
There is another form of appreciation called “forced appreciation” where you buy a property for very cheap and then rehab it to “force” the appreciation and add value to the house.
This is another obvious concept where the tenant is paying down your mortgage each month.
One of the biggest advantages of rental properties are the tax savings you get, especially being in the highest tax brackets. These tax savings are in the form of depreciation where you deduct cost basis of your property over 27.5 years. Also, you have Schedule E deductions from rental properties as well where you deduct any travel costs, interest payments, insurance fees, repair fees, property managers, etc. Lastly, if you are able to qualify as a “real estate professional” you can further use these deductions to directly lower your taxable income!
I hear some people say that cash flow is not important with rental properties because of the of appreciation, tax savings and loan pay down that rentals offer. However, I think it is essential that you can find a property that has positive cash flow. You do not want to be putting in money each month to pay for the mortgage. Appreciation is more of icing on the cake vs a primary way to make money (unless it is forced appreciation). Furthermore, if there is a downturn in the real estate bubble, you can rely on your positive cash flowing properties to make sure you can pay for the mortgage as you wait for the value of the house to come back up.
Another way to make money off of rental properties is to buy a multifamily unit and live in one unit and rent out the rest of the units. Or purchase a single family home and live in one room and rent out the rest. This is a way potential way to live rent free as a student, resident physician, or even as an attending! This is called house hacking and I’ve seen some of my friends from college and medical school that did this successfully.
Risks with Rental Properties
Now having rental properties sound amazing right? For the most part they work out well. However, you should know the risks of having rental properties. The good news is that many of these risks can be averaged out by having multiple properties. Below I list the most common risks and problems I face with rental properties.
This probably accounts for the most cost of having rental properties are the vacancies. Each month you don’t have a tenant you still have to pay that mortgage and that unfortunately has to come from your personal bank account if you only have one property. Understanding your market is key. I personally use property managers to help find my tenants (especially since I am out of state). Having multiple properties helps because if there is one vacant property at least the cash flow from the other properties can even out the cost for those vacant months.
Property Damage and Repairs
This is inevitable but items wear down and get damaged over time. This can once again can be minimized by having positive cash flow properties. Many people hesitate getting into rental properties because they don’t want to be “called in the middle of the night” for a plumbing issue. First of all it occurs much less frequently than you would think. Also, I recommend just using a property manager to handle these problems. If you find the right deals with the right cash flow, it will also take into account the cost for property repairs and property managers.
This is one you have no control over but natural disasters such as floods, fires, earthquakes can take out your property instantaneously. Of course, you will have homeowner’s insurance to cover for these damages. However, you may not have any money coming from tenants and still must pay the mortgage as repairs are being done. This is a reason to have multiple properties and if possible, have properties in different cities or states in case one city has an extremely bad natural disaster. You don’t want to put all your eggs in one bucket in case something like this happens.
The SINGLE BIGGEST RISK of Rental Properties
The single biggest risk of having rental properties is rushing into a purchase and not properly analyzing deals and doing due diligence. This can have disastrous effects to your net worth and your income. It took me about 4 months of focused learning to feel confident in my first purchase. However, on the other hand, don’t have analysis paralysis where you are always spending time learning and never actually investing, you can miss out on lots of opportunities this way as well.
Things I Wish I Knew Before My first rental Property
Things I wish I knew better when I first started obtaining my first rental property:
- How to best analyze rental property deals quickly
- How to best find property managers for my properties
- How to network with others to find deals
- How to qualify as a Real Estate Professional for significant tax savings
- How to form an LLC to put my real estate properties into
Fortunately, there are now many resources that are made specifically for high-income professionals looking to invest in their first rental properties.
Resources to Get Started with Rental Properties as a Healthcare Provider
So after going over above, do you think it is the right time for you to consider adding rental properties into your investment portfolio? If so, the biggest reason I see people hesitating on starting to invest is that they feel they don’t have enough expertise or time to start buying rental properties. Trust me I felt the same way in the beginning.
Back then, I wished there was a resource out there that could simplify and give me exactly what I needed to know as a busy physician wanting to get into real estate. The great news is that now there are many physicians that are starting to share the knowledge of how they have succeeded in real estate investing from a healthcare professional’s perspective.
Here are Some Resources to Get you Started:
Peter Kim from passiveincomemd.com has great resources on how to start building a real estate empire using a combination of rental properties and real estate syndicate.
Dr. Cory Faucett, a retired general surgeon, recently published a book on the “basics of real estate investing for busy professionals” that I highly recommend.
If you are extremely serious about starting to buy rental properties and are looking to invest soon, then I would actually recommend you take a comprehensive online course to help you get started. The course I would personally recommend is by Dr. Kenji and Dr. Leti, a husband and wife physician couple who specialize in buying rental properties for passive income. They have multiple apartment complexes and have proven that it is possible to successfully invest in real estate despite being two busy physicians with children.
The course they offer is an extensive two and a half month course going over all the details you would ever need to know to get started with your first rental property.
I have personally met Kenji and Leti who made this course and the amount of knowledge and support they offer for any physician or healthcare professional looking into rental properties is phenomenal. The price of their course is minimal compared to how much you can save with time and avoiding common real estate pitfalls that can cost you tens of thousands of dollars (and you can use your CME Dollars as this course offers CME credit!). This is the course I wish I had before I started investing in my own rental properties!
Unfortunately, there is a deadline to signing up for the course and it is December 15th, 2019.
I reviewed the entire course that was offered earlier this year and it really blew my mind. I can honestly say it is very comprehensive and has all of the actionable information for you to get started. It also contains information that even more experienced real estate investors such as myself can benefit from as well.
Here are Some of Highlights from the Course That I Found Useful:
- How to create the right mindset for investing.
- How to spot value immediately
- How to create a team
- Excel Calculators to help you analyze deals immediately
- Property Evaluation
- Networking opportunity with experienced investor agents
- Direct Support from Kenji and Leti
- CME Credit
- Detailed Rental Property Tax savings
Don’t risk losing thousands of dollars by not having the proper knowledge to invest in real estate.
If you would like to check out Kenji and Leti’s course to learn more, just click here! If you have any questions regarding the course to see if it is right for you, feel free to contact me.
Good luck on your journey to financial independence and I hope you are able to use rental properties as one of the vehicles to get you there!