Passive real estate investing can be an excellent way for physicians to create diversified income streams, allowing them to earn money without having to actively manage their properties. However, like any investment, there are risks involved that can make even the most seasoned investors nervous. In this blog post, we’ll explore the top fears that physicians may have with passive real estate investing and how to overcome them.
- Fear of Losing Money
Losing money is a common fear for any investor, but with proper research and planning, you can mitigate the risk of losing your investment. Start by setting a realistic budget and sticking to it. Then, conduct thorough due diligence on the properties or investments you are considering. Look for a strong track record of success with the operators you are considering and ask the right questions when investigating the investment opportunity.
Remember, it’s always wise to diversify your investments so that if one investment performs poorly, it won’t completely tank your portfolio. By investing in a variety of assets within the real estate subclass such as Multifamily, Single-family, Self Storage, Short Term Vacation Rentals, etc, you can spread out your risk and increase your chances of long-term success.
- Fear of Not Having Control
Passive real estate investing means you are not actively managing your properties, which can make some physicians feel like they don’t have control over their investments. However, by choosing the right investment opportunities and working with reputable partners, you can have peace of mind knowing that your investments are in good hands. Look for investments with a strong track record of success and network with other investors or mentors who can help you make informed decisions.
When choosing partners or investment opportunities, make sure you understand the management structure, how decisions are made, and your recourse if the investment goes sideways. This information can be found in operating agreements and subscription documents. You want to work with people who have a proven track record of success and who communicate clearly and regularly. It’s also important to ensure that your partners’ goals and values align with yours. If you want cash flow, a 2x equity multiple in 5 years, and principal returned within 3-4 years, for example, seek investments that match those criteria. By doing the work up front, you can alleviate the feeling of not being in control because your goals are the same as the operators.
- Fear of Market Volatility
The real estate market, like any market, is subject to market volatility. This makes all of us nervous about investing. However, did you know real estate has one of the best Sharpe Ratios of any investment class? This means it has better returns relative to the investment risk taken. By diversifying into real estate and having a long-term investment mindset, you can minimize the impact of market fluctuations. Consider investing in several real estate opportunities to give you exposure to multiple markets and asset classes to even further mitigate and reduce exposure to market volatility.
Investing for the long term can help you weather short-term market fluctuations. Remember that real estate is generally a long-term investment and that the key to success is to buy and hold.
- Fear of Tax Implications
Taxes, specifically income taxes, are the biggest roadblock to generational wealth. Passive real estate investing can have tax implications, but they are usually beneficial. Between passive income being tax-advantaged, income from exits treated as capital gain, and massive benefits of depreciation, real estate is one of the most tax-advantaged asset classes available. I strongly recommend working closely with a tax professional who specializes in real estate so you are able to understand the tax benefits concerning your real estate investments. This will help you develop a comprehensive tax strategy that maximizes your returns and minimizes your tax liability.
It’s essential to understand the tax implications of your investments and work with a tax professional to develop a tax strategy. A good tax strategy can save you thousands of dollars in taxes and increase your overall returns. Be sure to ask questions and seek advice from experts in the field. Want to know what questions to ask a CPA before hiring them? Check out my ebook HERE for those answers and other FAQs in real estate investing.
- Fear of Lack of Liquidity
Real estate investments are typically illiquid, meaning that it can be difficult to sell your investments quickly if you need to access cash. However, by understanding the investment time horizon, potential cash flow, and how quickly you will receive your principal back, you can adequately plan and decide if the investment is right for you.
Remember, when you invest with sponsors in real estate, it’s important to understand that it’s generally a long-term investment. There are opportunities to invest in lending funds and shorter-term options as well that will return capital quicker and allow your investment to be more liquid. The point is, consider your investment goals and timeline before making any decisions.
Passive real estate investing can be an excellent way for physicians to diversify their income streams and build long-term wealth. However, as with any investment, there are risks involved that can make even the most seasoned investors nervous. By addressing the top fears that physicians may have with passive real estate investing, my hope is to provide valuable insights to help you make informed decisions.
Remember to start by setting a realistic budget and conducting thorough research on the properties or investments you are considering. Choose investments with a strong track record of success, and work with reputable operators who have a proven track record of success and whose goals and values align with yours.
Additionally, it’s important to understand the tax implications of your investments and work with a tax professional to develop a tax strategy that maximizes your returns and minimizes your tax liability. And finally, be sure to consider your investment goals and timeline before making any decisions and seek advice from mentors and your network.
If you’re interested in learning more about passive real estate investing, I’m happy to help you dip your toe in the water or dive into the deep end! Feel free to reach out to me HERE or sign up for my Investor Club. As a physician and experienced real estate investor, I’d love to provide any insight I can and help you navigate the world of passive real estate investing with confidence.
Here’s to winning your time back!