5 reasons why every physician should consider real estate investing, especially in light of COVID

By Joe Pendon, MD

At the time of this writing, the coronavirus pandemic is ravaging out of control in many parts of the world. New case records are set every week, and a new, more transmissible variant of the virus is spreading. The vaccination effort has just started, but with challenges to the rollout. We are grateful for the courageous response of all health care workers fighting this terrible epidemic.

The global pandemic has impacted physician income 

Without a doubt, the coronavirus pandemic has had far-reaching effects on the economy. Millions of Americans have felt the economic disruption in their daily lives. Many workers have lost jobs, and others have had to work from home. Consumers have changed their spending patterns, and stores and restaurants have had to limit patrons. Travel has slowed as vacations have been postponed. Likewise, physicians and physician practices have been affected by COVID’s impact on the economy. 

The pandemic has had a destabilizing effect on physician incomes. For instance, when the pandemic started, many patients avoided appointments with their doctors or going to the hospital. Offices were temporarily closed, and staffing had to be reduced. As COVID surges occurred, elective surgeries were suspended to preserve hospital capacity. Some physicians became ill themselves and paused employment as they recovered. These adjustments have had real impacts on physician incomes.  Many physicians would be well served to develop alternate sources of income for uncertain times. 

Multifamily real estate is an asset class that has had strong performance in spite of the global pandemic. The following are reasons why physicians should consider establishing this alternate source of income. 

1) Real estate can be a source of passive income.

Most physician income is derived from active time and effort. That is, income is often correlated to the number of patients seen, hours worked, or cases performed.  For many physicians, if you don’t show up and generate RVUs, then you don’t get paid. Real estate investing, on the other hand, can be a much more passive process. In real estate, the tenant pays for the use of your property, and income is generated without your presence on a daily basis. When you invest in real estate, you allow your money to work for you, rather than you working for your money. Real estate investing can be an efficient way to generate income.

2) Private real estate offers diversification from the stock market.

Private real estate is not correlated to the performance of the stock market. There are swings in the value of the stock market on a daily basis, and the individual investor has no control over the value of their investment. The value of a stock is often impacted by things such as worldwide events or CEO behavior. Pricing in the stock market depends upon investor sentiment. In contrast, real estate valuations do not fluctuate on a daily basis. The value of real estate depends upon making a solid investment in a market with robust job and income growth. Furthermore, real estate cycles do not follow the ebb and flow of the stock market.  

The stock market can be very volatile, and no one knows when the next bear market will occur. When the income from a stock portfolio is needed, such as in uncertain times, the financial markets may be in a downturn. It is beneficial therefore to have a diversified source of income such as real estate.  In fact, a majority of the wealthiest individuals in America have made or preserve their wealth through real estate. 

3) The income from real estate is highly tax-advantaged.

The income from real estate has various tax advantages over stock and bond investing. Two examples are depreciation, which allows you to offset taxes on income from real estate, and the 1031 exchange, which allows you to avoid capital gains taxes. When you participate in a multifamily investment, you earn income from real estate. At the same time, you are able to deduct paper losses in the form of depreciation. Depreciation reflects the expected loss in value of an asset over time due to wear and tear. It is a paper loss, as the value of real property increases over time. Depreciation allows you to write off losses against your investment income, thereby greatly reducing your tax liability. 

You can also utilize Section 1031 of the tax code at the time of sale to defer capital gains taxes. When an asset is sold at a profit, you are liable for taxes on the capital gains. In real estate, you can utilize a 1031 exchange to defer paying these taxes. A 1031 exchange entails applying the proceeds of your sale to the purchase of another property. For a more detailed discussion of depreciation and the 1031 exchange as it applies to multifamily real estate, please see our other education resources. 

4) Physicians often have high income but not high net worth.

Many physicians have high incomes but not high net worth. This financial state is a result of the many years of education and large student debt it takes to become a physician. By the time physicians make an attending-level salary, they are ten years behind their colleagues who are not in medicine. This delayed gratification often translates to “living like a doctor”, or living beyond one’s means, once attending level salary is reached. Even if physicians do not spend beyond their means, many do not make the investments necessary to create high net worth, as it is difficult to create high net worth on a physician's salary alone. Physicians must find other means to generate wealth and allow their money to work for them. Real estate is one path to wealth creation and should be considered part of a well-diversified portfolio. 

5) Multifamily real estate has continued to thrive in the pandemic.

Multifamily real estate as an asset class has proven to be a strong investment even despite COVID. While the pandemic has stifled commerce and travel, it has not impacted the need for housing. Apartments are an evergreen investment, and people will always need a place to live. Furthermore, rent collection in the pandemic has remained healthy. Data from the National Multifamily Housing Council indicate that rent collection in 2020 was reduced by only 2% compared to 2019. While other sectors of the economy suffered catastrophic losses, multifamily real estate remained very robust. Collection of rent overall remains very strong in spite of other economic challenges, as residents of multifamily properties consider rent payment an important responsibility.

Health care workers have responded courageously in the face of COVID-19. The coronavirus pandemic has had profound effects on daily life and has created uncertain economic conditions. The incomes of many, including physicians, have been adversely affected. Multifamily real estate is a source of passive income with various diversification and tax advantages. An alternate source of income is essential to weathering economic uncertainty and having long-term financial success.