While physicians generally earn significant incomes, they still tend to face financial challenges, such as saving for retirement. For one, they often need to play catch-up on retirement contributions due to not having much money to save while in their 20s in medical school. At the same time, they want to be able to save enough to maintain a similar lifestyle to what they have in their prime earning years, while also needing to consider tax implications that come with higher incomes.
Achieving these goals generally requires a multi-prong financial plan with investments in different areas such as stocks and bonds. However, multi-family real estate is another type of investment that many physicians can benefit from incorporating into their portfolios as part of a larger investment strategy.
Specifically, multi-family real estate offers benefits such as:
Many investments move relatively in the same direction; a strong economy could benefit both stocks in both large and small companies, for example, so investing in both does not necessarily provide an investor with their desired level of diversification. Yet research finds that real estate has very little correlation with the stock and bond markets, according to the Pension Real Estate Association (PREA).
Consider the fact that in the five recessions that have occurred since 1980, housing prices fell during two and rose during three, according to data from ATTOM Data Solutions as reported in Curbed. Thus, a down economy does not necessarily mean your real estate investments will also fall. Instead, you could even end up increasing your investment gains during a stock market drop.
In particular, multi-family real estate can differ from economic conditions that can drive housing prices and the returns in other asset classes. If you invest in multi-family apartment rentals, for example, demand may increase during periods where people do not feel economically secure enough to buy a single-family home. Other non-economic factors such as the addition of public transportation near multi-family apartment buildings could also drive demand, whereas that likely wouldn’t have much effect, if any, on the broader stock market.
To be fair, this lack of correlation could also mean that a rising national economy does not equate with strong real estate returns, particularly if local market conditions differ. That’s why it’s important to diversify. By investing in uncorrelated assets, such as a mix of stocks, bonds and real estate, you can potentially reduce volatility and even come out ahead compared with if you only bet in one direction.
Passive, Stable Income
Physicians may also be attracted to multi-family real estate, particularly rental buildings, as a way to earn passive, relatively stable income.
Buying and selling single-family homes can be time-consuming and require significant capital, and you would have to wait until the transaction completes to realize the investment gain. With multi-family rentals, however, physicians can own part of a building alongside other investors to then share the ongoing passive income from tenants paying rent. Meanwhile, property values could still rise to provide upside on the backend when the physician eventually wants to sell their ownership of that real estate.
This income can also be relatively stable, as tenants still need to pay rent whether markets go up or down. Even if a recession caused a few tenants to move out or stop paying rent, it would seem unlikely for an entire building to stop generating rental income, particularly in ones with a large number of units. Physicians can also diversify their multi-family real estate holdings with a mix of luxury properties, affordable housing, apartments with varying numbers of bedrooms, etc., to help position themselves to continue to earn stable income regardless of how economic conditions change.
To truly make multi-family real estate a passive investment, physicians can invest in a structure such as a real estate investment trust (REIT) or a private equity real estate fund. From there, physicians can earn income on an ongoing basis as a dividend, while the fund manager deals with issues (often via hiring others) such as upkeep of properties, finding tenants, collecting rent and conducting other tasks that physicians do not have time for. Fund managers can also help optimize the tax aspects of owning real estate, so investors can keep more of their returns.
Doing Good While Increasing Wealth
Physicians spend their careers trying to help others live healthier lives, and they can put their money to work doing a similar job of improving people’s lives while still earning a significant return from their investments.
While different housing types each have their pros and cons, multi-family real estate can significantly contribute to improving issues like sustainability, housing affordability and the quality of life of residents, particularly with well-planned new or retrofitted buildings.
For example, although sustainability can vary significantly based on factors like how a home has been constructed, the average household in a single-family detached home uses three times more energy than a household in a multi-family building with five or more units, according to the U.S. Energy Information Association (EIA). Part of that difference is due to home size, but other factors like the shared walls in multi-family buildings can play a role in how much heating is needed, notes the EIA.
Multi-family real estate can also improve sustainability and the quality of life of residents, such as by providing housing close to major employers, thereby cutting down commute times and potentially providing residents with a way to walk or take public transportation to work. Well-planned multi-family projects can also add to the vibrancy of a neighborhood, as adding housing in certain areas can help support nearby businesses like restaurants as well as community locations like libraries, museums, parks, etc.
Moreover, many communities throughout the U.S. suffer from a lack of housing. For example, a report from the city of San Diego finds that housing production in the city has been increasing at less than half the rate of population growth over the past decade, causing an estimated shortage of 130,000 units.
Housing shortages can drive up prices temporarily, which can be good for current investors, but it can also cause housing bubbles and harm economies long-term. Meanwhile, many individuals and families need a home they can afford, which creates a prime opportunity for physicians to invest in affordable multi-family real estate.
Just because these units are affordable doesn’t mean that investors can’t earn a return. It just means that the rental prices may not be as high as they are in other buildings, yet these affordable homes may have cost less to construct and market to tenants. From there, the strong demand means investors can potentially recoup their investments and then some through stable rent payments.
As these examples show, there are many advantages to investing in multi-family real estate. This asset class can be particularly appealing to physicians who want to diversify their hard-earned wealth while potentially helping others without having to take too much time away from their primary jobs.