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How to Get a Guaranteed Return With Real Estate

guaranteed return with real estate

Summary: Is there such a thing as a guaranteed return on your investment? Doesn’t investing always carry with it some element of risk?  In this article, we do a quick rundown on the components of return and show you how to get a guaranteed return with cashflowing rentals.  

 

One of my mentors once told me, “the tax savings from real estate investing is your only guaranteed return.”

My initial reaction: every investment has an element of risk, there is no such thing as a guaranteed return!

Or is there?

Before we answer this question, let’s do a quick rundown on taxes, investing, and the components of return from investing in cashflowing rentals.

Before we go any further, we have to remind you that we are not accountants or lawyers, so please consult your own tax advisors about the topics covered in this article.

 

Taxes are your biggest expense

If you’ve ever looked at your paycheck, you know the difference between pre-tax and post-tax income. 

Your pre-tax income is how much your employer is paying you each month, while your post-tax income is the amount you actually receive in your bank account. Your employer will typically withhold a certain amount and you never end up seeing this money in your account. 

This is probably one of the reasons people don’t realize that taxes are your biggest expense.

Imagine if, instead of withholding taxes from your income, you had to write a check for this amount each month. Then, you’d realize how much you are paying in taxes. It’s more than you pay for the essentials: housing, food and clothing. More than you pay for entertainment. More than you pay for vacations. 

So imagine if you could keep all of these taxes instead of giving it to the government. Imagine how quickly your wealth could grow if you could keep an additional $90,000 (assuming a 30% effective tax rate on a $300,000 salary). This is on top of whatever you were already saving each year. 

 

Investing 101

Now let’s shift gears and talk about investing. 

Whenever you invest, there’s an element of risk. And the general principle behind investing is, the higher the risk, the higher the return. So bonds are considered relatively safe and the return is low. Index funds carry more risk than bonds, so the returns are higher. Penny stocks are very risky but if you get lucky and pick the right stock, your return could be astronomical. 

Where does real estate investing fit in? There are a lot of ways to invest in real estate, so let’s focus on cashflowing rentals, which is the focus of our blog. 

On the one hand, some might argue that cashflowing rentals are really mini-businesses and not investments. I think that’s largely true but not everybody shares this opinion. For example, owning rental properties run by professional management can be almost completely passive if that’s what you want. 

We choose to be more active and manage our rental properties like a business so that we can claim real estate professional status. This important status is what enables us to shelter our income each year. 

So where does real estate fit on the spectrum of risk? It’s probably somewhere close to stocks if you know what you’re doing, and worse if you don’t. However, unlike stocks, the return from cashflowing rentals far surpasses the return from stocks.

 

Components of return from cashflowing rentals and the only guaranteed return 

You can make money from cashflowing rentals in a number of different ways. We covered all of the ways in a prior article. In brief, there is the cashflow, debt paydown, tax savings, and appreciation. 

When you combine all four above, your returns with cashflowing rentals can be greater than 25% return. However, each of the above components carries a different risk profile. 

For example, you won’t get cashflow or debt paydown from your rentals if your property sits vacant. In terms of appreciation, there’s no guarantee that your property will appreciate. In some cases, it could even depreciate in value.

What about taxes?

There are two types of tax savings. 

One is the tax-free income you get from cashflow. This was covered in detail in another article, but in brief, rental properties generate cashflow but come tax time, you usually don’t have to pay taxes on the cashflow because you have certain paper losses that cancels out the rental income so you don’t pay taxes on the cashflow. 

This form of tax savings is not guaranteed because if your unit sits empty, you have no income and therefore, no tax savings. 

But what about the other form of tax savings?

The other form of tax savings comes from buying a property and using something called bonus depreciation to shelter your income from taxes. This is covered in detail in a previous article. 

In brief, you can use bonus depreciation to shelter income and the result is lower taxes on your income.

[Editor’s note: For high-income earners, you have to be a qualified real estate professional in order to shelter your income using bonus depreciation]

This tax savings is guaranteed. Whenever you buy a property, you can use bonus depreciation every time and without question. 

 

So what does this look like in practice?

Let’s run through an example of what this looks like.

Say you have W2 or 1099 income totaling $250,000. 

In order to shelter this income, you will want to buy about $1 million worth of properties. 

When you buy $1 million worth of properties, this creates about $250,000 in bonus depreciation. [Editor’s note: This is just a hypothetical estimate. In order to get the true bonus depreciation, you have to do something called a cost segregation study]

This bonus depreciation can be used to completely offset your income and you don’t pay taxes.

At a 30% total effective tax rate, your savings would be $75,000. 

If your invested $250,000 for the downpayment on the $1 million property, your return would be: $75,000 divided by $250,000 or 30% return, just from tax savings alone. 

This doesn’t even include any of the other components of return, which we didn’t include in the return calculation because they are not guaranteed. 

So at worst, by investing in cashflowing rentals, you’ll generate a 30% return from the tax savings alone. 

So was my mentor correct?

He sure was. 

Let’s repeat: Tax savings are your only guaranteed return. You can take that to the bank.

Interested in learning how to get a guaranteed return from real estate? Join the waitlist (if our course isn’t currently available) or sign up (our course is offered twice a year) for our popular course, Zero to Freedom Through Cashflowing Rentals by clicking here.

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Semi-Retired M.D. and its owners, presenters, and employees are not in the business of providing personal, financial, tax, legal or investment advice and specifically disclaims any liability, loss or risk, which is incurred as a consequence, either directly or indirectly, by the use of any of the information contained in this blog. Semi-Retired M.D., its website, this blog and any online tools, if any, do NOT provide ANY legal, accounting, securities, investment, tax or other professional services advice and are not intended to be a substitute for meeting with professional advisors. If legal advice or other expert assistance is required, the services of competent, licensed and certified professionals should be sought. In addition, Semi-Retired M.D. does not endorse ANY specific investments, investment strategies, advisors, or financial service firms.

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Hi, we’re Kenji and Leti

we provide coaching and mentorship for doctors and high-income earners

Several years ago, we were newlyweds working as full-time hospitalists. On paper, it looked like we had everything: the prestigious careers, the happy marriage, the luxurious rental home, the cars, etc.

But in reality? Despite having worked for several years, we had very little savings. Despite our high income, we had very little freedom in terms of time or money.

One thing was clear: we had to do something.

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