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HOW TO MAKE YOUR JOB OPTIONAL”

Masterclass on January 22!

 What if you could enjoy a doctor’s lifestyle without depending on your clinical paychecks?

HOW TO MAKE YOUR JOB OPTIONAL”

Masterclass on January 22!

 What if you could enjoy a doctor’s lifestyle without depending on your clinical paychecks?

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All the Ways You Make Money Investing in Real Estate

Summary: Investing in cashflowing rentals is one of the best ways to build wealth. Because you are using the power of leverage and earning money from multiple sources including cashflow, rental appreciation, forced appreciation, and tax savings, real estate allows you to Fast FIRE far quicker than traditional investments (stocks and bonds). In this post we explore all the ways that real estate puts money in your pocket–so you can semi-retire in the next few years, not decades.

When Kenji and I first decided to have financial independence as a goal, we chose real estate as the vehicle.

Why real estate?

Besides the obvious fact that we like owning property, through reading we had come to realize that investing in cashflowing rentals is the fastest, most predictable way to build true wealth.

Think about how many wealthy families in America have been involved in real estate investing in some way. Many successful, wealthy people have their fingers in real estate investing.

Real estate investing is incredibly lucrative because there are so many ways you make money when you directly own rentals. From collecting rents to forced and market appreciation to the tax savings, the odds are stacked for success with cashflowing rentals.

Additionally, you have the benefit of using leverage.

When you buy an investment property using a loan, you make money and save taxes on the bank’s loaned money as well as your own. Using leverage allows you to grow your wealth far faster than you ever could investing in something like stocks, where only your own contributions compound and grow. Keep leverage in mind as you read the rest of this post.

With that, let’s jump into the six ways you make money in real estate.

Cashflow

Cashflow is the amount of money you make each month after all the expenses are paid. It’s the money that actually goes into your pocket. Cashflow is the extra income source that can allow you to cut back at your clinical job. It could also allow you to weather a particularly difficult financial month (or year).

Kenji and I aim for 10% cash-on-cash. What this means is that after all expenses, our properties should end up putting 10% of our investment back in our pocket each year. So, if we put down $50,000 on a property, we should get back a minimum of $5,000 in cashflow each year after we pay out for property management, taxes, insurance, maintenance, utilities, etc.

Equity Paydown

When you buy a property right, your renters pay down your mortgage each month. This makes you money a third way: equity paydown. Equity paydown grows each year as your mortgage payments become less interest and more principal.

At this point in our careers, our equity paydown is close to $50,000 per year. And this will naturally increase as our loans get paid down over time. Though we don’t see this money directly, it’s adding to our net worth.

Property Appreciation

By the nature of the real estate market, your investment property will often gain market value (appreciate) over time. And if you buy in the right neighborhood, market appreciation can outpace the rate of appreciation of the city/metro region as a whole.

Appreciation of income-producing properties is usually based on the amount of income it produces. This is called forced appreciation. We’ll cover this below in more detail. Smaller rentals especially (single family homes, 2-4 units) can be highly influenced by market appreciation. If your small rental is in a “hot” area, the price of the rental may go up regardless of the income it produces.

Rent Appreciation

This is the amount that you can increase rent rates per year. It usually ranges on the order of 2-5% percent per year. Over ten years, this can mean your property’s rent increases 85% at minimum!

Keep in mind, if you are investing in B/C class properties, these tend to do better during downturns compared to higher-end properties. It might be that you find yourself actually increasing rents during the next downturn. Demand for cheaper properties is higher, since people can no longer afford luxury apartments or primary residences. Investing in real estate with an eye on things like these can help you think about the bigger picture.

Forced Appreciation

You also can increase a property’s value by improving it, and then increasing rents proportionally (or disproportionately). This is called forced appreciation.

Forced appreciation is what we’ve used to create a lot of our wealth. We’ve regularly bought duplexes and fourplexes that were renting in the low to mid $700s each side. We then spend a chunk of cash to bring them up to rent in the $1100-1300 range. In each case, the amount of money that we’ve spent to bring them up to that level of performance has been less than the increase in return (we measure this by looking at the return on investment and aim for >10% cash on cash when we make repairs).

Then add in the tax savings. This is equivalent to the government paying for 20-30% of the rehab (depending on your tax bracket). You can see how quickly your returns are going to grow.

Tax Savings

As I hinted at above, the tax benefits of cashflowing rentals are substantial. These may not initially be your primary driver to get into real estate. They really should be at the top of your list, however.  They can significantly reduce a typical physician’s tax burden.

Traditionally, one of the main reasons the tax advantages of owning real estate was so great was because the government allowed you to depreciate at a minimum of 1/27th of the value of your property (the building, not the land) each year. This meant that over the course of 27.5 years, your property value became $0 (and, remember, you’ve paid probably 20-30% down, so you actually collected depreciation on the bank’s money as well as your own). What this has meant in practice is that you make money through cashflow each year, but it looks like you are actually losing money (paper losses).

In the fall of 2017, the depreciation benefit got even better with 100% bonus depreciation. Instead of slowly depreciating your property by 1/27.5 each year, now you have the ability to get a cost segregation study and then take 100% of the items that are depreciable over 5-15 years in the first year. This roughly translates to depreciating somewhere in the range of 20-30% of your purchase price of your property the first year.

For example, if you buy a $400,000 property, you’ll roughly get $100,000 of losses to write off your taxes that first year (assuming you are an active investor). That means more money in your pocket today. You can grow your portfolio now, and be in a much better position 5-10 years down the road.

Are you convinced of the value of direct ownership of real estate over traditional investments (stocks, bonds)?

When you invest in real estate, you make money on your money and the bank’s money. Your ability to grow your wealth rapidly is amplified by leverage and tax savings. Both of these benefits are not something you’re going to find if you invest in the stock market. Investing in real estate can be the key to future happiness and success!

So why are you following the traditional route? Why are you aspiring to Slow FIRE when you can get there so much faster using cashflowing rentals?

Interested in learning more about how to build a portfolio of cashflowing real estate? Be part of the conversation! Follow our general Semi-Retired MD Facebook page and then join our physicians or professionals group!

Do you want to learn how to creatively fund your real estate portfolio and achieve financial freedom? Join the conversation! Follow our Semi-Retired MD  Facebook page and join our Doctors or Professionals  group!

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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