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5 Steps for Doctors to Start Investing in Real Estate

When I first came across the idea of investing in real estate for doctors, I dismissed it out of hand. But eventually, I changed my mindset and started to think, “If all of these other ducts can do it successfully, why not me?” So, Selenid and I made it a goal to learn more about real estate investing. Fast forward 2 years and 3 months and we are closing on our 7th cash flowing property.

Getting going in real estate investing can be a tricky thing

As physicians we are very mistake adverse. We want to feel ready before we jump into something.

doctors real estate

But, there will likely never be a time where you feel ready to begin investing in real estate. This leads to analysis paralysis and complete inaction over a long period of time.

What I encourage you to do is to remember when you just finished medical school and became a resident. When you walked into the hospital on intern day #1, did you feel ready? Hell no! At least I know that I didn’t. But, we went in head first and figured things out and got better. We were trained enough that it was time to get our feet wet and learn by doing.

It’s very similar to that with real estate investing.

My goal with The Prudent Plastic Surgeon is to always be transparent while breaking down what can seem like challenging concepts – like real estate investing – into manageable bites. Because truly any of you can do it. And real estate investing, while not a get rich quick scheme – remember, it’s more like a flywheel – will accelerate your path to financial freedom.

So, let’s go over the 5 steps that Selenid and I took to get started in real estate investing.

Disclaimer: None of this is easy. But it can be broken down so it is simple. It will take time but it is worth it. Also, I am a full time physician with a busy operative practice. So it’s not like I am not practicing what I preach!

5 steps for doctors to start investing in real estate

Let’s get started!

1. Educate yourself

This is obviously the logical first step. Don’t jump right in without first making sure you understand the basics of real estate investing.

However, I see too many people get bogged down in this stage and fall into analysis paralysis. (Here is my guide to overcoming analysis paralysis btw.)

So, I’m going to lay out exactly what Selenid and I did to educated ourselves before buying our first property:

I give you my experience so you have a baseline of an appropriate level of studying before diving in. Everyone will be different but that was my experience.

After that, we felt ready to learn by doing. Sure we made mistakes. But we would have made the same ones even if we read a book or two more. We needed to jump in. (But, I will admit, it was still scary!)

2. Determine your real estate investing strategy

My wife and I have chosen to focus on Buy, Rent, & Hold multifamily investment properties. 

There are a number of reasons that we decided on each of these sub-strategies:

  1. Buy – Well, you can’t own real estate without buying it so there’s step #1
  2. Rent – By renting the properties, we can have the tenants pay our mortgage with their rents. In addition, since the total rents exceed the mortgage/tax/insurance/etc. payments, we keep the extra money as cash flow.
  3. Hold – The overall real estate market is not unlike the stock market. They both go up and down in the short term. However, in the long term, they generally go up. So, in buying properties that cash flow and holding them for a long time, we can increase the chance that the property gains value by the time we eventually plan to sell it.
  4. Multifamily – By increasing the number of units under one roof, you decrease the cost per unit, increase profit in general, and make your business more efficient. Right now, we are starting with 2-4 unit properties but will go bigger in the future.

Cash-on-Cash is our metric of choice

There are a ton of different metrics to evaluate real estate properties and they all depend on what you are hoping to get out of them.

For us, cash flow is numero uno. The way to measure cash flow is a cash-on-cash calculation.

Cash-on-cash = Yearly cash flow/Amount of money that youput into the property

In this equation,

  • note that the yearly cash flow is the amount of cash you make each year after all expenses including mortgage, insurance, etc. are paid, and
  • the amount of money that you put into the property is the exact amount that actually came out of your pocket

For instance, if I bought a $100,000 property with a mortgage and 20% down with $5000 of closing costs, the denominator in the above equation (amount of money out of my pocket) would be $25,000. If the property cash flowed $2500/year, $2500 is my numerator. And my cash-on-cash would be 10%.

Our goal is to find properties that will cash flow >10%. Most properties will not meet this goal off the bat. Instead, we look for ways to tap hidden value – ways to increase rent or decrease expenses – that others don’t see in order to reach our goal of >10%.

Before moving on to step #3, let’s address a common mindset pitfall for potential doctor real estate investors…

That cash flow doesn’t seem like that much…is it worth it?

Don’t be fooled by the initial numbers. 

One property will not make us wealthy. In fact, the cash flow we get from our actual first property is a drop in the bucket compared to our W2 income. (In fact, it’s equal to 1.6% of our W2 income)

But we are not in it for one property, and neither should you. 

Let’s go back to our example property.

We buy it at $100,000 for 20% down with a 15-year mortgage and have $5000 in closing costs. After monthly expenses, we cash flow about $208/month for an annual cash flow of $2500. We save this extra cash flow each month to reinvest in future real estate.

In 15 years, the property is ours, free and clear, as the last mortgage payment is made. 

In that 15 years, we would have continued making cash flow each month. Plus, the mortgage is now paid off completely by our tenants. That means we have 100% equity in the property. Plus, the property likely appreciated in market value over that long time period (15 years) due to the upward trend of the overall real estate market.

Now we can take the money we made from cash flow to buy another bigger property and repeat the process.

But wait, there’s more

Let’s just say instead of buying one property in the beginning, we saved and bought one each year. 

Now, say we used advanced techniques like forced appreciation to increase our cash flow and market value so we could sell the property at a profit sooner than 15 years. 

Let’s say when we sell our properties, we do so using a 1031 exchange for another property so that any capital gains are tax-free.

Let’s say with each property, we take advantage of cost segregation/bonus depreciation to claim paper losses despite accumulating real profits from our real estate business. Now we have passive losses to offset passive gains on your taxes. 

Or even better, let’s say we claim Real Estate Professional tax status and are able to claim these paper losses against our W2 income. This would save us tens or hundreds of thousands of dollars in taxes.

This is how wealth is created!

This is our strategy. We are sticking to it for the long haul. It’s in our written financial plan

It does take work and effort. It is not passive. But, who else can understand the benefits of delayed rewards like a physician? Like I’ve said many times before, the hard road gets easy but the easy road gets hard.

I truly believe that this is the best way to build wealth. 

And physicians are primed to take advantage of active real estate investing. We are high-income earners who can set aside the “seed” money needed for real estate investing with even a modest savings rate. Then real estate investing begins to act as gasoline poured on the fire (FIRE?) of our financial goals.

(But, remember, with this being said, I am a proponent of a hybrid approach to wealth building. Many investors fall on one side of the fence – either stock market investing or real estate investing. I advocate for both.

3. Build your team

Real estate investing is not a one woman or man endeavor. It takes a team and you are best off if you gather this team together before you buy your property so you have them all lined up to help you from the get go.

This is maybe one of the most important steps. Especially for doctors investing in real estate. We want to automate as much of this investment as we can. Our team is what helps us do that.

This will not be a comprehensive review but you need:

  • An investor real estate agent that has experience working with investors and really should be invested in real estate properties themselves
  • A lender that you get a pre-approval from ahead of time
  • A property management company if you plan to use one to help run the day to day operations of your rental property
  • If you don’t plan to use a traditional property manager, I recommend using an online property management platform like Hemlane
  • A general contractor/handyman that you have vetted, is licensed, insured, and has worked on rental properties before (to ensure the work is “rental grade”)

Along the way, you may pick up additional team members like an electrician, tax advisor, etc. But these are the core members of your team. If they are good, these members will be able to refer you to other awesome people to help run your real estate investing business.

My best advice is to start with your investor real estate agent. They are the most important team member and will be able to refer you to other team members.

Related Post:
5 Important Questions to Ask Your Investor Real Estate Agent

4. Start looking for and analyzing properties

And everything that you need to know about this is right here:

Once you find a property that meets your real estate investing strategy and criteria that you set above, go for it!

5. Trust the process!

Honestly, those are the big steps that you need to take to get started.

Don’t get me wrong. There are about 1,000 other steps along the way as you get your first, then second, then third property and on and on.

But you don’t need to know how to do all of those steps right when you start. Just I didn’t need to know how to perform a DIEP flap when I was an intern. I trusted that the process of residency would get me to the point. And it did! (This corollary between the journey that doctors take and real estate investing really holds up!)

After you identify a property that you would like to invest in, all of these little steps will follow. But they are just that, little steps. And your team (again, not how important the team is!), will guide you through them.

Things like:

  • Placing the offer
  • Signing a contract for the property
  • Going through closing
  • Renting it out
  • And on and on

We didn’t fully understand how to do this the first time. But we trusted the process and trusted ourselves to figure it out.

And that ability to trust and believe in the process and yourself is the biggest difference I see between successfully real estate investing doctors and those who unfortunately never start.

A roadblock to ignore

This is a quick aside but I feel I should bring it up.

Do not, I repeat – do not- get caught up worrying about your asset protection plan for your real estate investments right at the beginning. I see this happen to doctors looking to get into real estate way too often.

There is plenty of time to figure that all out as the process unfolds.

You can learn more about the different options for asset protection and what Selenid and I do here: Creating an Asset Protection Plan for Real Estate Investments

The bottom line is…

You can do this!

Take it step by step as above. I started with zero knowledge and zero experience. So have many other doctors looking to get into real estate investing. And this is exactly how Selenid and I did it. So you can too!

And if you are looking for additional resources, check out these posts!

You can also get an insider look into our actual rental properties here!

What do you think? Should doctors be investing in real estate? Why or why not? What is the best way to get started? How did you do it? Let us know in the comments below!

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    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected].

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