We all know that physicians often face high-stress work environments, and over time, burnout can become a serious concern. In today’s medical environment, burnout is likely the greatest threat to our profession. Developing alternative income streams, like these, can help alleviate this pressure by reducing dependency on “day job” income. Passive real estate, especially in the private market, provides a means of potentially generating reliable passive income, stabilizing portfolio returns, and creating more flexibility in balancing work-life demands.

EquityMultiple is a key resource specializing in passive real estate opportunities. They often speak with investors who think about “laddering maturities” with real estate investments to pursue passive income streams that, assuming steady performance, will predictably grow over time.

Let’s look closer at how passive income from real estate can help stabilize an investment portfolio.

Real estate passive income: A steady anchor for portfolio stability

Unlike the volatility inherent in public equities, real estate provides stable income through rental yields or interest from debt positions. Further, this is largely unaffected by daily market fluctuations. This characteristic makes real estate an attractive addition to portfolios for those seeking consistent, less market-dependent returns.

A closer look:

• Consistent Income with Lower Volatility: Private-market real estate debt and equity investments provide stable cash flows. For instance, senior debt investments often yield around 5-9% annually, while mezzanine debt can offer 8-12% returns on average, according to the National Council of Real Estate Investment Fiduciaries (NCREIF). The National Property Index (NPI) reported an average annual total return of 8.8% for private real estate over the last 25 years. And much of this return can be attributed to consistent income generation. Given the stability of returns, private-market real estate delivers greater risk-adjusted returns than major stock market indices over numerous periods. 
• Potential Downside Protection: Unlike stocks, private real estate is typically less affected by short-term economic swings, or even major economic headwinds. Real estate has also exhibited relatively strong performance during inflationary, and even stagflationary periods (when inflation is high but economic growth is low). During the 2008 financial crisis, private real estate, as measured by the NCREIF Property Index, declined by around 30%, while the S&P 500 dropped nearly 57% over the same period. The reduced sensitivity to public market cycles allows real estate to act as a stabilizing force, particularly during economic stress.
• Lower Correlation with Stocks: Real estate’s unique positioning as a tangible asset class also makes it less correlated with the stock market. NAREIT research shows that private real estate’s historical correlation with the S&P 500 is about 0.14. This means returns tend to move independently of public equities. This feature makes it valuable for mitigating portfolio-wide volatility.
• A Potential Source of Yield During Low-Interest Environments: Bonds, a traditional income source, faced record-low yields in many years over the past three decades. In contrast, real estate income yields have remained more robust. For example, as of recent NCREIF reports, U.S. private real estate funds have achieved average income returns of around 4-5% per year, compared to U.S. Treasuries, which have yielded 2-3% annually over the past decade. The debt and preferred equity investments within EquityMultiple’s Earn pillar, for example, target fixed rates of return in the 8-12% range.

By adding real estate to their portfolios, physicians can establish an income stream that is relatively insulated from stock market fluctuations. By blending private real estate debt and equity with traditional investments, physicians nearing retirement can take a more balanced approach to pursuing financial stability. Platforms like EquityMultiple offer access to these types of investments. This allows physicians to customize a diversified portfolio that aligns with their long-term goals.

Building a real estate portfolio for wealth preservation

The specifics of your real estate allocation should depend on your risk tolerance, retirement goals, and other particulars. That said, many physicians choose to pursue a portfolio that balances risk and return potential across a diversity of investments within private-market real estate.

Physicians can structure a real estate portfolio that balances stability with moderate, alternative returns by allocating investments across different parts of the capital stack (for more on the capital stack, refer to this article). Here’s how each layer can contribute to a wealth preservation strategy:

Senior Debt: Lower Risk, Income-Focused Investments

Senior debt is ideal for investors nearing retirement who prioritize security and income. As the most senior position in the capital stack, senior debt holders are paid first in the event of any cash flow or liquidation, reducing the risk of capital loss.

Example: A $100,000 investment in senior debt with an 8% annual return would yield $8,000 per year in interest income. This predictable income can supplement retirement funds, supporting a stable, low-risk cash flow.

Example: EquityMultiple’s Ascent Income Fund is a timely option for investors seeking exposure to real estate private credit. This diversified fund is structured as a private REIT. It offers redemption options and a minimum of just $5K for first-time investors.

Mezzanine Debt: Balancing Stability and Higher Yield

Mezzanine debt offers higher returns than senior debt but comes with slightly more risk. It occupies a middle position in the capital stack. This means mezzanine investors are paid after senior debt holders but before equity investors.

Example: Suppose you invest $50,000 in a mezzanine debt position at a 10% return rate. This investment could generate $5,000 annually. This offers a balance between risk and yield that may appeal to those seeking a moderately higher return while still maintaining relative stability.

Preferred Equity: Combining Income with Moderate Growth Potential

Preferred equity provides investors with a contractual income. This occurs often with an “accrued” return kicker upon exit, positioning it as a hybrid option between debt and equity. For physicians nearing retirement, preferred equity can serve as a middle ground. It combines regular income with the potential for an additional return at the end of the investment term.

Example: A $70,000 investment in preferred equity offering a 9% current return and a 3% accrued return could yield $6,300 in annual income, with an additional $2,100 at exit. This structure can provide a reliable income stream, with some added growth, helping to preserve and grow capital in retirement.

Common Equity: Potential for Long-Term Growth in Early Retirement

Although common equity carries the most risk, it can also offer substantial upside potential. Common equity holders are paid last in the event of a liquidation, but they benefit the most from property appreciation. While it’s generally higher risk, including a small portion of common equity can make sense for physicians in early retirement who may want to retain some growth potential in their portfolio.

Example: If you allocate $30,000 to a common equity investment with an expected 5% average annual (cash on cash) return, this could yield $1,500 annually on average (in a strong market scenario), with potential for a larger payout at exit. If this investment exited after four years at a favorable moment, you might expect something in the ballpark of an additional 50% profit (your principal of $30K plus an additional $15K). This would result in a 1.7X equity multiple and a 15% net IRR (an expression of time-weighted total return). Though this involves more risk, common equity investments can provide growth opportunities for those who don’t mind extending their investment timeline.

Short-Term Notes: a Flexible Cash Management Solution

Real estate-backed, short-term notes can serve as an attractive supplement to CDs, bonds, and other short-term investments. These investment products often serve a treasury function for the company offering them, similar to a corporate bond. 

Example: EquityMultiple’s Alpine Note offers terms of 3, 6, or 9 months, and a return (APY) to investors of up to 7% (as of Nov. 13th, 2024). Alpine Notes also allow for flexible redeployment of capital into other real estate investments on the EquityMultiple platform.

Hypothetical portfolio allocation for wealth preservation

Physicians nearing retirement can use a balanced allocation across the capital stack to create a portfolio that meets their specific needs. Let’s look at a hypothetical example to illustrate this approach:

Imagine a physician investor with $250,000 earmarked for real estate investments, allocating funds as follows:

1. Senior Debt: $100,000 at an 8% return ($8,000 annually)
2. Mezzanine Debt: $60,000 at a 10% return ($6,000 annually)
3. Preferred Equity: $70,000 at a 9% return with an additional 3% accrued ($6,300 annually plus $2,100 at exit)
4. Common Equity: $20,000 at a 1.7X net multiple and 5% avg. annual cash-on-cash return

In this structure:

• The senior and mezzanine debt allocations provide $14,000 annually in income.
• Preferred equity provides $6,300 annually, with potential for an additional $2,100 at the end of the term.
• The common equity portion, while smaller, offers growth potential that may support legacy planning or buffer against inflation.

This portfolio would generate approximately $21,300 annually. Further it would generate an additional $2,100 at the exit of the preferred equity investment and an additional $10K at the exit of the common equity investment. This blend supports wealth preservation and stability, with a small growth component. Please note that, as with any investment, there are risks associated, and returns are not guaranteed. These figures serve purely as a hypothetical example.

Note also that investments across CRE sectors (such as multifamily, self-storage, hospitality, and niche assets like data centers and medical office buildings) can help further diversify an investor’s portfolio. 

Tax efficiency and wealth preservation

One benefit of real estate investing is the potential for tax advantages. These advantages include depreciation, 1031 exchanges, and, for some, tax-deferred accounts like self-directed IRAs. Depreciation can offset taxable income. This is especially useful in equity investments. Meanwhile, a 1031 exchange allows you to defer capital gains taxes when rolling over investments into new real estate assets.

For example, a physician could invest in real estate through a self-directed IRA, allowing for tax-deferred growth. They could then later consider 1031 exchanges to manage capital gains and preserve wealth over time.

Note, please consult with a licensed tax advisor like one of our key tax resources when considering real estate investments. Tax benefits and strategies depend heavily on each investor’s particular situation. 

Key takeaways for physicians nearing retirement

To sum up, many investors choose private-market passive income real estate as a powerful supplement to a traditional portfolio of public assets. Diversification within the private-market real estate asset class can serve physicians and other accredited investors well as part of a comprehensive wealth management strategy. 

In simple terms, the strategy may look like this: 

1. Balance Income with Stability: Senior debt, preferred equity, and mezzanine debt provide a stable income foundation, minimizing exposure to high-risk positions. This allocation can supplement an investor’s bond allocation.
2. Incorporate Growth Cautiously: Allocating a smaller portion to common equity to potentially enhance portfolio growth without overly compromising stability. This allocation can supplement an investor’s public equities portfolio and provide alternative upside.
3. Leverage Tax Advantages: Consider real estate’s potential tax benefits to enhance income and preserve capital.

EquityMultiple’s platform in particular simplifies access to these investment types. This allows physicians to build a diversified, income-focused portfolio without the burden of direct property management. By selecting investments carefully across the capital stack, you can work towards a retirement portfolio that not only preserves your wealth but provides reliable income throughout retirement.

Real estate, with its blend of cash flow and capital preservation, can be a strong asset in any retirement plan. Especially for physicians seeking stable, long-term income. Platforms like EquityMultiple makes this accessible by offering institutional-grade investments across the capital stack. This enables physicians to align their portfolios with their retirement goals and focus on enjoying their later years with financial confidence.

While investing in passive real estate can be an amazing way to create alternative streams of income, there are many ways to take advantage of all that real estate has to offer physicians in particular. These resources can help you get started or optimize your investing strategy:

• A Real Estate Investing Guide for Physicians
• Real Estate Investing: Why the Tortoise Beats the Hare
• Real Estate Cost Segregation: How Does It Work?
• Should Doctors Invest in Real Estate Just for the Taxes?
• How To Actually Buy A Real Estate Investment Property

What do you think? Is real estate a good source of passive income? Do you invest in real estate? If so, how? If not, why not? Let me know in the comments below.