Risk of real estate investing as MD

[Doubledocs]

I've thought a lot about starting a real estate investing business on the side. We are a dual physician family and it would seem wise to have an alternative source of income (outside medicine). Diversify our income so to speak.

My primary concern is the potential liability we would be exposing ourselves to in doing this. Real estate seems to be a fairly litigious business.

Obviously, there are asset protection mechanisms we could use, but is it worth it? I'd appreciate the community's input. We have substantial savings and have them invested in the market currently. Should we just stick with this plan?

Thanks in advance.

[Joseph]

There are definitely risks.

Lots and lots of wealthy people have lost a whole lot of money very quickly in real estate.

Of course, you can turn a profit too.

Tread carefully.

REITs are your friend, if you ask me.

[Jim]

Crowdfunding is getting pretty popular too.

 

[JebJ]

One of the advantages to real estate investing is that you can use leverage to enhance your gains. Also, you have extremely helpful tax deductions which can greatly lower the effective tax rate on that income. Neither REITs nor crowdfunded real estate provide these benefits.

I really like REITs and use traded REITs for most clients, however the possible returns aren't really in the same league. The big problem for some with buying actual real estate is the work involved. It's not the same as buying an index fund and letting it ride. Some people aren't interested in being a landlord and that's completely fine. For those that are willing to do some work and buy the right properties at the right valuation, it can be a great way to build wealth.

I wouldn't recommend trying to buy and flip houses but by buying strategically, it can be possible to make money through both the cash flow of a rental property and through appreciation of the property. Scale is key to this, particularly when considering cash flow. Scale allows you to hire a handyman or a property manager, which takes away a lot of the headaches which come with being a landlord.

[jfoxcpacfp]

You can use an LLC to shield your risks. The problem is that you have to have each piece of property inside a separate LLC or all of the property in the LLC is exposed if you are sued. Having multiple LLCs can be quite expensive and a nightmare to manage paperwork. A solution in some states is the Series LLC which allows a single filing for Multiple LLCs.

Real estate works for some, not for others. Historic long-term returns are not so different from historic long-term returns of equities, but there is a lot more work involved. For our clients, we recommend diversification with a slice of their portfolios in REIT funds.

As a dual-physician family, I don't see a need for outside income. And RE investing won't give you SE income for a SOLO-k.

[dragonfruit]

Johanna Turner wrote:

he side. We are a dual physician family and it would seem wise to have an alternative source of income (outside medicine). Diversify our income so to speak. My primary concern is the potential liability we would be exposing ourselves to in doing this. Real estate seems to be a fairly litigious business. Obviously, there are asset protection mechanisms we could use, but is it worth it? I’d appreciate the community’s input. We have substantial savings and have them invested in the market currently. Should we just stick with this plan? Thanks in advance.

Click to expand...

For my first buy and hold real estate property, how do you recommend I go about setting up a series LLC?

[The White Coat Investor]

Jeb Jarrell wrote:

One of the advantages to real estate investing is that you can use leverage to enhance your gains. Also, you have extremely helpful tax deductions which can greatly lower the effective tax rate on that income. Neither REITs nor crowdfunded real estate provide these benefits.

I really like REITs and use traded REITs for most clients, however the possible returns aren’t really in the same league. The big problem for some with buying actual real estate is the work involved. It’s not the same as buying an index fund and letting it ride. Some people aren’t interested in being a landlord and that’s completely fine. For those that are willing to do some work and buy the right properties at the right valuation, it can be a great way to build wealth.

I wouldn’t recommend trying to buy and flip houses but by buying strategically, it can be possible to make money through both the cash flow of a rental property and through appreciation of the property. Scale is key to this, particularly when considering cash flow. Scale allows you to hire a handyman or a property manager, which takes away a lot of the headaches which come with being a landlord.

Click to expand...

You can get most of the tax benefits in a syndicated/crowd-funded investment. You generally just lose the ability to exchange.

[jfoxcpacfp]

1. Live in a state that offers them.


2. Work with a professional to set them up correctly.

There is no need for the Series LLC unless you are in a situation to need multiple LLCs to hold multiple properties. Otherwise, a plain vanilla LLC will be just fine and you can DIY online at your Secretary of State. You'll file a Schedule E for the LLC, along with your Form 1040. Depending upon where you live, you may have state and local filing requirements.

Note that the single form filing is only for 1-member LLCs. If this is a husband-wife owned LLC (or any combo other than 1 person), you'll have to file a partnership return, form 1065.

[JebJ]

dragonfruit wrote:

Johanna Turner wrote:

he side. We are a dual physician family and it would seem wise to have an alternative source of income (outside medicine). Diversify our income so to speak. My primary concern is the potential liability we would be exposing ourselves to in doing this. Real estate seems to be a fairly litigious business. Obviously, there are asset protection mechanisms we could use, but is it worth it? I’d appreciate the community’s input. We have substantial savings and have them invested in the market currently. Should we just stick with this plan? Thanks in advance. 

Click to expand…

For my first buy and hold real estate property, how do you recommend I go about setting up a series LLC?

Click to expand...

Good point on the taxation.

You still don't have the ability to use leverage though. The leverage can be dangerous but it can also greatly enhance your returns when used judiciously.

Real estate isn't for everyone but it can play a large role for those looking to become financially independent, for those willing to put in the work.

[Zaphod]

You have to set up a separate llc to make it not personal, anything else is super risky. Capitalize it well initially, and get a nice umbrella policy. This will go a long way to shield you. There are also lots of other ways to keep safe, that dont always require separate llcs. There are types of llcs that will separate things out inside, but this usually depends on local set ups so may/may not apply. You can equity strip, take out liens, etc...so there is essentially no value in going after the assets etc...

 

After thinking about hassles, transaction costs, property management (fees), etc...its tempting to consider syndicates or some other form, but that nagging 1031 ability really does gnaw at you. Im still unsure about what I'll end up doing as I do want to start a real estate business, but the above seem super annoying and I've another idea I'd like to tackle first. The ease of new ways to invest in RE are making me sit back and see how it shapes up. Who knows, in a little bit you may be able to do a 1031 with one of these synthetic instruments as its not necessarily real estate specific.

[dragonfruit]

Johanna Turner wrote:

1. Live in a state that offers them.


2. Work with a professional to set them up correctly.

There is no need for the Series LLC unless you are in a situation to need multiple LLCs to hold multiple properties. Otherwise, a plain vanilla LLC will be just fine and you can DIY online at your Secretary of State. You’ll file a Schedule E for the LLC, along with your Form 1040. Depending upon where you live, you may have state and local filing requirements.

Note that the single form filing is only for 1-member LLCs. If this is a husband-wife owned LLC (or any combo other than 1 person), you’ll have to file a partnership return, form 1065.

Click to expand...

If I am the RE investor, wouldn't it offer more asset protection to have only me own the LLC?  I wouldn't want anyone to come after my husband the doctor who everybody thinks is rich.

[jfoxcpacfp]

@dragonfruit: Possibly so. Rules are different for community property states than they are for the other 41 so you would be more exposed in a CP state. But your "riches" are probably mostly held jointly, anyway, except for retirement accounts. Retirement accounts should be protected, but that depends upon where you live and the nature of the accounts. In general, it is simpler to have the LLC held in one name, as long as your marriage is secure.

[jfoxcpacfp]

dragonfruit wrote:

Johanna Turner wrote:

1. Live in a state that offers them.


2. Work with a professional to set them up correctly.

There is no need for the Series LLC unless you are in a situation to need multiple LLCs to hold multiple properties. Otherwise, a plain vanilla LLC will be just fine and you can DIY online at your Secretary of State. You’ll file a Schedule E for the LLC, along with your Form 1040. Depending upon where you live, you may have state and local filing requirements.

Note that the single form filing is only for 1-member LLCs. If this is a husband-wife owned LLC (or any combo other than 1 person), you’ll have to file a partnership return, form 1065.

Click to expand…

If I am the RE investor, wouldn’t it offer more asset protection to have only me own the LLC?  I wouldn’t want anyone to come after my husband the doctor who everybody thinks is rich.

Click to expand...

Possibly it would. Rules are different for community property states than they are for the other 41 so you would be more exposed in a CP state. But your "riches" are probably mostly held jointly, anyway, except for retirement accounts. Retirement accounts should be protected, but that depends upon where you live and the nature of the accounts. In general, it is simpler to have the LLC held in one name, as long as your marriage is secure.

[psych007]

While there are risks involved, I believe the opportunity to build wealth by owning properties allows you the opportunity to pass properties to children and later generations for them to manage, including the opportunities for them to learn entrepreneurial skills and supplement their "stable" profession with (I think WCI has a post on that), even if you take some personal hits in the short term.  And plus, I need something to occupy my hypomanic mind with especially since I've drunk the Kool-aid on passive investment/index funds.

[jfoxcpacfp]

psych007 wrote:

While there are risks involved, I believe the opportunity to build wealth by owning properties allows you the opportunity to pass properties to children and later generations for them to manage, including the opportunities for them to learn entrepreneurial skills and supplement their “stable” profession with (I think WCI has a post on that), even if you take some personal hits in the short term.  And plus, I need something to occupy my hypomanic mind with especially since I’ve drunk the Kool-aid on passive investment/index funds.

Click to expand...

As long as your investments are dictated by your goals, are not speculative, and you understand the risk/reward, I have no problem with your choices. In your case, you have reasons for purchasing real estate outright (the goal of teaching your children, want more challenge), which is logical. In all honesty, I have some rental real estate myself, but I don't know that I'd choose to do it all over again. I've just been lazy about getting the property I'd like to get rid of in shape to sell and it's easy to collect a monthly check.