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How to invest in RE? MFH? Commercial? Syndications?

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  • How to invest in RE? MFH? Commercial? Syndications?

    I'm an Emergency Medicine physician in the Bay Area, 2 years out of residency training (still paying off loans). I currently own one SFH rental that was a property I purchased in residency using a physician loan and converted to a rental when I moved to California. My SFH has been cash flowing ~ $500/month (not including saving for cap ex).

    My first property is in a Dallas suburb that I purchased using a physician loan in 2016, I ended up moving to California in 2020 for work and started renting the property then.

    I love working in Emergency Medicine, but I'm interested in the FI portion of FIRE movement. If I do the typical save a lot, invest in index funds I can likely reach full FIRE at age 50 (currently 31). My goal is the accelerate the the timeline to FI via REI due to cash-flow.

    Right now I'm trying to figure out where my REI journey will take me. My primary goal is to be cash-flowing $10k/month within 10 years (only $9,500 to go).

    I realize with SFH it's going to take a lot of deals to get there....

    At this point I'm trying to figure out where to put my energies:

    Active
    - small MFH ( 3/4-plexes I can purchase with conventional financing) and build my portfolio over time

    - commercial (apartments, self-storage or industrial)

    OR

    Passive
    - LP in syndications


    One of the challenges I have with REI that no one seems to talk about is the labor that it takes to find deals and carry them out. As a higher income earner, if I were to account for my labor costs in deal analysis a lot of these deals suddenly start looking much less appealing...perhaps this is because I haven't quite figured out my path yet. It just seems like the key to REI is getting a property significantly below market-value which requires a lot of work, lots of deals will fall through, then there is all the time with property inspections, title process, closing, rehab and dealing with contractors, and then finding tenants and actually renting it out. This doesn't even take into account the likely hundreds of hours of background research determining which markets to invest and building a team...

    A lot of the REI books I've read seem to propose an approach of building a portfolio of SFH and small MFH before jumping to apartments for example.

    I'm thinking, the time it's going to take to build a portfolio is not negligible and I almost wonder if I should just jump to bigger deals. If I end up staying in residential and I assume at least $200/month cash-flow per unit I'm going to need 50 units....

    In short, I'm not opposed to putting in the time reach my FI goals quicker -- I'm just looking to spend my time most efficiently. I don't have a "passion" for real estate, if I did I would have become a RE professional rather than a physician. RE is a means to an end.


    I appreciate any input/advice and happy to help anyone I can!


  • #2
    As a full time physician you will unlikely have time to manage yourself. I sure didn't so I used 3rd party management. I started out in multifamily as my reading pointed to that being more cost effective than SFH for 3rd party management. You will need to educate yourself first to avoid serious mistakes but understand most of us make some mistakes, just don't make the same one twice. As a full time Dr you won't qualify as a real estate professional. It's good you're starting out at your age as time is on your side to build a portfolio in real estate.

    Comment


    • #3
      There’s nothing magical about cash flow accelerating your path to FI.

      How long it takes you to get to FI depends on three other things: how much money you make, how much money you spend, and the time- and dollar-weighted return of your investments over time. That’s it.

      There are lots of ways you can spend down assets in index funds prior to age 59.5.

      Point being, RE is an optional asset class. You might get to FI a little sooner if it has higher returns and diversification and tax benefits. But don’t bother if you don’t think it’s worth the time and hassle. I agree with much of what you’ve written about direct RE investing and why the juice isn’t worth the squeeze.

      If you want to learn more about syndications and funds, I’d start by reading the books by Sean Cook and Brian Burke. There are a plethora of courses affiliated with this site but I am not sure how good they are or what commercial angle they have.

      Comment


      • #4
        Originally posted by dennis View Post
        As a full time physician you will unlikely have time to manage yourself. I sure didn't so I used 3rd party management. I started out in multifamily as my reading pointed to that being more cost effective than SFH for 3rd party management. You will need to educate yourself first to avoid serious mistakes but understand most of us make some mistakes, just don't make the same one twice. As a full time Dr you won't qualify as a real estate professional. It's good you're starting out at your age as time is on your side to build a portfolio in real estate.
        At this point, I am working about 30 hours/week and currently only have one property which has been pretty easy to manage. As my portfolio grows I'll definitely be looking into professional property management.

        Comment


        • #5
          Originally posted by Lithium View Post
          There’s nothing magical about cash flow accelerating your path to FI.

          How long it takes you to get to FI depends on three other things: how much money you make, how much money you spend, and the time- and dollar-weighted return of your investments over time. That’s it.

          There are lots of ways you can spend down assets in index funds prior to age 59.5.

          Point being, RE is an optional asset class. You might get to FI a little sooner if it has higher returns and diversification and tax benefits. But don’t bother if you don’t think it’s worth the time and hassle. I agree with much of what you’ve written about direct RE investing and why the juice isn’t worth the squeeze.

          If you want to learn more about syndications and funds, I’d start by reading the books by Sean Cook and Brian Burke. There are a plethora of courses affiliated with this site but I am not sure how good they are or what commercial angle they have.
          I agree with your assessment of reaching FI. I see RE as a means to achieving FI faster due to: cash-flow (earning more) and enhanced tax-advantaged returns. Even without have RE professional status the passive losses and the opportunity to do infinite 1031 exchanges is very appealing.

          My personal belief is that the work for RE can be worth the effort, and I don't mind doing the leg work BUT I'm looking to be as efficient with my time as possible. Basically, I want to make sure the specific REI I pursue will have an IRR that is greater than I could have had investing in a traditional portfolio when accounting for the opportunity cost of my time. Basically if I assume that time spent working on RE could be time spent working clinically, when my hourly rate is added into the equation do I still come out on top? Obviously there is no crystal ball, but figured I could try to crowdsource some experience related to this topic...

          Comment


          • #6
            RE can have returns much higher than stock investing, but only if done well. I have been at the real estate game long enough to have learned a few things. My spouse will have real estate professional status for the first time in 2021. We will use cost segregation and bonus depreciation to generate large paper losses, and then use those losses to wipe out much of my taxable income. The first year returns will be impressive:

            Tax savings: 85% return (cost segregation with 25% first year depreciation losses, which equals the entire investment downpayment, saving me taxes at my 46% combined marginal rate, so when $54 of post tax net income remains $100 of fully investable income, that is the 85% return)
            Cash on cash: 8% return (tax free, equals 15% taxable return)
            Mortgage pay down from rent payments: 8% return (also not taxed)
            Appreciation: conservative estimate 3% of overall market value, leveraged at 25% down is 12% return (also not taxed until you sell, and delayed if you 1031 exchange when you sell)

            Add it all up: 120% 1st year return

            These are some crazy numbers, much of it due to the tax advantages. My plan is to add these substantial returns to juice up my net worth through the real estate investments in 2021. You cannot get these types of returns with stock investments. The same level of tax advantages are just not there.

            Comment


            • #7
              Originally posted by White.Beard.Doc View Post
              RE can have returns much higher than stock investing, but only if done well. I have been at the real estate game long enough to have learned a few things. My spouse will have real estate professional status for the first time in 2021. We will use cost segregation and bonus depreciation to generate large paper losses, and then use those losses to wipe out much of my taxable income. The first year returns will be impressive:

              Tax savings: 85% return (cost segregation with 25% first year depreciation losses, which equals the entire investment downpayment, saving me taxes at my 46% combined marginal rate, so when $54 of post tax net income remains $100 of fully investable income, that is the 85% return)
              Cash on cash: 8% return (tax free, equals 15% taxable return)
              Mortgage pay down from rent payments: 8% return (also not taxed)
              Appreciation: conservative estimate 3% of overall market value, leveraged at 25% down is 12% return (also not taxed until you sell, and delayed if you 1031 exchange when you sell)

              Add it all up: 120% 1st year return

              These are some crazy numbers, much of it due to the tax advantages. My plan is to add these substantial returns to juice up my net worth through the real estate investments in 2021. You cannot get these types of returns with stock investments. The same level of tax advantages are just not there.
              Tax benefits aside, the returns are not comparable with RE at 75% LVR Vs index funds unlevered.

              A more comparable example would be $100 equity:
              Do you buy $200 in RE or $200 in world index ?

              The RE has undiversified risk but people do well by leveraging it to much more than they would indexes (in your case by buying $400 of RE). This can be advantageous early career but the risk with leverage is increased risk if it goes wrong.

              Later career I find the debt is not limited by debt capacity but how much debt I want to have.

              To the OP’s question, IMO if you don’t understand the importance of leverage in RE, you don’t understand a major reason (to me the main reason) for investing in this asset class.

              Comment


              • #8
                Originally posted by White.Beard.Doc View Post
                RE can have returns much higher than stock investing, but only if done well. I have been at the real estate game long enough to have learned a few things. My spouse will have real estate professional status for the first time in 2021. We will use cost segregation and bonus depreciation to generate large paper losses, and then use those losses to wipe out much of my taxable income. The first year returns will be impressive:

                Tax savings: 85% return (cost segregation with 25% first year depreciation losses, which equals the entire investment downpayment, saving me taxes at my 46% combined marginal rate, so when $54 of post tax net income remains $100 of fully investable income, that is the 85% return)
                Cash on cash: 8% return (tax free, equals 15% taxable return)
                Mortgage pay down from rent payments: 8% return (also not taxed)
                Appreciation: conservative estimate 3% of overall market value, leveraged at 25% down is 12% return (also not taxed until you sell, and delayed if you 1031 exchange when you sell)

                Add it all up: 120% 1st year return

                These are some crazy numbers, much of it due to the tax advantages. My plan is to add these substantial returns to juice up my net worth through the real estate investments in 2021. You cannot get these types of returns with stock investments. The same level of tax advantages are just not there.
                yea RE professional status is a total game changer. unfortunately my spouse and I are both FT emergency docs so unlikely to have access to that. even without it though, the additional income should be taxed minimally just with depreciation and the passive losses can be carried forward plus 1031 makes it appealing, though not as much as RE professional status

                Comment


                • #9
                  Originally posted by Dont_know_mind View Post

                  Tax benefits aside, the returns are not comparable with RE at 75% LVR Vs index funds unlevered.

                  A more comparable example would be $100 equity:
                  Do you buy $200 in RE or $200 in world index ?

                  The RE has undiversified risk but people do well by leveraging it to much more than they would indexes (in your case by buying $400 of RE). This can be advantageous early career but the risk with leverage is increased risk if it goes wrong.

                  Later career I find the debt is not limited by debt capacity but how much debt I want to have.

                  To the OP’s question, IMO if you don’t understand the importance of leverage in RE, you don’t understand a major reason (to me the main reason) for investing in this asset class.
                  the leverage aspect of REI is definitely a game changer. it seems in syndications as a LP there's not really much opportunity to directly take advantage of leverage, although it's essentially built into the deal

                  Comment


                  • #10
                    Originally posted by jnack View Post

                    the leverage aspect of REI is definitely a game changer. it seems in syndications as a LP there's not really much opportunity to directly take advantage of leverage, although it's essentially built into the deal
                    I think in syndications and REITS you are more diversified but you replace this undiversified risk with agency risk.

                    The incentive is often to juice returns with less obvious forms of leverage and for the managers to bail out of the equity at a large markup, leaving investors to be the bagholders with a high cost ongoing manager that has given them some sort of benefit.

                    When I was starting out I went to a few property investment seminars. The industry is probably better these days, but it’s probably not that different. It amazed me how good underlying properties got structured into something unprofitable. In one instance the underlying property appreciated 3X and somehow the investors lost most of their capital. Prior to the GFC some REITS were doing great with consistent returns. Post GFC, some had management companies that were very difficult to remove with poison pill clauses. Look carefully at the underlying incentives in the investment.

                    Personally I don’t invest in syndications
                    or in partnership with anyone.
                    I estimate that my hourly rate from the time I have spent on RE investments over the last 20 years is around $5000/hour.
                    I invest in acreages that I think have subdivision potential. They are very negative cashflow, but I have used my stable physician salary to carry them and earlier in my career to leverage them. I have very little in RE deductions as there isn’t much that is depreciable. I don’t think most people are comfortable with this type of RE investing. It has major risks, but it has worked out well for me. Sometimes I wonder whether it was luck or skill. Probably both, but I don’t know the relative contribution. I bought my first property when I finished internship and when I could get a mortgage. Good luck in your endeavours.

                    Comment


                    • #11
                      Originally posted by Dont_know_mind View Post

                      I think in syndications and REITS you are more diversified but you replace this undiversified risk with agency risk.

                      The incentive is often to juice returns with less obvious forms of leverage and for the managers to bail out of the equity at a large markup, leaving investors to be the bagholders with a high cost ongoing manager that has given them some sort of benefit.

                      When I was starting out I went to a few property investment seminars. The industry is probably better these days, but it’s probably not that different. It amazed me how good underlying properties got structured into something unprofitable. In one instance the underlying property appreciated 3X and somehow the investors lost most of their capital. Prior to the GFC some REITS were doing great with consistent returns. Post GFC, some had management companies that were very difficult to remove with poison pill clauses. Look carefully at the underlying incentives in the investment.

                      Personally I don’t invest in syndications
                      or in partnership with anyone.
                      I estimate that my hourly rate from the time I have spent on RE investments over the last 20 years is around $5000/hour.
                      I invest in acreages that I think have subdivision potential. They are very negative cashflow, but I have used my stable physician salary to carry them and earlier in my career to leverage them. I have very little in RE deductions as there isn’t much that is depreciable. I don’t think most people are comfortable with this type of RE investing. It has major risks, but it has worked out well for me. Sometimes I wonder whether it was luck or skill. Probably both, but I don’t know the relative contribution. I bought my first property when I finished internship and when I could get a mortgage. Good luck in your endeavours.
                      One of the appealing aspects of real estate is the wide range of niches that are available for investment. I would never do as you did with owning just land because I always want depreciation to shelter income. But it works great for you so more power to you. I've stuck with residential (multifamily and single family) as I feel it's the safest niche. People will always need a place to live. And I have also set up syndicates myself and invested in other syndicates. They have worked for me.

                      Comment


                      • #12

                        I think given your already very limited time outside of you profession coupled with lack of passion around being a landlord, passive investments through syndications would likely make sense. I work with a ton of folks in the Bay Area, though they're in FAANG typically, and what they like about syndications (aside from it being passive) is that they can invest in better cash flowing markets that are more landlord friendly - in our case, primarily Kansas City. If you have any specific syndication related questions, I'm happy to answer questions for ya!

                        Ryan Beatty
                        Professional real estate investor/syndicator
                        Real Estate Investment Advisor
                        FixedIncomeMd.com

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