How Physicians Can Build Stronger Portfolios with Real Estate

Introduction: The Need for Diversification

Physicians are paid well, but also face unique financial pressures, including student loans and the need for financial stability given the demanding nature of their work. Unlike in other careers where income gradually builds throughout one’s twenties and thirties, physicians often achieve high incomes and zero debt slightly later, creating an immediate need for thoughtful asset allocation.

In addition, the demands of patient care, performing procedures (invasive and non-invasive) as well as on-call responsibilities make it challenging for physicians to have time to adequately manage their finances.

Therefore, the investments most appropriate for physicians are often those that are passive, such that cash flows are created for them while they are working.

With the above in mind, real estate investments can offer valuable diversification away from traditional stock and bond portfolios, which is crucial for managing risk and ensuring long-term financial stability.

The Advantages of Real Estate for Physicians

Investing in real estate can provide physicians with several benefits:

Passive Income: Real estate can generate rental income, which can be particularly appealing for physicians seeking to reduce their workload or secure income during retirement.

Tax Benefits: Real estate investors can benefit from various tax deductions, such as mortgage interest, property taxes, and depreciation. Additionally, the pass-through deduction can allow landlords to deduct up to 20% of their business profits, potentially reducing their taxable income​.

Appreciation Potential: Over time, real estate properties generally appreciate in value. This capital appreciation can significantly enhance a physician’s return on investment​.

Real Estate Investment Vehicles Suitable for Physicians

Direct Ownership: Physicians can invest directly in properties, becoming landlords and managing properties themselves or through property management services.

While direct ownership of property can provide strong potential returns and satisfaction, most physicians we speak with have too many demands on their time to feel that they can execute well on direct property investment. This is particularly true when it comes to non-residential CRE that entails greater operational complexity but may offer an alternative investment thesis and additional diversification, such as medical office buildings.

Real Estate Investment Trusts (REITs): REITs offer a way to invest in real estate without having to own physical properties directly, or even to pick individual assets. While public REITs often correlate more closely with stock market performance, private REITs can offer similar diversification while behaving more like an alternative asset. REITs typically carry specific tax advantages. EquityMultiple’s Ascent Income Fund, for example, is structured as a private REIT. Physicians can take advantage of this Fund, which provides a compelling income objective (12.09% net historical distributed yield as of Q2, 2024) with quarterly cash flow distributions which can be made to the principle or can be returned to the investor on a quarterly basis.

Real Estate Crowdfunding: Otherwise referred to as “online syndications,” platforms like EquityMultiple allow physicians to invest in commercial real estate projects passively, at relatively low minimums, from anywhere. When investing via a real estate crowdfunding platform, your capital is pooled with that of other investors. In sum, this capital funds a portion of the equity or debt needed to finance the project.

When investing through a real estate crowdfunding platform, note that investors now have many options to choose from, creating opportunities and posing risks.

Among real estate crowdfunding platforms, physicians should consider the various strategies available and keep some evaluation criteria in mind in terms of platform selection.

Available Investing Strategies include:

• JV equity
• Debt or preferred equity
• Private funds or REITs
• Short-term notes

Some platforms may offer just one or a combination of several of these options. EquityMultiple happens to offer all. Ultimately, physicians may choose to allocate among several different platforms and across options. More on this in a bit.

Key Considerations

• The track record of the platform to date — virtually any platform that has been around for several years will have underperforming investments. In real estate investing, no one bats one thousand, especially when macro events like the COVID pandemic or rising interest rates complicate business plans. What’s important is that an investing platform transparently shares results, and that you are comfortable with the probability of underperformance or even capital loss based on that track record.
• The model of the platform and how involved its team remains in your investments — some platforms operate as marketplaces: connecting points between individual investor capital and sponsors looking to raise capital for their project. EquityMultiple, on the other hand, employs a dedicated asset management team that works to maximize returns on investor capital all the way through to exit of the investment.

• The structure of the underlying investments and what degree of protections you may have — be sure you understand how the investment is structured from a legal entity standpoint. In some cases, you may be investing directly with the sponsor, which could limit your rights. In other cases, you may be investing through a SPV structure, whereby investor capital is pooled into a larger entity and each individual investor potentially benefits from greater rights and negotiating position with respect to the sponsor. As you browse equity investments, also take a close look at the profit splits (the sponsor promote and waterfall) and evaluate whether that split is acceptable given the complexity of the plan, the risk the sponsor is taking on, and the overall net return potential you may see as an individual investor.

Choosing Real Estate Investments

Anyone who has survived med school is well versed in “algorithmic” thinking — making decisions via heuristics and booleans. Picking real estate investments is similar. You don’t know how any given investment will play out, and all investments entail risk. Any investor would opt for a “low risk, high return” investment if they could, but remember that all investments involve a tradeoff between risk and potential return.

The best choice of real estate asset allocation for your portfolio at any given moment can depend on a group of fairly straightforward criteria:

• Hold period
• Sponsor quality
• Income potential
• Your preexisting asset allocation
• Your goals and risk tolerance
• Your age and investing time horizon

Below is a decision tree you may go through as you are selecting investments on the EquityMultiple platform. Note that should not be taken as hard-and-fast investment advice; what you choose depends on other factors. And, in any case, diversification across strategies is recommended.

That said, our investment pillars — Keep, Earn, Grow — were designed to fit distinct life stages and strategies. You might practice this type of thinking in beginning to craft your EquityMultiple portfolio.

How Do Physicians Invest Through EquityMultiple?

All types of investors use EquityMultiple to build more diversified portfolios and easily access the commercial real estate asset class — Individuals of various ages, professions, and levels of real estate knowledge. Physicians, however, are the largest professional segment, representing over a quarter of EquityMultiple’s investor community.

The reason physicians gravitate to EquityMultiple should be clear by now. To recap, EquityMultiple allows mid-career physicians to:

• Establish alternative passive income streams that can help provide a backstop against overreliance on a potentially stressful career. Private-market real estate, of the type EquityMultiple offers, can potentially be part of a diversified portfolio peace of mind for physicians who may worry about burnout.
• Invest easily and passively in private-market real estate in markets across the U.S., from anywhere, in a relatively short amount of time. While some physicians may opt to own rental property directly, EquityMultiple makes it easy to continue building a real estate portfolio even during years where the demands of career and family make “landlording” untenable.
• Potentially realize tax benefits, including pass-through depreciation; potentially offsetting losses against passive income if applicable; or investing via a self-directed IRA (SDIRA). Note that EquityMultiple does not provide tax advice. Please consult with a licensed tax professional when making real estate investments.

Physicians who invest via EquityMultiple adopt varying strategies in terms of asset allocation depending on their preexisting portfolio, age, risk tolerance, and other factors. That said, it’s instructive to look at the aggregate portfolio of physician investors across EquityMultiple’s three “pillars” — Keep, Earn, and Grow.

Physician investors on the EquityMultiple platform are fairly well diversified, with nearly identical allocations to “Earn” (income-oriented debt and preferred equity investments) and “Grow” (JV equity investments targeting higher potential upside). Versus EquityMultiple’s broader investor network, physicians are slightly more allocated toward Earn — income-oriented investments.

The graphic above shows that for a typical $100,000 investment in EquityMultiple, approximately 20% is comprised of senior debt (the Keep designation) which is viewed as very safe and will generate steady and predictable cash flows. The remaining 80% is comprised of assets that should generate a higher rate of return with the expected increase in risk (Earn and Grow designations). While this is a good starting point for physician investors, future whitepapers and real-life case studies will look at more specific examples of physicians’ real estate portfolio allocations.

This stands to reason, as physicians are often minded toward reliable passive income. Further, while some physicians have substantial real estate investing knowledge or experience, many are relatively new to the asset class. Some physician investors rightly begin with Keep or Earn, which entail shorter target hold periods and greater investor protections. Again, note that each investor’s EquityMultiple portfolio should depend on their overall strategy, risk tolerance, liquidity, and investing time horizon. Regardless of how investors allocate among the three pillars, we recommend diversification across a number of investments in each, which is generally achievable via relatively low minimums.

The Three EquityMultiple Investments with the Highest Proportion of Physician Investors

(Minimum of 40 total investors)

While physicians have participated in every investment available on the EquityMultiple platform dating back to 2015, the following three drew a particularly high percentage of doctors:

The Bottom Line: Building a Real Estate-Enhanced Portfolio

For physicians, real estate investment is not just about generating additional income. It’s about creating financial security and potentially achieving earlier financial independence. With the right strategy, real estate can be a powerful tool for building a resilient and diversified investment portfolio.

As physicians enter their prime earning years, many focus intently on building a more diversified portfolio and passive income streams. This is wise for any investor, but particularly for physicians who often work long hours doing stressful, important work. For this same reason, passive real estate investing — without the “tenants and toilettes” — is often the preferred means. EquityMultiple has continued to refine our suite of investment options with physicians in mind. As you navigate a busy life and a sometimes stressful career, you need someone in your corner. We aim to be your trusted guide as you build a diversified real estate portfolio.

Learn more at equitymultiple.com