If you're aged 40 to 60 years old, the next 5 to 20years will be critical. In retirement you'll need 80%of your preretirement income—more if you want totravel—but that's just the first year. In each of the followingyears you'll need even more to compensate forthe rate of inflation. Many doctors would like to retireearly, but the longer the retirement, the more they riskhaving insufficient retirement income.
The major advantages of real estate are in rentalproperties. They offer stable income, which increaseswith inflation, and real estate always has residualvalue—prices will never fall to zero. Also real estate isa hybrid asset, having the capital appreciation of astock but the income-producing capacity of a bond.This makes a real estate investment the ultimate protectionfrom inflation because in this situation, inflationworks for you, not against you, pushing the value ofyour asset upwards as well as your rental income.
However, doctors share common roadblocks as towhy they don't invest—insufficient time and lack ofknowledge. The following are some issues to considerwhen looking into real estate investments:
•Appreciation. Carefully analyzed real estateinvestments will usually increase in value over time. Bybuying property in the right location, the investor canrest assured that the value of their investment willalways increase over the long run.
•Leverage. By applying the concept of leverage(ie, borrowing most of the funds necessary as a loanagainst real estate to buy other real estate or businessassets), an investor will have greater purchasing power,which gives them the ability to acquire a number ofinvestments, resulting in larger returns.
•Income. Renting real estate creates cash flow.The tenants pay the rent, which you can apply to themortgage. They can literally buy all or most of theproperty for the investor.
•Tax advantages. The investor can deduct, as anexpense, all of the interest, property taxes, insurance,repairs, and depreciation of their property. The rules ofdepreciation bear no relationship to the market valueof the real estate; the property can be appreciating invalue while the investor is depreciating the real estateasset on their tax return. This noncash expense canreduce current taxable income without reducing actualincome. Real estate is the only investment that theIRS allows you to show a depreciable loss when youhave, in fact, made a profit.
•Tax-deferred exchanging. This allows aninvestor in real estate to sell and purchase other investmentproperty without current tax liability and createfor the investor substantial additional wealth.
By applying the above concepts, a doctor can investin real estate and get the cash flow of bonds, the appreciationthey could see in a successful year in stocks,along with the ability to have someone else pay for themajority of the investment. Additionally, you candeclare a loss on your taxes even though the real estateis making money. This makes real estate the most prudentinvestment today for doctors.
Paul Hanks, president of Portfolio Development Services, startedhis professional career as an orthodontist. He became a Californiareal estate broker and started a company tailored to the needs ofclinicians that offers a trustworthy and safe way to invest in realestate. His company caters to people who are simply too busy toinvest and strives to create future financial security and wealth for his clients andtheir families.