The current financial crisis and impending recession has created a challenge for doctors and other medical professionals looking to create a sustainable life and set aside money for retirement.
Many have watched their retirement savings dwindle as the stock market crashes, while others have had to deal with draining working hours, short staffing, and stagnant wages.
However, there is one way that medical professionals can still build passive income through real estate even in today's economic climate: using their 401k or Roth IRA to invest in real estate.
As a part of your passive income plan, you can double down on your retirement savings. If you're currently contributing the maximum amount to a 401(k) or similar plan at work and if you've maxed out other tax-deferred investment accounts, Roth IRAs, and health savings accounts, consider investing in real estate.
In this blog, we'll look at how medical professionals can double down on their retirement savings by investing in property through these accounts with little or no tax liability associated with it—and how they can scale up these investments over time as well to build a passive income that will supply up to $5,000 per month in rental income with one property per month!
Building Passive Income is Achievable and The Best Investment for Doctors
Building wealth is hard enough when you have an entire investment portfolio working behind your back. Still, it can be downright impossible when all your money goes towards paying off student loans and keeping up with the rising cost of living in most major cities across North America.
Even if you earn over $600k annually, it might still feel like there isn't much left after paying for rent and food each month. With the right plan of action and smart investments, you can generate up to $5,000 per month off of one real estate investment - but how?
First, you will need to decide what type of property you want to purchase and what the average rent in your city is. For example, if you are looking to purchase an investment property to rent in Boston, the average rent is currently $3,772 per month for a two-bedroom unit. If the average three-family home in and around Boston costs $1,000,000, then you should expect to pay around $4,500/month for your mortgage for a 30-year fixed mortgage with a 20% down payment ($200,000).
Your rental income on three units at the average rental price of $3,772 should bring in around $11,316 per month in rental income. After subtracting your mortgage of $4,500+/- and insurance/maintenance, you should be left with a little over $5,000 profit per month. Another example of how to earn $5,000 per month in passive income from real estate can be found here.
Use Your 401K to Make Investments
For instance, you might be a doctor or nurse who has been putting aside money into their 401(k) plan at work. The funds deposited into this account are not taxed until they are withdrawn (which typically happens when the investor retires). Let's say that after putting away $1 million in your 401(k), you decide to invest it into an apartment building through a self-directed IRA account or similar retirement vehicle. You then get paid rent from tenants living in the apartments and earn interest on any mortgages used to finance those properties - both of which will be tax-free because they come from sources other than earned income such as wages or salary.
However, your 401K won't be of any help to you until you reach the age of 59 1/2. If you are a young professional, the approach of using your 401K to build a passive income will stunt your potential and limit your lifetime earnings significantly.
What Is a Taxable Brokerage Account?
A valuable option for an investment vehicle that medical professionals, in particular, can take advantage of is a taxable brokerage account.
A taxable brokerage account is an investment account that has been opened for you by a broker-dealer. For example, if you were to open a Roth IRA at Vanguard or Fidelity for example, this would be considered a taxable brokerage account because it was opened by one of these institutions (a broker-dealer). You will usually want to use this type of investment account for your stocks and bonds investments. You cannot use it for most other types of investments like real estate or private businesses.
Are Withdrawals From a Brokerage Account Taxable?
Yes. Capital gains from the sale of stocks, bonds, and mutual funds held for more than one year are taxable at a rate of long-term capital gains. This can be offset by any losses you may have incurred during that same period, which you'll be able to deduct against your income in order to reduce your tax liability.
These withdrawals are taxable, and these taxes can differ based on your current tax bracket. What is the best taxable brokerage account? Some will argue that stocks, EFT, or Real Estate Investment Trusts are the best taxable brokerage accounts to generate passive income.
Taxable Brokerage Account vs. Roth IRA vs. Syndications
As noted above, when you withdraw money from your taxable brokerage account, you will have to pay taxes. With a Roth IRA, your only tax liability is before you place the invested sums into the Roth IRA - so when you originally earn this money, like the taxes you pay at a W-2 job, that comes directly from your paycheck.
A Roth IRA is not an option for everyone -check with your financial advisor to see if this type of account is the right choice for you.
Syndications include the process of forming a group of either individuals or other organizations to jointly undertake the responsibility and capital required to invest. While this can sound intimidating, it's actually easier than you think. For a comparison of returns with 50k/yr into a taxable brokerage account vs. 50k/yr invested into syndications (returns reinvested), check out this informative link.
Trying a Hybrid Approach to Generating a Passive Income with Real Estate and How to Invest
Is rental real estate passive income? Real estate is a great way to build wealth, but it can be very expensive. How can you make passive income with real estate? In addition to paying down your mortgage each month and making repairs when needed, you might also need additional funds for renovations or upgrades that increase the value of your property over time.
Depending on how much cash flow you're getting from rent—and how much risk you're willing to take—it may make sense for real estate investors who already own rental properties as an investment strategy to sell one property every two years or so while keeping another one in their portfolio at all times.
Whether you're a doctor, nurse, or other medical professional, there are many opportunities to build passive income through real estate, even in today's economic climate.
You can use leverage and other techniques to purchase properties that provide returns above their cost of capital. That means you'll be able to generate rental income without having any skin in the game. The best way to invest in real estate for passive income should be something you discuss with a trusted financial advisor and a local real estate agent who understands your situation.
The key is finding great deals on residential income properties—and knowing how to finance them so that they provide a great return on investment (ROI). In many cases, if you are able to purchase a multi-tenanted rental property in a major city, you could generate up to $5,000 per month in passive income from rent just by owning the property.
As a medical professional, you know that your money can go further than most people's. That’s because you work hard and deserve to enjoy the rewards of that labor! One of the best ways to do this is by building passive income through real estate investments.
But as we've discussed in this post, it's not easy for everyone: there are many considerations and challenges involved with starting out on this journey.
However, if you're willing to put in some time and research (and maybe even hire a financial advisor), then there are plenty of opportunities out there for doctors or nurses who want their money to work hard for them instead of them having to work hard until retirement age. Real estate might be your quickest and easiest solution to make passive income as a medical professional over the other options of investing in your 401K or a taxable brokerage account.
David Price MD is the Founder and CEO of getFREED, a business providing real estate education and vetting of individual deals to help physicians and other healthcare professionals build a passive stream of income, allowing them to work less and practice on their terms.
David lives with his wife and two daughters in Atlanta, GA, USA.
To find out more about David and getFREED, head to http://www.get-freed.com.