A few short years ago, I started to worry about my family’s financial future while vacationing. During our annual ski trip, I took a nasty fall, landing on my wrist. The pain in my arm made me take notice of just how fragile our financial situation was.
As a self-employed periodontist, I asked myself:
- What if I was injured while playing sports with my kids?
- What if I became permanently disabled?
If this was the case, then no other income would be coming in.
Not a good situation to be in, right?
This fact alone made me take a hard look at our financial future, and I realized that something needed to be done.
Most doctors have only one source of income from their practice. I was also in this category until a few short years ago when I decided something needed to be done before it was too late.
Now I’ve learned how to build multiple streams of passive income using real estate so that I’m replacing my active income.
Start with your why
Why real estate?
By having a “why” you want something, it’ll help keep you motivated to pursue your goals when setbacks and mistakes occur.
For our family, we wanted passive income streams.
Passive income gives you options. I love options.
It doesn’t matter if you want to work forever, retire early, or change careers, multiple income sources can make it happen.
Our passive income is not only tax-free, but we’re also able to access it if needed, unlike traditional retirement accounts.
Three benefits of passive real estate investing
1. Tax advantages. As a successful doctor, the IRS wants its fair share from you each year by way of taxes. If you want to legally lower your taxes, then real estate can help.
How? The first way is by depreciation, which is one of the most powerful wealth-building tools the rich use. The IRS allows us to write off the value of an asset over time via a cost segregation study, which lowers taxes owed on the cash flow.
Another huge tax benefit is the 1031 Exchange.
Again, the IRS encourages U.S. citizens to own real estate by offering something that can defer taxes.
This strategy allows you to defer paying capital gains taxes on an investment property when it is sold as long as you roll the entire amount you originally bought the deal for into a new deal.
This is how the rich get really rich.
If you’re tired of paying 40+ percent to Uncle Sam each year, consider real estate.
2. Cash flow. Rich Dad Poor Dad author Robert Kiyosaki invests in real estate strictly for cash flow.
Most people that invest in real estate do so in order to create an additional positive cash flow stream.
According to Thomas Corley, author of Rich Habits, he found self-made millionaires:
- 65 percent had three income streams
- 45 percent have four income streams
- 29 percent have five income streams
Why do you think most doctors stop at only creating one income stream?
The goal is to create multiple streams of income through passive investments.
When you invest properly in a correctly managed asset such as an apartment complex, it produces positive cash flow in excess of expenses.
3. Appreciation. Appreciation is the increase in the value of an investment property over time. It’s an important variable that plays a key role in defining the profit from a property for investors.
When considering to passively invest in assets such as an apartment syndication, you should pay attention to what improvements are being performed to increase the future value.
The syndication deals I’m currently in are value-add properties, which produces forced appreciation.
This is caused by improvements such as:
- painting
- landscaping
- remodeling
- parking lot repairs/replacements
- addition of new facilities (i.e., swimming pool, playground, etc.)
- addition of new services such as a laundry room
By making these improvements, rent can gradually be raised over the normal 5-7 year hold period these deals have before turning around and selling them at a higher price due to this forced appreciation.
What should you invest in?
The great advantage real estate offers is it allows you to be:
- completely hands-on
- completely hands-off
- somewhere in between
In other words, you can be active, passive, or somewhere in the middle.
We’ve touched on different ways to invest in real estate in previous articles such as:
If my wife and I hadn’t set up specific financial goals, then choosing the best option wouldn’t have been easy.
Passive investing in syndications was our clear choice as we wanted to free up our time to spend with kids.
Jeff Anzalone is a periodontist who blogs at Debt Free Dr.
Image credit: Shutterstock.com
