Despite worried forecasts for the start of the new millennium, the economy was strong. As stock prices began to fall in the early 2000s, however, investors began looking for options to further diversify their portfolios. Commercial and residential real estate became popular for those with extra disposable income, such as doctors, and people who had never purchased these types of assets for investment discovered exciting opportunities. The subsequent downturn of the real estate market in 2007 and 2008 caused many of these same investors to see the values of their property decrease significantly, thus begging the question: Is real estate a good investment? And, if so, for whom?
Data seems to show that the most successful investors in real estate are those who do it for a living. They understand the debt market and typically spend significant time and effort evaluating properties and the real estate climate as a whole, and adjust their risk tolerance accordingly. A good real estate professional will diversify their portfolio to help deal with extended vacancies, and knows when prices have exceeded value, which translates to a seller’s market. For doctors wanting to invest directly, this type of risk and involvement is often too great and too time-consuming while also trying to manage a full time medical practice.
Real Estate Investment Trusts, or REITs, evolved to solve for this very dilemma. Using pooled resources to invest in commercial properties, mortgages and other real estate investments, profits or losses from REITS are shared among investors without the headache of managing properties or taking on additional debt. While REITs do offer a way to diversify an investment portfolio, they are often more complicated than they appear, and any investor should research very carefully to find a reputable REIT before investing.
Doctors, medical professionals and other casual real estate investors can safely diversify their portfolio and directly invest in real estate by following some simple guidelines:
- Engage a good real estate agent that has knowledge and experience in the area you are looking to invest. Although time is at a premium, a serious investor should take the time to find a good agent. It will pay huge dividends in the end product.
- Engage a real estate attorney, not a general practitioner, family attorney or litigator that does real estate on the side. Just as a doctor would not refer a patient with a heart condition to a nephrologist, nor should his/her largest single investment be trusted to anyone other than a professional trained in real estate. A real estate attorney can help identify and understand some of the subtleties in negotiating a letter of intent and contract. One common issue a property being sold “As-Is”. What does this mean and how can an investor protect themselves in an “As-Is” deal? A real estate attorney has experience dealing with such nuances.
- Invest in the familiar. Owner occupied real estate gets preferential treatment in the debt market and if a professional occupies more than 50% of the property, they can qualify for certain SBA (Small Business Administration) loans that can provide long term debt at very competitive rates, with as little as a 10% down payment. Medical professionals purchasing medical office space is often a smart investment decision, and allows for controlling costs and use of space. In addition, physicians owning their own office buildings make for good “forced savings” and can provide extra income in retirement. When a physician retires, he/she is able to continue to lease the space to the new tenant or physician who takes over the practice. Statistics show that even in turbulent markets, the delinquency rate for general office space is around 9%, compared with 3% for medical office space.
- Understand the investment time frame. If the property is going to be held for more than 10 years, there is more flexibility in evaluating a property’s price to value ratio. New construction looks nice, clean and modern, but often carries a premium, may not be built as well, may have un-manifested defects and tends to lose its value quickly in a market downturn or if there is an abundance of new product.
- Though it may sound cliché, location, it turns out, is still the most important aspect of buying. Consider that sometimes purchasing ahead of the curve can be very rewarding if an investor has the means and patience to wait for the market to catch up. There is a reason why redevelopment of downtrodden areas has been booming. Property values are typically low and the room for growth is great.
Adhering to the principles outlined above will ensure a positive experience for real estate investors. As the economy slowly recovers, real estate continues to offer tremendous investment opportunities and can be a good addition to any physician’s portfolio. Contact Frier Levitt to speak to an attorney.