How to invest in real estate (without being a landlord)

Physicians with an interest in adding real estate investments to their portfolio may wonder how they can possibly make the time to manage properties and do their jobs. But real estate experts offer several ways to earn passive or semi-passive income from real estate that don’t require becoming a landlord in the traditional sense. For physicians, who tend to be high earners, real estate investments can also have tax breaks.

Figure out your goals

To figure out the right real estate investment strategy, it’s useful to first outline your financial goals, according to Harry Nima Zegarra, MD, a pulmonary and critical care physician at Baylor University Medical Center in Dallas, Texas, and owner of Nima Equity. “A return on investment is important, but as important is how much time do you want to devote to doing certain types of activities?” he asked.

Real estate has multiple advantages, he said, including “cash flow, appreciation, leverage, the equity that keeps building when paying your mortgage, and tax benefits.”

Nima Zegarra, who has an active real estate portfolio, first became excited about real estate’s wealth building possibilities after selling a home he and his wife had bought in 2011 that had appreciated significantly in the years they owned it. They did not want to spend the time and effort that goes into property management and soon found out about real estate syndication.

Real estate syndication

Real estate syndication is where a group of investors come together to purchase a property at a price that none of them could afford individually. After the property appreciates over time, they sell it and share the profits, according to Eli Goodman, a licensed real estate agent with Illinois Real Estate Buyers in Chicago, Illinois.

In this method, a $2 million to $3 million investment is raised by the investor group, which can include any individuals who decide to invest together, Goodman said. Once the capital is raised, the real estate syndicator oversees all the hard work. “The promoter of this would find the assets, raise the capital, buy the property, raise the value, stabilize it, and manage it,” Goodman said.

Nima Zegarra and his investment group prefer to purchase apartment complexes. So not only do the investors receive passive rental cash flow during the year, which he estimates at a 7% to 10% return each year, but they also gain appreciation as the building increases in value. In four to six years, the syndicate sells the building and splits the equity.

While the returns on syndication can be very good, Nima Zegarra warns that this is not a liquid investment. “If I change my mind in two months in stocks, I can sell my stocks and get my money. In syndication it’s usually an investment for four to six years,” he explained.

Additionally, most of these types of investing require a significant upfront layout, from $50,000 to considerably more. And every investor has to pay the syndicator an entrance fee and an exit fee, typically in the form of a percentage on the return.

The benefit is that it’s a passive form of income building once one has done the legwork to find the right syndication group, which, Nima Zegarra says, takes time and research. And returns can be quite good, as much as 10% to 15% return annually, according to rental investor and broker Donnie McGriff, owner of Echo Properties in Dothan, Alabama.

Nima Zegarra said his group aims for 50% to 60% percent gains on the amount of investment, selling at year 5.

Buy low, renovate and flip

Another real estate method that doesn’t require becoming a landlord is to, essentially, “flip” houses by buying at a low price then investing in renovations and selling it at a higher purchase price, McGriff said. “There are a lot of opportunities in California and nationwide for physicians to buy low and do renovations. California in particular has sub-markets where there’s an opportunity to get into assets that have not been serviced or maintained.”

While this method is still passive over time, it requires a lot more work up front, and a physician should ask some important questions, McGriff said. “Do they want to hold it for a duration, or do they want to renovate and then sell the assets and take advantage of increased value in equity and repairs?”

It’s also possible to pay a broker to do the flipping process, according to Brian LeBow, a licensed real estate broker and owner of Bell Properties in Arcadia, California. “They trust me with their money and we do an equity split,” Bell said. He engages all the parties necessary to renovate and reappraise the property before selling it.

Another angle in flipping properties is to use the appreciation value of a new home, and its higher appraisal value, to take out a loan to purchase another property, McGriff said. “Then you can rinse and repeat. You don’t have to keep your money tied up in a property forever,” he said.

Work with a
property manager

While becoming a landlord may not appeal, cash flow from rental properties can be a great form of passive income, LeBow said. But physicians don’t have to manage the properties themselves; they can outsource that work to a property management company. In LeBow’s experience, “A lot of clients will go six or seven months without any communication [with their property managers]. Many physicians will give property managers a financial authorization to take care of any repairs or issues that crop up. “It can be really hands off for them,” he said. “We have one doctor with a 30-unit apartment complex in Glendale, California. We talk to him maybe once a year around tax time.”

There are property management software programs that simplify and automate the daily tasks of being a landlord, according to Chris Lee, owner of Landlord Gurus, a website that offers advice to independent landlords and rental owners.

“Property management software simplifies and automates the daily responsibilities of landlords, from advertising, tenant screening, bookkeeping and rent collection.” Tenants can even pay their rent directly through the software’s portal.

Lend money to other real estate buyers

Perhaps the most passive form of return in the realm of real estate is to simply lend money to those who need loans to buy properties, McGriff said. Not only do you get a good return on your money, but in the worst-case scenario, when someone defaults on the property, you acquire it. “You can be extremely passive.” Goodman says an investor can make as much as an 18% return annually on lending money.

Buy your own building

Physicians who have the opportunity to buy the building they work in can take advantage of generous tax benefits, LeBow said. “You can write off big chunks of depreciation over time,” he pointed out, as well as management fees and other costs related to the upkeep of the building.

However a physician begins to build a real estate portfolio, Nima Zegarra urged, “The first thing I would do is get educated. Do some research, start reading, network. You should do your due diligence before investing a good amount of your hard-earned money.”