Practice Academy Winter 2023: Prescribing wealth - tax-advantaged real estate mastery

Real estate investing: ©Kanjana - stock.adobe.com

INTRODUCTION

Everyone wants to retire, and the best way to do that is with smart investing. But not all investing is the same. The question is: How involved do you want to be with your investments?

If you’d rather not spend your golden years managing a property, passive real estate investing might be the right choice for you. Passive real estate investing offers a need for little starting capital, no physical labor or landlord duties involved and less capital gains tax in the short term compared with the higher risk and higher expenses associated with active real estate investment. It is easy to see how passive investing can be an appetizing prospect for physicians.

But where does one get started in passive real estate investing and what are the available options for physicians looking to get involved?

LEARNING OBJECTIVES

• How to reduce taxes.
• How to build passive income and equity.
• How to be an investor rather than a landlord.

Meet the panelist

Travis Watts
Director of Investor Education
at Ashcroft

To watch this session on-demand, click here.

What is a real estate private placement?

According to Watts, a private placement is an arrangement in which investors pool their capital in order to purchase and update properties that are later rented out. These arrangements create two groups of investors. The first are the general partners who find the deal, underwrite the deal, raise the capital for the deal and manage the business plan.

The other group of investors are limited partners who invest in the deal, share in the profits and are hands-off. This is the opportunity Ashcroft is offering for a minimum investment of $25,000.

Common types of investors who take part in these private placements are medical professionals such as physicians and dentists, corporate professionals such as CEOs and engineers, as well as lawyers, professional athletes and entrepreneurs.

“As a physician, it’s about reaching your highest and best income potential,” Watts said. “Physicians don’t necessarily have the time or want to make the time to go fix and flip houses on the side or to manage tenants. It’s a hands-off approach to real estate investment.”

Tax implications

Ashcroft investors receive a K1 tax form either in the mail or digitally by March 31 with all the math already completed for them, which Watts says is a great convenience.

“Whether you do your own taxes or use a tax professional, they just plug in the numbers from there,” he said.

Ashcroft holds each property for more than one year, so investors are in a long-term situation as far as capital gains from the gains on the sale. This along with depreciation claims are all included in the K1 tax form provided by Ashcroft to investors.

How profits are generated

When Ashcroft purchases a property, the first thing it does is rebrand it, changing the name, the website, the color scheme. It renovates the clubhouse and amenities and addresses any other issues with the property as required and repositions the property for sale to institutional buyers such as a hedge fund or pension fund that is looking for a turnkey operation, Watts said.

These institutions will operate the properties for extended periods of time until they need refurbishment once more, at which time they often sell them to investment groups like Ashcroft.

In addition to refurbishments, Ashcroft will also increase rents periodically to not only increase immediate profits but also increase the value of the property for this eventual sale.

These rent increases aren’t implemented overnight nor are they guaranteed to occur, as the tenants would not be able to afford them. But currently rent increases are supported by the strength of the U.S. economy.

Demand

Another appetizing aspect of real estate investment, particularly in multifamily housing, is the severe shortage of housing across the country and the need for more apartments as interest rates continue to make home ownership unattainable.

“We need about 4.3 million new apartment homes between now and 2035 to accommodate the demand that we have right now for renters,” Watts said.

Rising interest rates also have impacted Ashcroft’s ability to purchase properties; with previous owners unable to afford to hold onto these properties, Ashcroft is buying multifamily properties for 20% to 25% less than previous pricing.

Solutions & takeaways

• Private placements allow investors to participate in real estate deals managed by a group of professionals.
• Hands-off real estate investment is popular among physicians and other high-net worth professions.
• Ashcroft uses a value addition strategy by purchasing older, undervalued properties and renovating and modernizing them to increase rents and property value.
• K1 tax forms simplify reporting for investors.
• The current economic climate has potential for high returns for investors.