[This is a guest post from emergency physician Akhil Saklecha, MD, who I met over lunch at the ACEP Scientific Assembly last fall. Akhil is also a partner in a venture capital firm, Artiman Ventures and on the board of HomeUnion. This post is about his experience investing in real estate. I have no financial relationship with Akhil, Artiman, or Homeunion, but I do with some online crowdfunding companies, so there are some affiliate links in this post. That means if you sign up and invest with them after going through these links, I might make some money. There are lots of ways to invest in real estate with varying degrees of hassle factor. This post introduces readers to another place on the continuum between minimum hassle REIT index funds and maximum hassle direct ownership where you fix toilets. Homeunion is a firm that provides a “turnkey” experience to allow the control and benefits of direct ownership, while decreasing the acquisition, management, and selling hassles.]
I’ve always wanted to invest in real estate. Ever since I made my first dollar as an emergency medicine resident in Akron, Ohio, I was attracted to owning hard assets, such as rental properties, rather than company stocks. I loved the idea of having positive cash flow, potential tax savings, possible appreciation, and a personalized portfolio of homes. My father-in-law, who owns several single-family homes, would walk through potential properties with me and discuss the pros and cons of ownership, as well as values and rents. I learned a lot about becoming a landlord, but each time I came close to making a bid on an investment property, I hesitated and pulled back. I was afraid of the hassles of leaking pipes, broken appliances, and midnight phone calls from distressed tenants. It was an odd dichotomy — I was very comfortable with taking care of a critically ill patient, but could not handle the uncertainty of owning investment properties. Yet, deep down, I knew this wasn’t the end of my adventures in real estate.
According to a study by Fidelity Investments, the salary of the average physician using their investment products is $299,000, compared to the $60,000 annual income of non-physicians. In 2014, 55% of practicing physicians were worth $1 million or more by age 50, and by age 65, almost half had accumulated over $2 million in wealth, according to Fidelity’s research. Depending upon our financial goals, we would be well advised to create a diversified investment portfolio, consisting of individual stocks, bonds, mutual funds, and real estate to hedge against unforeseen shocks in the domestic market or global capital markets. The first three categories are easier to access for mainstream investors through institutions such as Charles Schwab or private wealth managers, but real estate is a different story.
Smaller investors can easily purchase into a public real estate investment trust (REIT), which is similar to a mutual fund, but backed by real estate. However, REITs are highly correlated to the stock market and subject to the same shocks, limiting the diversification benefits of investing in real estate. Home prices, meanwhile, have proven to be uncorrelated with the S&P 500 over the past 25 years.
There are also newer investment alternatives, such as RealtyMogul, RealtyShares, Equity Multiple, Origin Investments, Fund that Flip, Lending Home (all of these are or have been WCI advertisers) and Fundrise, which are crowdfunding platforms that allow investors to purchase fractional shares of real estate assets or loans for various types of properties. Unlike REITs, these projects are not subject to capital market swings. However, investors utilizing these platforms surrender the tax benefits, asset selection and disposition decision associated with wholly owning investment properties. Furthermore, fees can be substantial and many crowdfunding platforms only accept accredited investors, which is an unnecessary threshold for investors in single family homes. While these options may make sense for some, I still wanted to own and make decisions regarding actual properties, because my financial goals are unique and not necessarily aligned with those of crowdfunding platforms, such as when to sell.
My research showed that single-family rentals (SFRs) satisfied my personal requirements of having an affordable, tangible asset with cash flow, appreciation, and a tax shelter. It made even more sense when I realized that I could use the current low mortgage rates to my advantage, as monthly rental income could more than cover my loan payments, even on a 15-year fixed-rate loan. The proceeds from rental income serve to pay down my assets’ loans and cover all of the expenses related to ownership. At the same time, real estate appreciation and rent growth have outpaced the rate of inflation over the long term, which increases my equity and cash flow over time. SFRs have produced average annual returns of 7.8 percent over the past 25 years, according to data from the U.S. Census Bureau.
The tax benefits of owning real estate are substantial, and can only be fully realized through direct ownership. Investors are able to depreciate the asset over time, while deducting the mortgage interest from rental income. Furthermore, property taxes, HOA dues, maintenance, and insurance can be deducted from rental income, thereby lowering one’s annual obligation to the Internal Revenue Service.
As a busy professional, the thought of investing in SFRs, particularly in areas where the returns are maximized, can be daunting. Several companies occupy space in the SFR rental sector, but only a handful offer investors a one-stop solution. HomeUnion, which I’m on the board of, and REI Nation are two such companies. HomeUnion operates in 18 markets, while Memphis Invest limits its focus to three metro areas. Memphis Invest purchases and rehabs properties, and then sells those assets with tenants in place to investors – but it’s a manual process and still hyperlocal. HomeUnion, on the other hand, uses a powerful data and proprietary analytics platform to create a customized portfolio of SFRs in different regions, so that investors can focus on maximizing returns with diversified geographic risk, instead of on individual properties in one local economy. HomeUnion then secures or helps arrange financing on behalf of its clients, acquires, manages, and sell properties in a hassle-free manner. Either of these companies can help professionals reach their goal of diversifying through real estate.
The access to a platform such as HomeUnion is covered by an acquisition fee of up to 3.5%, similar to the front-end load of an actively-managed mutual fund. This supports the use of the data analytics and the company’s on-ground team in every market in which it operates. The ongoing monthly payment is an asset management fee of up to 10.5% of the rent during tenant-occupied months. In addition, the company provides monthly reporting on performance, quarterly updates on the economic environment of each market, annual tax forms, and it handles all of the aggravating issues of ownership. Selling a property includes all of the standard processes and fees as with any other home sale, but with the added benefit of marketing to HomeUnion’s worldwide customer base.
Indeed, technology has enabled new avenues for individual investors to seamlessly participate in one of the largest financial markets. As stock markets rise or fall in bubble economies, physicians can, and should, take advantage of this opportunity to invest in real estate as a diversification of their finances into one of the best-performing asset classes.
[Editor's Note: Each method of investing in real estate has its pluses and minuses. Significant downsides of turnkey properties include not being able to drive by and check on it (assuming it isn't in your metro area), being reliant on another company (that could go out of business) for management, lower levels of diversification, and higher minimum investments. The main upside is you get to decide when you sell and you can theoretically exchange from one property to another until you get the step-up in basis at death, so the tax treatment may work out better than investing in syndicated properties, and you still get to avoid fixing toilets.]
What do you think? Would you consider directly owning a turnkey property in another city? What about in your city? Do you see this as a better option or a worse option than purchasing shares of a syndicated property? Comment below!