The Investment Scientist

Physicians Are Not In Real Estate Business

Posted on: May 29, 2012

Doctors and Real Estate Investments

What would making $1.5mm a year look like? How about living pay check to pay check, and one bad real estate deal away from bankruptcy.

This is exactly what happened to one physician before he became my client. He is a partner of a very large practice and brings home more than $1.5mm a year, and yet he has only $100,000 in his bank account. If he stops working today, the money will run out in three months.

How did he get into such a quandary? In short, real estate.

He owns two plots of empty land in Florida, an office building in the most economically depressed county of Maryland, several condos and townhouses for rent in various states, and a few apartments in Shanghai. All told, his real estate investments total more than $7mm; these “assets” are not producing positive income for him. In a good year, they cost him more than $100k to own because of taxes, utilities, maintenance, and repairs.

When asked how he is going to make money from his real estate investments, he told me that he expects the real estate values to double when the market turns around. My jaw dropped at his unbridled optimism and … naïveté.

In my book, he has spent millions to buy a bunch of “liabilities” for himself. They cost huge sums of money from the get-go, and cost more money on an ongoing basis. What kind of assets are these?

Worse, when this doctor was dragged to see me by his wife, he was thinking about another $2mm real estate investment. To do that, he would need to take out a $1.7mm bank loan using his own house as collateral. Now, that’s one real estate deal away from bankruptcy.

This doctor’s story is not uncommon among very successful doctors. Here are the problems I see.

1. Their success in medical practice leads them to believe they are equally savvy in real estate.
2. They are so flushed with cash they don’t need to be careful, or so they think.
3. They are magnets for unscrupulous advisors and relatives.

Take this doctor, for example; all his real estate investments are brought to him by his “good friends.” These good friends know the kind of money he makes and apparently treat him as a moneybags.

My advice for very successful doctors who are thinking about investing in real estate: Your profession is medicine, not real estate. You don’t know what you don’t know. If you have to invest in real estate, try a real estate investment trust index fund such as VGSIX or DFITX.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.


3 Responses to "Physicians Are Not In Real Estate Business"

One important question: Is your M.D. client in the “real estate business”, treating it seriously as a business, or is he a speculator who happens to own land and buildings? Someone can say he/she is in the business, but if the person is not learning about and researching property values, determining market rate rents, advertising for and evaluating tenants, and generally devoting time to the business, then this is tossing money at a real estate agent and hoping for the best. That kind of speculation gives you the rate of return you would expect… for the agent, but not for the investor.

Here is my rule of thumb: If the M.D. would be horrified at neglecting his medical practice the same way he seems to be dabbling in his real estate “business”, then this isn’t a serious business.

He is not in real estate business, but he might as well be since he has to spend time looking for tenants for his empty buildings.

By the way, my story is based on a number of clients’ true stories. Numbers and locations of properties have been changed so that my clients’ identities could not be guessed.

Michael,
I’m not sure if I am getting my thought across. My point is that the reason your clients are losing money is because they are not seriously in the real estate business. Simply buying a building and expecting the money to roll in from tenants is not taking real estate seriously as a business, because someone has to be the manager. It’s a real job that takes time. Businesses do not run themselves. People who expect otherwise lose money.

Even stock mutual funds are not zero-effort businesses. Someone has to run the corporation selling the stock, and gets paid for it. Someone else manages the mutual fund, and gets paid for it. Investors pay money, take risk, and collect dividends, but often forget that they (via the businesses) also pay the corporate and fund managers. It only seems like ‘no work for profit’. Treating real estate ownership like mutual fund ownership is misguided.
regards,
Jerry

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



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