Whether it’s to diversify a portfolio, avoid the ups and downs of the stock market or just to own something tangible, investing in real estate is a popular option for physicians.
There are a number of ways to invest in real estate:
- You can purchase undervalued property and sell it later at a profit.
- You can buy rental properties and collect regular income.
- Another option is to buy homes that can be converted into rentals, or properties in below-average condition that can be fixed up and resold for a profit.
If you’re thinking about real estate as an investment, here are a few items to consider.
Consider the negatives. Like with any type of investment, real estate can decrease in value. This occurred extensively during the subprime mortgage crisis in 2007-2008 when a wave of foreclosures and higher lending standards caused there to be more homes available than there were buyers.
Another issue to consider if you're planning to rent property is whether you have the time and patience to be a landlord. It requires:
- Screening possible tenants.
- Dealing with city regulations.
- Answering tenant complaints.
- Cleaning the property after tenants vacate.
- Possibly dealing with tenants who don’t pay rent on time.
You could delegate these matters by hiring a property manager, but that will also incur added expense.
Have cash available. You’ve probably heard the saying, “You have to spend money to make money.” That’s definitely true when investing in real estate.
Not only will you need money for a downpayment, but depending on the property you buy there may be other cash requirements as well. You may need to make immediate repairs, plus there will always be ongoing maintenance. If the property is currently vacant, you will need to spend a little to market it to potential tenants.
Invest for a return. Just like with any kind of investment, one of the keys to success is buying low. With real estate, you want to purchase property that is currently undervalued or that can be flipped and resold for a quick profit.
Work with professionals. Talk to other investors. Work with your mortgage lender and definitely enlist the services of a local real estate agent or broker who understand the market into which you’re buying.
Thinking about buying a home and need financing?
Compare the best doctor loans online here!
There is more risk involved to a lender when financing investment property than there is to a primary residence or vacation home. Therefore you should be prepared for the following financing requirements:
- You will likely need at least a 20 percent downpayment, as mortgage insurance is not available on investment properties.
- Higher credit scores will be required than what is needed for a residential purchase.
- Lenders will consider whether you can afford the expenses on both your primary residence and an investment property. In addition to the monthly payments, lenders may factor in the costs of maintaining a rental, such as taxes, insurance and maintenance costs.
- Fannie Mae guidelines for investment properties stipulate a minimum in cash reserves before you can obtaining financing.
If you go the house-flipping route, another option is a bridge loan. Flipping involves buying properties in less than ideal condition, fixing them up and reselling them for a profit.
Lenders will sometimes provide bridge mortgage loans, or hard-money loans, to flippers. The loans are usually for a about a year and the interest rates and fees are much higher than for other types of lending.
One option to help you finance a rental or investment property is a home equity loan, provided you have a considerable amount of equity in your main home.
You might be able to borrow up to 80 percent of the equity in your home, and use those funds for any purpose. So if you own a $500,000 home with a mortgage balance of $250,000, you have $250,000 in equity. If you borrowed the full 80 percent, you could pay cash for a rental of up to $200,000.
An advantages of this option is that a home equity loan is secured by your main home. From the lender’s perspective, the second home doesn’t matter since a home equity loan can be used for anything.
This makes it less of a risk to the lender, which means you could obtain a lower interest rate than if you financed an investment property loan by obtaining a mortgage on that property. Also, a home equity loan will typically require fewer upfront closing costs and fees than a separate second mortgage.
Another benefit is that you may be able to take a tax deduction on the interest of a home equity loan.
The main downside is that you would be reducing the equity in your main home. But you will have equity in that second property.
If you don’t want to use all of your available equity to buy a rental, you can use some of it to make the required downpayment.
For more physician finance tips and tricks, check out our:
2021 Physician Finance Checklist: 10 Simple Steps for New Doctors
Joel Palmer is a writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.