Choosing Investments for Retirement

[damon30]

Hi,

As a person looking to become a specialist and eventually accumulate greater wealth and financial security, I was curious as to why doctors seem to choose real estate and similar investments. Is it the safety and more hands-off approach? I understand that going into something like stock-trading carries significantly more risk with the potential of higher yield in a shorter period of time. But what kind of investments could a specialist with $500k to $1 million in savings be making that is in the middle? Earn money faster than real estate investments but with less risk than the stock market?

Apologies if I sound completely uninformed. Just trying to learn, hopefully from you wise souls!

Thanks!

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[WholeLottaGame7]

It depends on what you mean by "real estate investments." Are we talking REITs? Peer to peer loans? Real estate syndications? Single family rentals? They all have different risk/return profiles.

Remember, return and risk are always correlated. There are no magical "faster return, less risk" investments. Many people choose real estate (in some flavor) to diversify along with stocks and bonds. Doctors probably just tend to have more disposable income lying around than some specialties.

 

[damon30]

It depends on what you mean by "real estate investments." Are we talking REITs? Peer to peer loans? Real estate syndications? Single family rentals? They all have different risk/return profiles.

Remember, return and risk are always correlated. There are no magical "faster return, less risk" investments. Many people choose real estate (in some flavor) to diversify along with stocks and bonds. Doctors probably just tend to have more disposable income lying around than some specialties.

Reading other people's posts and comments on here has made me more interested in REITs and real estate syndications. Do people diversify within real estate too (investing some in REITs, then some in syndications, then maybe SFRs)?

 

[WholeLottaGame7]

Reading other people's posts and comments on here has made me more interested in REITs and real estate syndications. Do people diversify within real estate too (investing some in REITs, then some in syndications, then maybe SFRs)?

For sure. It depends on how much work you want to put into it. I'm pretty lazy so I stick to REITs (just VNQ, really). But you aren't going to get the same returns as some of the other types.

 

[sliceofbread136]

If you own a home consider you already have a lot of real estate exposure and further exposure may cause your net worth to be disproportionately tied to the housing market. Also consider that reit payments are taxed as income not as capital gains.

 

[The White Coat Investor]

Easier to leverage real estate.

Trading stocks generally a bad idea. Best to just buy them all and hold them forever.

No reason you can't invest in both stocks and real estate of course. That's what I do.

 

[damon30]

But you aren't going to get the same returns as some of the other types.

Right, would you consider it a low risk, low return kind of investment?

 

[sliceofbread136]

Right, would you consider it a low risk, low return kind of investment?

no, it has equity like risk

 

[WholeLottaGame7]

Right, would you consider it a low risk, low return kind of investment?

No, as @sliceofbread136 said, it's closer to being a stock. You're basically buying part of a company (actually a whole lot of companies) who deal in real estate. It's not exactly like buying a company like Apple, because REITs have special rules about what they have to do with their profits, etc. But it's similar. So if the company is poorly run, or is driven out of business, you're out of luck. You don't own any physical land or buildings, exactly. Likewise, there are a bunch of middle men who also need to get paid, for owning/running the real estate companies, etc.

On the flip side, you don't have to worry about 1 of your 3 rental homes not having a tenant, the 2nd one where the best you can do is break even because of a downturn in the market, and another one where stuff is constantly breaking and you're dealing with angry phone calls all the time. But if you're good at it and you have the time for it, running your own real estate empire is likely more lucrative, as there are less middle men and you can exploit local market inefficiencies better.

So I don't think any category of real estate is low risk, low return. I would say depending on the type of real estate you dabble in, it's either medium or high risk. If you want to learn more about real estate, check out Passive Income, MD. He does mostly real estate. White Coat Investor also has some good real estate articles, though it's not his primary focus.

 

[Baron Samedi]

Something to keep in mind is that real estate earnings are generally taxed as income and are subject to your highest marginal tax bracket. As a specialist, you'll likely be at or near the top and taxed heavily.

 

[FutureInternist]

Something to keep in mind is that real estate earnings are generally taxed as income and are subject to your highest marginal tax bracket. As a specialist, you'll likely be at or near the top and taxed heavily.

If you were to sell an asset after > 1year, would capital gains tax (and not income tax) apply?

 

[Baron Samedi]

If you were to sell an asset after > 1year, would capital gains tax (and not income tax) apply?

I believe it's not technically referred to as capital gains, but it essentially is the same rate-- yes. This tax is applied if you sell an asset that is not your primary residence.

You will be taxed on any rental income, however; at your marginal income tax rate. It is essentially treated as a dividend.

 

[TheHungarianCPAPFS]

I believe some do it because real estate is tangible. You can drive by a building and say, I own that building. However, if you going into syndication, redevelopment, etc. your risk could be even higher than the stock market. It would be like investing into a startup or a micro cap company. If the person doesn't know what they are doing they can lose your money just as easily. Some do it because they have already maxed out their retirement accounts, their HSAs. 529 Plans (if needed) and they need diversification. For some its their after tax portfolio, as real estate should not be in pretax account, otherwise you will lose both the depreciation and the capital gain treatment in the retirement, pretax account. So it just really depends on where you are, what you have, what your goals are, your allocations, etc. So you are not seeing the entire picture, that is why this is confusing. Hope this helps.