Physicians: Don't Overestimate Your Real Estate Expertise

April 8, 2012

My advice for very successful doctors who are thinking about investing in real estate: Your profession is medicine, not real estate.

What would making $1.5 million a year look like? How about living paycheck-to-paycheck, and being 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 $1.5 million 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. His real estate investments total more than $7 million; these “assets” are not producing positive income for him. In a good year, they cost him more than $100,000 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 $2 million real estate investment. To do that, he would need to take out a $1.7 million 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 moneybag.

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 index fund such as VGSIX or DFITX.

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