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Why Is Real Estate America’s Favorite Investment?

real estate investmern

Real estate is the American investment because it effectively serves two purposes: It’s an asset that can be easily leveraged and one of the only investments that comes with bragging rights.

Let’s face it: If you have a drawer full of stock and bond certificates or CD notes, it’s not exactly the same as showing your friends this amazing two-bedroom condo you just purchased in Nosara, Costa Rica, to go along with the two you have tucked away in Telluride, Colorado.

Real estate, when used correctly, both investment-wise and tax-wise, can be one of the main drivers of wealth accumulation.

Why is Real Estate a Good Investment?

Real estate is a great investment because it allows for both wealth creation and tax savings. It’s a tangible asset that’s easy to leverage, meaning you can buy it with a small down payment and borrow the rest, maximizing returns on your investment.

It also provides numerous tax benefits that can help offset tax liability; particularly with high-income earners.

For most Americans, the best benefits are as follows:

Real estate offers stability

Unlike stocks or other financial assets, real estate is a physical, tangible asset. You can knock on the door, walk around, and even install a cocker spaniel with a bad temper as security.

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Property ownership gives investors a sense of security since it can be seen, touched, and used. The relatively stable nature of the real estate market, which doesn’t experience the wild fluctuations of the stock market, is a major draw for people seeking long-term security and enjoying things that properly exist in our three dimensions of space and one of time.

Real estate is the easiest asset to leverage

Unlike most investments, real estate is one of the easiest assets for everyday people to leverage, meaning you can borrow money to buy a property.

Think about it like this: if Dr. Patel, a family physician, wanted to invest in stocks, she’d likely need to have all the cash upfront. But if she’s buying a rental property, she only needs a small percentage of the price as a down payment, and the bank loans her the rest—allowing her to own an asset much more valuable than the cash she initially put in. This leverage means even a small increase in property value can lead to a significant return on her initial investment.

Real estate fairs well compared to other growth investments

Real estate tends to perform well compared to other investments like stocks or bonds because it usually appreciates steadily over time.

Unlike the stock market, which can be very volatile, real estate provides more stability over the long run, even if the face of ups and downs caused by financial crises and pandemics that may or may not have originated in a Chinese lab. (that furin cleavage site is kind of suspicious).

Below is an example of real estate compared to other investments over ten and 20-year periods on average.

investment comparison

Real estate offers potential for cash flow and income

Real estate, particularly rental properties, is one of the best ways to generate cash flow around and cash flow is a luxury that is important to have.

Rental income provides a reliable source of passive income that can supplement other earnings. Furthermore, taking advantage of short-term rentals can offer an even better return and allow you to use your property.

For example, you could have a 2 BR condo in Vail, Colorado, that you purchased for 400,000 (when interest rates were low and a fixed rate was locked in).

annual expense

As you can see in this model, the Airbnb property in Vail costs $400,000 to purchase, with a nightly rental rate of $240 and an occupancy rate of 65%, bringing in about $56,940 in annual rental income.

After accounting for expenses and a $20,000 yearly mortgage, the property nets $25,000 in annual profit. This provides a solid rental yield of 6.25%, making it a profitable investment for anyone looking for passive income from short-term rentals.

Can Real estate Help with Tax?

Real estate provides significant tax benefits, allowing you to keep more of your earnings. You can lower your taxable income by deducting expenses like mortgage interest, property management fees, and depreciation.

This means you’ll pay less yearly taxes while still benefiting from rental income and property appreciation.

You can use tax loopholes to offset your income

Real estate allows high-income earners like physicians to reduce their tax bills significantly. When you own a rental property, the government allows you to deduct various expenses, like mortgage interest, property management fees, and maintenance costs, which lowers your taxable income.

Essentially, you get to keep more money in your pocket while your property grows in value.

For example, say a physician buys a rental property for $500,000 and collects $70,000 in rental income each year.

Deducting $40,000 in expenses like mortgage interest, repairs, and property management fees reduces their taxable income to $30,000. At a 30% tax rate, this allows them to save $12,000 in taxes that year, making the real estate investment even more profitable.

rental income

You can use depreciation to offset your taxes in future years

Depreciation is a powerful tool that allows you to spread out the cost of a property over its useful life, effectively giving you a “paper loss” each year that lowers your taxable income.

For high-earning physicians, this can be a game-changer because any excess depreciation can be rolled over to future years, creating ongoing tax breaks and allowing you to keep saving year after year.

For example, if a physician purchases a property for $400,000, they can deduct depreciation each year to lower their taxable income.

In the first year, a $14,545 depreciation deduction reduces their taxable income from $50,000 to $35,455, saving $4,364 in taxes. The following year, any remaining depreciation is carried over to offset income again, further reducing taxes by $6,273.

depreciation to offset your taxes

You can refinance and take out loans

One of the great advantages of owning real estate is that you can refinance your property or take out a loan against its increased value without paying taxes on that money.

Instead of selling a property and paying taxes on any profits, you can borrow against the equity you’ve built up, giving you access to cash while keeping your property and its potential for future appreciation.

This strategy allows you to get funds for other investments or expenses without triggering a taxable event, which is a huge benefit for high-income earners like physicians.

Bottom Line

Real estate is a reliable investment that offers stable returns, the ability to leverage your money, and significant tax benefits. Whether you’re looking for long-term appreciation, steady cash flow from rentals, or a smart way to reduce your taxable income, real estate can be a powerful tool for building wealth and diversifying out of other assets like stocks and bonds you might hold in your retirement plan.

With the added benefits of refinancing and tax savings, it’s a solid choice for high-income earners who want to maximize their investments and ensure that when they stop working, they have a nice cushion to fall back on.

Even though real estate might be America’s favorite investment, that doesn’t mean Americans are only investing in real estate in America.

Having a short-term rental income-producing condo in the Dominican Republic that generates income as well as provides an escape once in a while can be more valuable to some than anything else on Earth.

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