Real Estate Investment: How Not to Make Money Like a Doctor

The other day, I was driving by a street in my neighborhood and I saw a neighbor putting up a rental sign: “Tudor-style house for rent, 4,500 square feet, only $5,000 a month.”

I can’t help but do a quick calculation in my head to figure my neighbor’s rental return. His house is worth at least $2 million. With a $5,000 monthly rental, he will get $60,000 a year. After property tax which is 1 percent of appraised value, he will have $40,000 left.

He will likely need another $10,000 minimum for upkeep and repair, so he is left with $30,000. My neighbor is a neurologist, so I can guess with confidence that his combined federal and state marginal tax rate is north of 50 percent. After income tax (and an Obama Administration surtax on investment income,) $15,000 is all he will get from renting his $2 million Tudor-style house.

All in all, the $2 million house will yield a $15,000 economic benefit a year. That’s a return of less than 1 percent.

If he had invested the same amount of money in a Maryland municipal bond fund, he would get a 3.7 percent yield totally tax free … and hassle free.

I have known quite a few doctors who put a substantial portion of their wealth in real estate, none of them have more than 2 percent return, which barely keeps up with inflation.

In ascending scale of risk and return, he could have also invested in treasuries (2.5 percent), corporate bonds (5 percent to 7 percent), real estate investment trusts (8 percent to 9 percent), large cap stocks (10 percent), and small cap value stocks (13 percent), just to give a few examples. If that sounds too complicated than just buying a house, that’s an indication that you need a fee-only, conflict-free financial advisor.

Investment is a profession very different from medicine. I’ve never seen a professional investor refusing medical help; but I’ve seen many medical doctors refusing investment help. That’s how they earn the dubious distinction of worst wealth accumulator among high income professionals.