For high income professionals, real estate is one of the most tax efficient investments. Read below to learn more!
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Part of the “Road to Rental Real Estate” series
I’ve talked before about how I intend to increasingly shift more of my capital and investments into real estate. I haven’t directly addressed why I plan to do this. Is it because I think it’s cool to be a real estate investor?
While I do think there is some extra cachet attributed to real estate investors (I’m not sure why), this isn’t why I’m going into it. Simply put, I believe that real estate is probably the best way to grow wealth as a high income earner in the United States.
This is a pretty controversial statement, especially in the world of financial independence. There are some prominent FI bloggers that recommend putting everything into index funds like VTSAX, and to forget about the rest.
So to understand why I plan to ignore this advice, and go for real estate investing, let’s go back to the basics. Way back.
How to get to financial independence
- Spend less money
- Make more money
“Duh!” It seems so obvious, right?
Yes, it might seem obvious, but literally thousands of blogs, books, and podcasts have been devoted to the optimization of these two elements.
As I’ve discussed previously, I have a huge number of fixed costs that (for the time being), I’m unwilling to change. So while the Dr-ess and I certainly save money where we can, I am focusing for now on making more money and keeping more of it.
You’ll see soon that the “keeping more of it” is where real estate comes into play.
How to make more money
As an employed surgeon, I trade my time for money. The more patients I see and surgeries I perform, the more I’m paid. It’s a linear relationship, and therefore there are hard limits on this, such as:
- My base hourly salary
- The hours in the workweek
- Scheduling rules from my hospital administration
- My level of burnout and desire to see my family
I currently work about 50-60 hours a week on average, and whenever I exceed this, I start feeling burnt out. I am less friendly to my patients, I put less thought into my medical decisions, and the Dr-ess complains that I’m grumpy and less supportive.
There are a few major things that can easily derail your path to financial independence. These include losing your job, getting sued, or getting divorced. Working more hours makes all of these things more likely for me. So that’s not going to be my focus either.
In fact, as soon as I can make the numbers work, I may even explore cutting back my work hours. CrispyDoc has a nice blog series about doctors who have done this, and how it has positively improved many aspects of their lives.
Keep more of what you earn
So if I’m not going to work more hours to make more money, how do I increase my income?
The answer is to reduce my taxes so I can keep more of my paycheck and give less of it to Uncle Sam.
I read through an 860 page tax book to figure out how to do this, and here are my main conclusions:
- My income is too high for many deductions
- Being an employed (W2) earner greatly limits work related deductions
- The US tax code rewards business and real estate owners.
At my income bracket, even after all deductions are factored in, my overall tax rate last year was about 35%. This means that for about 4 months of the year, I’m essentially working for the government.
The most favorable investment I currently make outside of retirement funds is stocks. But since I live in California, my long term capital gains are taxed at over 30% when the gains are “realized” (cashed out)!
I could just give up and accept that as a high income professional, I’m going to pay a lot of taxes.
Or I could try to emulate what the truly wealthy in the United States are already doing, and start investing in real estate.
Do as the rich do
This is a interesting graph that breaks down the composition of wealth for various net worth brackets in the US.
What you’ll notice is that as people gain more and more wealth, their % of assets in business equity and real estate starts to grow.
It goes from 7.9% in the lowest net worth bracket, to 24.5% in the upper group, to a whopping 49% of net worth in those who are worth over $10 million.
Why is this the case?
It’s very simple. Real estate, especially rental real estate, is one of the most tax efficient investments available. Better than stocks? Yes. Much better.
In my next post, I’ll reveal the surprising tax efficiencies of real estate investment, and why I’m going to start moving more of my assets into this area.
What do you think? Are you already using real estate in your investing? Comment, share, and subscribe!
- My 15 year plan to financial independence, moFIRE style
- How we amassed an investment portfolio of over $1 million
- A Darwinian Doctor origin story: the meatball sub
- The Darwinian Doctor’s 13 Monthly Expenditures (with real numbers)