Talking to new dentists or even dental students, the vast majority will bring up income properties as one of their goals. To start 2023, in the first quarter alone, investors made up 30% of home purchases according to the Bank of Canada. Despite higher interest rates there remains a lot of interest around real estate for investment purposes. So why is it so popular amongst Canadian dentists? We’re going explore the factors that are contributing to this trend and what the modern dentist is doing today.
If you’re a practising dentist and/or whether you own an investment property, you’re already investing in real estate. The first way is obvious, if you’re a homeowner then you own real estate and are invested. But one of the ways that’s most common and least understood is through the Canada Pension Plan (CPP).
Most dentists pay into CPP, and much of what and where that money goes is not well understood. CPP is managed by CPP Investments, created through parliament in 1997. They are the managers and investment decision maker for all CPP contributions. As of March 31st, 2023, every Canadian that has money in CPP is an investor in real estate, approximately 9%. CPP has a huge advantage over any dentist, and that’s a portfolio size in excessive of half a trillion dollars. The options that exist for real estate investing at that magnitude are quite significant and probably look a little different than a dentist.
Real estate investing is a broad and misunderstood term that has gained notoriety thanks to “financial gurus” on Instagram and TikTok. Typically, we see dentists that have accumulated either personal or, more likely, corporate wealth and they’re looking to invest. They hear from other dentists that they should buy an income property. This is usually in the form of a condo or house which is purchased and subsequently rented. The dentist takes on the landlord duties while also working as a dentist.
This is by far the most typical or common form of real estate investing/income property investing we hear about with dentists.
In its purest form, real estate refers to land or any fixed asset that might be a residence, building, or even a factory. Real estate investing has been around for thousands of years but in today’s investment world we categorize real estate as an alternative investment, meaning a non-traditional investment. We segment real estate into three categories: commercial, industrial, and residential sectors.
The primary source of real estate investing as a dentist is through the residential real estate sector. You may be wondering why? The answer is availability. It’s much easier to fund an individual condo unit than entire apartment building. More significant is the ability to borrow money to make the purchase, also called leverage.
Borrowing to invest or leveraging is quite restrictive for a traditional asset type like a stock, ETF, or mutual fund. Lenders or banks just aren’t excited to give you large investment loans so you can go out and buy speculative stocks. Even stock in the largest financial institution in Canada, Royal Bank (TSX:RY), lenders would require significant collateral and existing capital on hand before these types of loans are doled out and would likely be subject to bank imposed maximum dollar limits.
Real estate is arguably the single most collateralized asset owned by a dentist.
Real estate borrowing operates with a different set of lending rules that make it much easier to borrow funds and borrow a lot more. Among lenders, it’s well understood that the ability to pick good real estate is easier than a good stock, so here we see why borrowing to invest for real estate is far easier than other investments.
The reason why to invest in real estate comes down to your investment strategy and an asset allocation structure.
Real estate is typically the first major purchase a dentist will make and usually the largest financial purchase, aside from perhaps a clinic. So, if we own homes valued at an average of $600,000 or more in Canada, how does this implicate our investment strategy to add additional real estate to our overall asset allocation? Remember, CPP is only holding 9%.
So where do you start? Formulate an investment strategy:
1. Decide on your asset allocation and security selection strategy; where you’re going to weigh your investments, such as stocks, bonds, real estate, or even private equity.
- Remember, this is highly individualized, wide ranging, and should be handled by/with a professional. Consider consulting with a portfolio manager or specialist in the desired asset class; in the case of real estate, a real estate agent or investment specialist.
2. Begin to implement your strategy.
- This may vary from person to person and asset to asset, but rolling out a strategy is an important step. There are sub strategies that exist around every type of asset. Stocks are commonly purchased slowly over time using an approach called dollar cost averaging. Real estate will have a myriad of considerations, from property type, lending parameters, or even down to the neighbourhood.
3. Establish an effective monitoring and evaluation tool or system.
- Tracking and understanding what you’re investing in and how its doing. Real estate will have its own set of challenges due to the cost and time of traditional appraisals. Residential real estate appraisals are conducted by a professional appraiser so you may want to get access to one or derive your own analysis tool.
Real estate does provide many benefits over traditional asset classes:
- Diversification to alternative investment type.
- Passive income generation.
- Inflation sensitivity. Tends to fluctuate with inflation and provides some protection.
- Stabilize portfolio returns when held over long periods of time.
The trend however has been an overexposure to real estate among dentists and the risk and constraints may be overlooked. Risks to consider:
- Leverage or interest rate risk.
- Liquidity.
- High costs, fees and expenses such as taxes, insurance and property management costs associated with the property.
- Taxes at disposition.
- Overall exposure to real estate relative to other investment asset classes.
- Opportunity cost of available resources.
- Market inefficiency within the real estate market.
Dentists are busy professionals, and this may become more than what one would consider a good use of time, so how else can you participate in real estate investing? Speak to a portfolio manger or financial advisor to learn about alternatives to direct held real estate investing such as real estate pools or syndications, real estate investment trusts or even mutual funds.
So, should a dentist consider a direct investment in physical property or leave it to a professional?
Consider:
- Overall investment funds available and the need to diversify.
- Willingness to directly oversee and own a property.
- Previous investment or property management experience.
- Desire to maintain control over taxable transactions.
As a modern dentist, should you consider this as an investment opportunity simply because other dentists are using the strategy or because its available to you? With everything, that depends.
About the Authors:
Richard Lochhead, CIM, Portfolio Manager/Senior Wealth Advisor, Renn Financial Group and Joshua Fernando, Partner, Insurance, Renn Financial Group, leverage their experience and expertise to offer real opinions, practical explanations and unmatched service on financial strategies concerning Canadian dentists. Richard is a portfolio manager, car enthusiast and soccer fanatic. Joshua is an insurance expert and a former Canadian reality TV show contestant. Together they make up Renn Financial Group, a Canadian-based independent brokerage specializing in insurance, tax, and wealth.