How Medical Real Estate will Pay for Your Retirement

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By Eli Schultz

There is a growing interest in medical real estate among real estate investors. The medical sector is an Amazon resilient, stable investment area the offers attractive low-risk yields and reliable income streams. These investment grade income properties make excellent additions to a retirement portfolio.

We are going to take a few minutes today to review why investment grade real estate should be part of a retirement portfolio and specifically why medical real estate should be at the top of the investing short list. We are also going to share some quick pointers on how you can find, fund, acquire, and exchange medical real estate investments.

Why You Should Include Investment Grade Real Estate in Your Retirement Portfolio?

All investment portfolios should have real estate as a core asset – but not all real estate investments are well suited for a retirement account. The goal here is to create a retirement portfolio that will create a stable income stream with no daily involvement. Management-intensive income properties (such as apartment complexes, strip malls, and office buildings) are not well suited as a stable passive retirement investment. Investors should consider the single tenant net lease sector instead.



What is an Investment Grade Income Property?

An investment grade income property is an investment category within the commercial real estate market. They are prime commercial properties leased to creditworthy corporate tenants on a long-term net lease.

The appeal of these properties is in their ability to generate true passive income with little to no property management. Because a lease to a corporate-based tenant last decades, it establishes a reliable income stream which preserves owner equity. The majority of leases are triple or absolute net meaning that the property owner would only be responsible for structural repairs (and no responsibilities at all with an absolute net lease). The prime location and excellent condition of these properties ensures value appreciation over the holding period.

Reasons to Invest in Medical Real Estate

Medical real estate is a sub-sector within the class of net lease properties. Medical real estate includes national chains such as Fresenius, DaVita Kidney Care, Banner Health, Aspen Dental, MedExpress, V.A. Clinics, IPA Healthcare, and UnitedHealth Group to name a few. National tenants in the healthcare class offer investors a median asking cap rate of 6.64%.

Medical office buildings (known for short as MODs) are also growing in popularity. The off-campus outpatient facilities include micro-hospitals, multi-specialty centers, walk-in clinics, small surgical centers, laboratory services, and doctor offices. According to Revista, a research firm, 15 to 20 percent more doctor’s offices are being constructed off hospital campuses than in the past. According to our sources at JLL Research, medical office buildings are supplying a 6.7% yield compared to the S&P 500 Dividend Yield at 2.0% and the 10-year Treasury bond rate at 3.0%.

Medical real estate is a growing core asset investment class. While MODs may not have credit-rated corporate backing, they are often backed by the financial stability of a regional medical center. They are ideal properties to be placed in a retirement portfolio. They are not threatened by digital commerce. There is a continuing demand for medical services. And the lease structures (NNN or absolute net leases) create a passive investment opportunity that can easily span 10, 20, and even 30 years.

How to Place Investment Grade Real Estate in Your Retirement Portfolio

Holding investment grade real estate in a retirement account is not all that difficult. There are a few provisions that can ensure that the investment works in your best interests and is sheltered from unnecessary taxes.

Create a Self-Directed Retirement Account

Not all retirement accounts can fund or hold real estate investments. Only a self-directed retirement account can be used to hold property. There are three types of self-directed real estate accounts: Self-Directed Traditional IRA, Individual 401(k), and a Self-Directed Roth IRA. Each of these have specific requirements, guidelines, and tax benefits – so you will want to consult with your accountant and/or tax advisor to maximize the benefits that fit your situation. In most cases, however, a Roth IRA is the best retirement account to hold real estate because all withdrawals made after the age of 59 ½ are tax free.

There are a few similarities between these accounts. First, all the income generated within the retirement account must stay within the retirement account. It can be reinvested into stocks, bonds, commodities, or other real estate assets – but it cannot be removed until penalty-free distributions are allowed. In addition, any capital gains from the sale of a property within the retirement account must also stay in the account.

A question that often comes up is if it is possible to get financing on real estate held within a self-directed retirement account. The answer is an unequivocal yes. You can use funds within the existing retirement account to purchase the real estate or you can obtain a nonrecourse mortgage.

Use a 1031 Exchange

Once the account is setup, the next step is to transfer a real estate investment into the account. Investors that own real estate in one asset class can utilize a 1031 exchange to sell the property and purchase another better investment while deferring all capital gains and depreciation recapture taxes.

For example, let’s say that you own a 25-unit apartment building. While the property has a good cash flow, it is very management-intensive and is being affected by depreciation and deferred maintenance – making it a less than attractive investment for a retirement account. You can sell the building utilizing a 1031 exchange and reinvest the proceeds into the purchase of a medical investment grade income property. It would first be placed into a Limited Liability Company (LLC) and then into the self-directed retirement account. This would all happen without paying one single dime in capital gains or depreciation recapture taxes.

Now you would have a low-risk real estate investment with a long-term reliable income stream held securely in your retirement account. The NNN lease releases you of all management responsibilities. The rental income is deposited into the retirement account and the net income is reinvested into other diversified investments to create a compounding income stream. What is not to love?

Assemble an Investment Team

Reorganizing a retirement portfolio can be intimidating and initially quite time consuming. But do not let this hold you back from taking control of your retirement planning and maximizing the benefits of placing medical real estate inside your retirement portfolio.

One way to facilitate any portfolio changes is to assemble an investment team. First choose a real estate broker that specializes in investment grade income properties and 1031 exchanges. They will then work closely with your financial advisor and accountant. They will help you to find, fund, acquire, and exchange a medical investment grade income property as an alternative to stock market investments – giving you the opportunity to make medical real estate pay for your retirement.

I help investors find, fund, acquire and exchange Investment Grade Income Property. My area of expertise is long-term net leased properties to corporate-grade tenants. Our industry research and expertise allows my clients to learn about and access the best sectors, tenants, and opportunities normally reserved for institutional investors.

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