Having more than one type of income stream — in particular, a source of passive income — can provide protection in a difficult market and might even help ease the productivity pressures from your job.
“It’s always nice to have multiple sources of income, so you’re not dependent on one thing,” says Nisha Mehta, a North Carolina radiologist and the founder of the online community Physician Side Gigs (www.physiciansidegigs.com). “Over the last few years, the importance of that has become even more relevant to physicians.”
Some potential sources of passive income are described below, but it’s important to note that none of these are truly “passive.” They all require at least some work at the outset, as well as an initial investment, and they may involve the risk of loss. In general, it takes time for passive income sources to generate significant income, so it may be years before these investments truly start to pay off.
That said, as a doctor, you’re used to trading your time for money. The goal of passive income is to find revenue sources that require less of your time while producing regular income. Establishing one or more streams of passive income can provide significant financial flexibility for physicians, whether you’ve recently launched your career and are building your financial foundation, or you’ve got your sights on retirement. Passive income might even allow you to retire early or reduce your hours.
“I’m a big fan of not having all of your [income] eggs in one basket,” Mehta says. “Having a second or third source of income can allow you to take a step back if you’re feeling burnt out. You can say, ‘I’m going to cut back a half a day and give myself a break, and I can afford to take that income hit because of passive income.’ “
Scammers like to prey on physicians, so make sure you do your due diligence before investing money in passive income opportunities. If you have a financial planner, talk to them about your plan to build passive income, and work with them to determine how the plan fits in with the rest of your earnings situation and your short- and long-term money goals.
Physicians should carefully consider all potential investments in order to understand associated risks and the amount of time the venture might require. Last year, more than a quarter of physicians invested in a stock or company that turned out badly, and another 11% made a real estate investment that did not work out.
There’s no reason to rush into such projects, Mehta adds.
Last year, primary care physicians earned, on average, $243,000, and specialists brought home an average of $346,000.
“Don’t feel pressure to develop the passive income possibilities all at once,” Mehta says. “The nice thing about being a doctor is that you have a good job and a good paycheck. Take your time learning and focus on something that you enjoy doing so it doesn’t become your second job.”
When choosing the right source of passive income, you also should think about how much time and money you’ll need to invest and whether such investments will affect your financial goals. Here are a few passive income sources to consider.
An Income-Producing Portfolio
A diversified portfolio of securities — such as dividend stocks, mutual funds, or real estate investment trusts — can produce regular income that you can reinvest or use for other purposes. While the initial return on such a portfolio may be minimal, depending on your revenue, it can grow quickly over time.
“It can be as basic as saving some of your after-tax income in a taxable investment account,” says Evan Potash, a TIAA wealth management advisor who works with hundreds of physicians. “A lot of my doctor clients accumulate too much in retirement assets, and they wind up with a hefty tax bill because of required minimum distributions.”
Even if you’re building a portfolio focused on income, you’ll still want diversification, Potash says. Physicians might consider exchange-traded funds, since they’re typically more tax-efficient than mutual funds, and doctors often have high tax liabilities. Include securities from a variety of sectors, and include large-, mid-, and small-cap stocks from domestic, international, and emerging markets.
“Look at the long-term history of paying dividends and try to fund investments that seem to steadily increase their dividends, if possible,” Potash adds.
Real Estate Investments
Becoming a landlord is a common way for physicians to create passive income. Whether you purchase an apartment building, a vacation home, an office, or a retail property, such a business can create regular income. Another bonus: the property itself may increase in value over time.
That said, real estate investing has downsides. Those include the potential for the property to decrease in value or of losing money if tenants are hard to find or the property has maintenance problems. You’ll also need to have the time and expertise to handle repairs and improvements or hire maintenance workers.
“Liquidity is another factor to consider,” Potash says. “Depending on the market, it’s important to think about how readily you could get your principal back if you need it.”
Bring a Related Business Into Your Practice
If you own your practice, consider partnering with an affiliated business — such as a physical therapist or aesthetician, depending on your specialty. There may be a partnership model that could create revenue for your business. The arrangement may be as straightforward as providing another practitioner space in exchange for rent or a share of revenue. Or you might consider bringing the clinician into your practice full-time.
Peer-to-Peer Lending
In peer-to-peer lending, investors make loans directly to consumers in exchange for a higher interest rate than a bank might receive. In other words, you become a banker for consumers or other professionals who need money. Interest rates are significantly higher than market rates — up to 30% or more — but you’ll have to pay some of that to the lending platform. It’s important to keep in mind, however, that peer-to-peer borrowers typically are accessing funds that way because they can’t get the loans they want from a traditional moneylender.
That means that there’s a higher risk of default, which means you can lose your entire investment. One way to reduce that risk is to build a portfolio of multiple loans, since it’s unlikely that all of the loans will default at once. Bear in mind that this is a risky strategy, especially now, since loan defaults tend to be higher during times of economic uncertainty or recession.
Become an Angel Investor
Entrepreneurship remains on the rise, and many startup founders need capital to grow their businesses. While investing in small businesses entails risks, there’s also potential that such businesses could turn into revenue generators for you.
“Finding people who want to leverage your money to other things that you believe are sound investments can be a great source of passive income,” Mehta says.
Be sure to do your due diligence regarding startup founders’ business plans, as well as the principals of the company and their track record.
Create Content
There are many ways that physicians can use their expertise to create and monetize content. Some options include writing books, launching a blog, developing a course of study, or starting a YouTube channel. Creating content requires a fair amount of work up front, but it can generate passive income over the long term in the form of royalties from books, advertising fees on a blog or YouTube, or course sales.
“Setting up a brand presence or a website is one way to generate income that’s independent,” Mehta says. “You could be getting royalties, or referral fees, or affiliate income if that website gets continued traffic.”
Step Away From Your Practice
For physicians closer to retirement, there may be an opportunity to use the business you’ve built to create an income stream in retirement. Rather than selling your practice outright, you might transfer just a portion of ownership, or simply step away from the operation of the business while retaining your ownership. Under such an arrangement, you may be able to enjoy regular revenue from the business without working there every day.
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