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A real estate prescription for doctor-investors

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The course of a doctor’s career differs from most other professional paths, especially with regard to their debt-to-income ratio.

The course of a doctor’s career differs from most other professional paths, especially with regard to their debt-to-income ratio.

In the early years after college, when many of their peers are beginning to save for retirement and may be investing in a home, these individuals must continue their education, residency and fellowship training, often accruing significant debt while simultaneously postponing earnings – sometimes by as much as 10 years.

One way to mitigate the consequences of insufficient savings and to make up for lost time is for doctors to consider alternative investment opportunities, such as investing in their own medical office building or ambulatory surgery center, if eligible.

 

DEBT BURDEN

First, a discussion of the level of debt many doctors face upon completion of their education and training is warranted. According to the Association of American Medical Colleges, 76 percent of medical students graduate with student loan debt, the median level of which in 2016 was $190,000. With normal terms, student loan repayments can equal more than $2,000 per month. And since the repayment terms for these loans can vary from 10 to 25 years, some doctors may still be paying off medical school debt at the age of 55.

During their education and training years, doctors miss out on nearly a decade of compounding interest on savings, one of the most powerful tools in building retirement savings. Other factors that threaten retirement savings for doctors are that they fall into very high tax brackets and receive little to no financial aid for their children’s educations.

Because the annual contribution limit for employees contributing to 401(k)s and other traditional retirement plans is $18,500 prior to the age of 50 and $24,500 after 50, these retirement vehicles may be insufficient to enable doctors to save enough to maintain their desired lifestyle in retirement. So what’s a doctor to do?

One possible way for a doctor to secure additional income, as well as a valuable asset, is for her to purchase or invest in her own medical office building. By establishing a separate LLC to buy the building, the doctor and her partners can become landlords of their own medical practice. Owning a building has the potential to be lucrative but care must be given to understanding all of the ongoing costs associated with property ownership, such as utilities and maintenance. In addition, a doctor would do well to buy opportunistically, not overpaying, and make judicious use of leverage prior to purchase. 

 

INCOME STREAM

One of the greatest benefits of owning a medical office building is that the building may continue to generate income for a doctor even after she retires and no longer sees patients.

Another way for certain doctors to turn a nice profit is for them to invest in their own ambulatory surgery center. Historically, these centers have the potential for outstanding profit margins, but investment eligibility is often contingent upon one’s being a participating surgeon who performs surgeries at the center. Also, investing in an ambulatory surgery center might be prohibited by one’s private practice or hospital. And finally, the amount a surgeon makes with this sort of investment is based on production: If she stops or reduces surgical procedures, she can get kicked out at often unfavorable terms.

Non-surgeon physicians sometimes have the ability to own the “means of production” related to their practice, similar to surgeons owning an ambulatory surgery center. For example, nephrologists can own interests in dialysis centers and other physicians can own interests in rehabilitation hospitals. Potential risks to be aware of are government regulation, reductions in reimbursements, or well-capitalized and politically connected hospital systems muscling into the space and changing the cash flow outlook on a dime.

Ideally, investing in a medical office building, ambulatory surgical center or in another “means of production” should help a physician make up for the savings she forfeited earlier in her career, but it’s certainly not guaranteed. As with most other investments, thorough due diligence is required.

Michael Joyce is founder and president of Agili in Bethlehem and Richmond, Virginia. He is responsible for overall investment strategy, management of investment portfolios and financial counseling services. He can be reached at mjoyce@agilipersonalcfo.com.

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