Please read this very carefully, especially if you are a younger physician.
Family physician and wife is pharmD, ages 45 and 44, respectively. 2 children, early teens.
Current annual take home pretax income $1,250,000 plus $150,000/year commercial real estate rental. We both started practice about 17 years ago at a combined income of about $350,000. Has been growing ever since. Broke the $1,000,000 mark 3 years ago.
Net worth currently $1,800,000 in retirement accounts, $1,700,000 in cash/non-retirement investments, $2,600,000 in commercial real estate ($4,200,000 value-$1,600,000 loans), $1,300,000 in primary residence ($1,700,000-$400,000 loans), $190,000 current value of four automobiles, $3,000,000 (current value of owned medical practice).
Anticipated net worth upon retirement $20,000,000-$30,000,000 depending on business growth rates and investment returns.
Most would say that at our ages, over $10,000,000 in net worth is great. Congratulations to those who have done better, for those looking to get here, some good advice that may be difficult to find elsewhere...but first read the following paragraph.
Are we happy - generally yes. Regrets - PLENTY!!! The most important point I want to make is: think about what you want in life very hard and keep in mind that what you want will probably change dramatically with each stage of your life. As the more senior doctors will likely tell you, your most valuable asset is your time and at least in the past, I feel my wife and I totally blew that. Now I use hospitalists for weekend and evenings, and am in the process of hiring other providers to ideally cut back to a 3 day work week even at the cost of take home income. Our financial success came on the back of back breaking hours - including 18 hours work days plus on call hours for years, missing functions with children, etc. - so you need to understand there are significant sacrifices necessary to get here - at the time it seemed worth it but now not so much. The truth is many doctors, like myself, are lured into excessive hours just because the work and income is there. At this point we have a 7500 sq ft home we had built 10 years ago. My daily driver is a BMW M6 convertible, my weekend treat is a ferrari F430 spider. My wife has a BMW 750Li and a Toyota Sienna XLE Limited. Do I enjoy what we have? - yes. Would I give it up in a heartbeat? - absolutely but for several practical reasons I don't. For example, I have a $500,000 HELOC on the house (in addition to the mortgage) that serves as a cushion as our expenses as business owners are huge - so I keep the property for low cost borrowing against my equity. I have borrowed against the cars at 2% or below - so everything we've done has been to optimize our finances. The downside of owning sports cars - very regular maintenance even if not driven - remember the most valuable asset is time, the cost of the repairs or depreciation is not the main issue. One day I won't need the financial prowess to support the business and at that point will definitely be happier with old beaters. We've also taken short vacations, but I wish we had taken longer and more regular vacations to create more family memories. I spend some time doing homework with the kids and being involved with their school activities - but I wish I had spent more time. TIME. TIME. TIME. Loss of this is often a doctor's biggest mistake, so try not to make it. Neglecting time with a spouse leads to resentment and, often, divorce.
Now let's say you still want the financial prosperity, here's how we did it and some realities doctor's (I feel) still don't understand based on their comments.
1- Society supports you far more for being a job creator than a physician. Think about CEO's of big business and athletes - are their personal efforts really worth $10,000,000, $100,000,000+/year. No, it's because they support and create thousands of jobs. So employed physicians will not create the wealth of self-employed physicians as the profits go to the employer. Just as the CEO makes lots of money on the efforts of the employees, so too does the physician employer enjoy passive income from the work of his employees (employed physicians, ARNP's, imaging technicians (ie ultrasound), in house pharmacy, ANS testing, allergy testing, Holters, etc. This how a successful business owner can continue to increase income while having more time by growing a business - more passive and less active revenue. Your own business is always best and IRA investment options are much better than 401(k)'s and over the decades that can mean tremendous differences in net worth due to compounding and the very fact that you can contribute much more to an IRA than a 401 (k) ($54,000 vs $18,000).
2- Working crazy hours as I did in the beginning does not make you wealthy, even with good income. You can only earn so much, that is another reason the passive revenue of business ownership and investments is very important. As corporate executive compensation packages are more worthwhile as stock options, so too should the young physician consider becoming more aggressive with compounding investments after he/she has an emergency fund for security and basic needs are covered. I started with excessively conservative investments such as bond funds and lost nothing in the 2008-2009 stock market disaster. However, after that I started investing aggressively after having paid off my house within 5 years. I know I'm not smart enough to pick individual stocks so I research and buy mutual fund holdings in my investment portfolio (never paid any advisor). Current holdings in relatively equal amounts are VFIAX, VQNPX, VWNDX, DXQLX, FBIOX, FSPHX, FSELX, OPGIX, UNPIX, UGPIX, TFFYX and currently 20% in cash. Some of these funds have returned in excess of 80-100% in a year. As the market reaches newer highs and as concerns of a bubble increase, sell into new highs to increase cash positions so when the next correction or bear market you will have a strong cash position to invest into the next bull market. The power of compounding is hard to see when you start with smaller amounts to invest, but as you get older and your portfolio ages, this passive income can be tremendous. I have had months where our IRA was over $100,000 in one month. Imagine how much more that will be after retirement in my 60's after all the upcoming years of contributions and returns adding to the base amount. Maximum allowed in 2017 for IRA for a couple was $108,000 and of course we put in the maximum. Also maximizing an HSA investment account ($6,750 for 2017)
but not using the funds for healthcare so the investments continue to grow.
3- Surround yourself with positive, more accomplished people than you. For me, those who have the smarts are not doctors. Do not be self-defeating - your attitude will become your reality. I hear doctors complaining about insurance companies all the time. You know the old expression - if you can't beat them, join them. If they are doing a good job, then invest in healthcare stocks like United Health care and prosper from them too - you'll be less resentful.
4- Pay attention to taxes. Primary residence and office building depreciation great for tax purposes. HSA funds go in and come out tax free if used for healthcare purposes. Maximize IRA contributions. Unfortunately I will be taxed at a personal income tax rate in retirement with RMD's, including appreciation of the IRA accounts. Non-IRA long term capital gains only taxed at about 20%, so don't be afraid to also use taxable accounts - for the high net worth individual they can be as good as or better than an IRA/401K.
5- Networking is critical. For example, we have networked very heavily with local chiropractors and attorneys to manage motor vehicle accident patients - something most primary care providers have not even thought of as a referral stream. We network with local surgeons for pre-operative clearances.
6- Buy everything on sale, personal use or office use. Buy the oldest cars you like car with the lowest mileage possible. I purchased my M6 from cars.com with about 6,000 miles for $54,000 as it was 4 years old (sticker price $130,000). Someone took a $76,000 hit over 6,000 miles. Do you want to be the one that does that? The guy that sold me the Ferrari put about $75,000 in options, I only paid about $10,000 above the cost of a base Ferrari of the same year and mileage. Let someone else take the hit because for reasons I don't understand, there are always people willing to do that.
7- Don't be fooled by people that offer too good to be true investments and even be suspicious of average investments. Never invest with someone who comes to you or calls you. Doctors are fooled all too often and lose hundreds of thousands in bad investments and outright theft. The story of the turtle and the hare, or the expression slow and steady comes to mind. Not interested in things like Bitcoin or the latest investing advice from a colleague over dinner.
8- The internet is very powerful with a wealth of information - medical, investment, life coaching, otherwise. Use it, and it's free.
9- Never buy anything as soon as you see it. Decide if a big ticket item is really worth it, and buy smaller items online for big discounts. Always negotiate on big items. Get over any shyness or you will be eaten alive as you are a target as a physician. No not overpay for home or auto repair services and do not be convinced you need more of what you are buying or the service you're getting.
10- Very few friends are really friends. Figure out who they are and if they see you are doing something incorrectly, don't be offended. Be thankful a real friend had the courage to speak up. Do not be stubborn, always be willing to change course. Persisting stubbornly with a bad decision can be extremely costly. That is not to say give up easily any undertaking when it is difficult - just the wrong efforts.
11- Your health can change on a dime. Do not believe it can't happen to you despite having seen it so many times with patients. Live every day as if it is your last.
12- Without depending on God, we personally do not believe we could have accomplished a fraction of this. We tithe and I donate time every month to a volunteer clinic. Keep your soul clean so when you approach the end of your life, you are happy with the life you lived.
Lot's of important lessons in life hidden in these blogs. Seek them out, avoid the critics. Someone will always find a reason to criticize you, me, this blog, etc. Criticism is of course not all bad - great when it's constructive, not so good when it's the result of jealousy and/or laziness.
Not an expert by any means, but I'm happy to answer questions if you think I may have anything to offer.
It's funny how life works. Some of our success comes from opportunities that present themselves without seeking them out, and are often hard to recognize as a worthwhile opportunity. This applies to our real estate holdings.
I left a big group to start my solo practice 11 years ago. I purchased a modest 2700 sq foot office building to start the practice. I just knew I didn't want to pay anyone rent. I lasted in that building about 10 years, at which time we grew out of the building. I saw this coming and started buying land to build a new office and, as property ownership is public record, was approached by a physician group, a salt room investor and a chiropractor about building larger and they would sign leases and design their own spaces. I purchased expensive land on a main road with 35,000 vehicle passes/day. That paid off as this drew the interest in the property and commands higher lease rates. I wound up having to buy the lot next door as well to accommodate all the tenants. Not many property owners have tenants ready and willing before breaking ground. All tenants, including myself moved into the new building September 2017. It is 15000 sq ft on 3.6 acres and cost about $1,000,000 for the land and $2,900,000 for the building. I take up about 6,000 sq ft and lease the rest (5-10 year leases) and also lease the old building. I also have the ability to expand the new building if needed.
I now like the diversity of the added commercial real estate portfolio to my investment profile. I however did not actively seek out this investment option - maybe the next opportunity will find me again.
I was initially against being a landlord. My father and father-in-law did residential real estate for decades very successfully, but at the expense of a lot of time, hassles and exhaustion. I figured commercial real estate was a little easier, but as you can see I haven't been doing it that long; so far so good. Planning to own the property for the next 20-25 years and hopefully eventually to sell the practice and building to a large group, hospital, etc. That's why I built high end. In over 30 years of building my builder won a first place builders award for this building that he won only three times before with scores of submissions. If a tenant moves out, I will decide if I want the space for an expanding practice or if I will pursue a new tenant - now at lease I won't grow out of my building.
So I would say don't force it, see if the opportunity falls into your lap. My neighbor is a residential realtor/property manager and is very successful at it, but residential is not for me.
If you take the plunge, negotiate on everything - from land and construction if you are building, to interest rates from the banks (you are very valuable to them). Be cost conscious but be wary of a less attractive area as I have seen colleagues pay for this mistake - unable to find tenants at much lower rents. Take care of any tenants and be fair to them.
Commercial real estate loans are an unattractive balloon loan, which means the rate locks for a few years (usually 5-10) but amortize over a longer period (ie 20-30) so after the 5-10 years are up, the balloon means you owe the remainder immediately as one lump sum! Better hope you can refinance then! Instead of doing this, I put a large down payment and negotiated a 10 year loan that amortizes over 10 years so there is no balloon. Therefore in 10 years I will have paid it all off (goal is prepayment of 5 years).
If you ultimately don't do real estate, I actually thing putting that money in the markets would do even better over the decades with the power of compounding. If you are going to introduce a lot of new money I would wait for the next bear market (Imagine $1,000,000 invested when the DOW was at 6500 in 2008-2009) or at least take small investment steps with market corrections, such as last week's - I am considering buying into some funds if the Chinese tariff threat eases, but at this point expect a continued downtrend over the coming weeks to months so I look for bottoms, not dollar cost averaging. Not buying just yet. If I miss the boat and the market reverses to new highs - then I sell out of current holdings in such a lofty market for some risk reduction and to ultimately buy more shares of a fund at lower cost during corrections/bear markets. Do not do what most do - buy high and sell low. Sounds obvious but people act on emotion, not principle and that usually leads to bad decisions.
I just like smart market investing a bit more than real estate. It's also a lot easier to get in and out if needed, but don't do it with large amounts unless you have a long term horizon. Major corrections take longer to recover. The last recession took 5 years to recover - that's why the say you should have a minimum 5 year horizon. Corrections under 10% historically recover in a few weeks-months.
By the way, if you have kids I believe the most important investment you can make is in their lives and education. My children always went to a private school and I almost always have a hired private teacher to give them an edge. Forget real estate or the markets if this is neglected. Reward kids for good deeds and good grades, but don't give them everything they ask.
Don't assume you and your spouse are on the same page regarding vacations - ask and communicate! Invest in this relationship as well. It's okay to take fewer vacations and work harder when the kids are too young to remember, but now mine are in their early teens and I find it very important as these are critical years to create memories and before I know it they'll be off to college. I prefer to make up the "lost vacation time income" the rest of the year or with my investments. As your net worth grows that "lost vacation time income" is a smaller issue and the value of your family time is put in perspective.
God bless!
