Some investments are available to anyone, but others are available only to doctors. Given the late, usually heavily indebted, start they have to their professional and investment careers, they should take advantage of as many of these as possible to speed their journey to financial success.
7 Top Investments for Physicians and Dentists
Each of these are productive, minimally speculative investments. Although some of them are not particularly diversified, all of them can have excellent long-term returns.
# 1 Starting or Buying into a Practice or Partnership
Our first investment is specific to doctors. It may involve opening a dental practice, buying into a partnership of hospital-based physicians, or joining another doctor with the intention to later take over the practice. Sometimes the buy-in is sweat equity, and other times financial. If financial, doctors often have to either save up a lot of money or find financing from an outside source or their new partners. Building and improving a practice can create a valuable asset that can be sold at the end of the career to boost the retirement nest egg. Even in a hospital-based physician partnership, there is usually at least a buy-out equivalent to a few months of accounts receivable.
However, the biggest benefit of owning your job is that you typically make more money throughout your career. There is nothing being carved out of what you produce by an employer or private equity group. In my specialty of emergency medicine, a group of owner docs may only have an overhead of 4-8%, but a contract management group may “skim” as much as 1/3 of what their employee docs produce. Ownership has its privileges.
# 2 Owning a Medically Associated Business
In addition to their practice, many doctors own a separate, but somewhat associated, business. Some examples include:
- Dialysis centers (nephrologists)
- Outpatient surgical centers (surgeons and anesthesiologists)
- Endoscopy centers (gastroenterologists)
- Imaging centers (radiologists)
- Urgent cares (emergency and primary care physicians)
- Labs (pathologists)
- Dental lab (dentists)
- Supplement business (functional medicine docs)
- Practice real estate (anybody)
Run well, sometimes these businesses provide more income than the doctor's practice itself. Doctors do need to be aware of the Stark Law, but there are plenty of exceptions. For example, for some reason, ambulatory surgical centers are not considered a health care business. No, I have no idea what business they are in if it isn't health care. There are “safe harbor” exceptions (such as doing 1/3 of your cases at that center) that allow you to even send Medicare (the only ones the Stark Law applies to) patients there.
# 3 Paying Off Your Student Loans
One of the best investments available to many doctors is simply paying off their student loans. Many doctors have non-deductible student loans with interest rates of 5-10%, yet most safe, fixed-income investments pay less than 2-3%. There is little sense investing in CDs or bonds if you have a 6.8% student loan providing a higher and just as guaranteed return. While anyone can have a lousy student loan, doctors are far more likely to have large amounts of them at higher interest rates. They are also less likely to be able to deduct the interest on them than those who simply used them for an undergraduate degree.
# 4 Index Funds
Anyone can buy index funds, but that does not make them a bad investment. The expense ratios on good index funds have fallen so low that they now offer professional management, daily liquidity, market-matching returns, and broad diversification essentially for free. Given the preponderance of professional trading on Wall Street and the heavy analysis of publicly traded stocks, the data is clear that index funds are a far better way to invest in the most profitable companies the world has ever seen than trying to find a talented active fund manager, much less trying to pick the winning stocks yourself. Even an employee physician without any side gigs who consistently carves out 20% of gross income and invests it into a reasonable mix of index funds should easily retire comfortably as a multi-millionaire.
# 5 Reasonably-Leveraged Rental Properties
While anyone can invest directly in equity real estate, doctors have the cash flow and credit worthiness to make the process easier. This certainly has elements of a second job, but that can be minimized through developing good systems and hiring good management. A good property can have stock-like returns even if it is paid off, but with a reasonable amount of leverage, expected returns reach into the double digits.
# 6 Syndicated Real Estate
While this investment is not physician-specific, it is specific to either the wealthy or those with a high-income who can qualify as an accredited investor. If choosing and managing your own properties is too much work, hire it out. When you invest in syndicated real estate, you are banding together with dozens of other investors to buy a property you can't afford to buy yourself. Even if you did have the funds to put a million bucks into an apartment complex, with syndications you could put $100K each into 10 different ones. You can get even more diversification using a fund that buys multiple syndications, and it will still pass the depreciation through to you on the annual K-1. More information about private real estate opportunities can be found here or by signing up for our free real estate opportunities email list.
# 7 Real Estate Debt Funds
While not very tax-efficient, these are some of my favorite investments. Real estate developers are often willing to pay 7-12% plus a couple of points to borrow short-term money quickly without being hassled by a bank. Savvy investors and fund managers team up to meet that need and earn low double-digit returns for their trouble, all while having their loans backed by the real estate in first position. While obviously riskier and far less liquid than a treasury bond, many accredited investors find a place for this asset class in their portfolio. Here's an example of one I've invested in.
Doctors may not get started building wealth until their 30s and often start with a dramatically negative net worth. By taking advantage of the best investments available to them, they can still build wealth and find the financial security that allows them to be the best partners, parents, and physicians possible.
What do you think? What do you think are the best investments available to doctors? Comment below!