From Active Wires to Passive Income
By Dr. Aly Kanani & Dr. John McManaman
The financial burden on a newly qualified health care professional is tremendous; having spent the first 30 years of their lives in training to become a professional. Spending money on university education and professional school, individuals will say lot of money must be spent by health care professionals before they are allowed to earn any back and the first dollar earned is already spent on debt repayment. Educational debt for professionals in dental fields in particular can run into the hundreds of thousands of dollars. Next, the dental professional has to take on more debt to establish their business through opening a dental or orthodontics practice as it is most common for doctors to work for themselves.
Since self-employed dental professionals only get paid when they are working they take loss in wages whenever they take time off for any reason including being sick, maternity leave, or disability. The idea and purpose of being a dental professional may be attractive to some who have qualified as dentists but the lifestyle of long hours and little time off rarely offers the same appeal.
With this in mind it is clear that the financial stability of many dentists and orthodontists in particular could be described as precarious at best. There are many factors that could result in less than favorable income for the dentists and dental specialists in particular who spent years and hundreds of thousands to gain qualification. The best advice that can be given to dentists and dental specialists who are in this situation is to diversify their income. This advice in fact is valuable to any person but has proven to be especially helpful for professionals who have debt at stake and are being challenged in an ever changing dental marketplace. Passive income streams can be gained through proper mentorship by investing in real estate or even in other businesses outside of health.
Creating passive income streams will allow any dental practitioner to know that they and their families are financially covered in case of illness or disability. Perhaps most importantly, diversifying into passive income streams such as real estate for dentists and dental specialists allows the individual to determine the quality of life they want and not be forced to work all hours to pay for the loans taken out, stress over increased competition and changing market pressures that could drastically impact their income.
Looking for financial security is something which is as important during the lifetime of the practitioner as it is to them to leave behind for loved ones. In this sense it is not advisable to concentrate on topping up pension funds with the above average money earned in a private practice. As many investors know, property is a sound investment as it is something which will always be there and cannot be lost by an economic upturn or a physical disability.
Being able to profit from alternative and dependable income streams will allow options in the future and the freedom to follow an alternative path should the person determine that they would prefer not to continue in their clinical practice and retire early. There are many uncertainties in life and the best way to defend against financial loss is to create alternative streams that are not dependent on one another. If it was always in the plan for the dental professional to sell their clinic at retirement age, it is worth knowing that the value of the business would be exponentially increased through owning the office building outright.
The largest assets most health care professionals have are their homes and their businesses. While it is likely that a family home is passed down through inheritance to a person’s children or beneficiaries it would be unlikely that a dental practice would be unless the successor was also a dentist or dental specialist. One primary investment that is advantageous to dental professionals who have started their own practice is to purchase the building in which the practice is located and as such become the anchor tenant. A steady income stream can be derived from renting out the rest of the building and when death does occur there is an asset retained from the business to pass along, allowing the family beneficiary to continue to profit from the rental stream or sell the building entirely. Considering that rent on the office would have to be paid to someone it is better for the long term beneficiary of these payments to be the health care professionals themselves.
Getting started in diversifying income streams away from active income into several passive income streams must start by taking the time away from the dental office to weigh up options and put actions into place. We suggest to begin by taking a half day to one or two full days off from actively working in the practice to concentrate on working on the practice. By breaking the pattern of working all the time in the clinic you will be diversifying your interests and have time to implement step by step changes.
Other real estate focused passive income streams that could be of interest to any health care professional operating their own clinic is investing in a business that is outside of the health care industry. This can be facilitated when the practitioner owns the property their unit is contained within and another, or a few, units are still available for rent in the building. Of course, investment in any business is possible but if it was contained within the building the clinic was in which the practitioner owned it would be easier to monitor the ongoing progress of the business.
The idea of decreasing reimbursement is a very valid threat as competition has already and will continue to put significant downward pressure on fees and for the fact that many dentists and dental specialists rely on payments set by insurance carriers relating to any specific service and when decreases happen it can greatly change the income stream. The possibility of a mental or physical disability becoming an issue in a dentists career would also play havoc to their active income stream.
Any of the above circumstances would not be good considering that most people accrue debt in relation to their projected future income streams, so if the practitioner’s sole income stream decreases there has to be another way of thriving while comfortably covering the debt. We would always recommend speaking to tax attorney, there may be the additional benefit of lower taxes and different tax strategies in earning passive income streams versus active streams. By creating more streams of income to ensure that a legacy is left for beneficiaries in the event of a death it is possible to decrease the spending on insurance since there won’t be the same need for life insurance coverage to ensure the stability of the health care professional’s family after their passing.
Important to any person is quality of life and the opportunity cost in having time to pursue interests while working in a profession that was chosen but which is hectic with high volume and long hours cannot be understated. Beyond that, uncertainty in the future stability of the clinic or the practitioner’s ability to continue practicing means that there are several reasons why it is important for a health care professional to diversify their income and seek to reduce the reliance on their active income streams through creating strong passive income streams such as through purchasing real estate.
It is never too early to be concerned about the path to financial independence, especially for health care professionals who, by nature of the profession, start their career with huge debt. Take the first step, get good mentorship, speak to people whom have done it already, surround yourself with like-minded professionals and teams of like-minded advisors, and make time to consider your options today.