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White Coat Investor Podcast
WCI #445: Buying Into a Practice, Building Wealth, and Planning Ahead
00:28:45
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Dr. Jim Dahle
This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011.
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This is White Coat Investor podcast number 445. Today's episode is brought to us by SoFi, the folks who help you get your money right. Paying off student debt quickly and getting your finances back on track isn't easy, but that's where SoFi can help. They have exclusive low rates designed to help medical residents refinance student loans that could end up saving you thousands of dollars, helping you get out of student debt sooner. SoFi also offers the ability to lower your payments just $100 a month while you're still in residency. If you're already out of residency, SoFi's got you covered there too. For more information, go to sofi.com whitecoatinvestor SoFi student loans are originated by SoFi Bank, NA member FDIC. Additional terms and conditions apply. MLS 696891 all right, some free stuff you should know about. We're giving away a free ticket to WCICON, the Physician Wellness and Financial Literacy Conference. It's a $1999 value. That conference is March 25th, 28th, 2026. It's in Las Vegas. Head to White Coat Investor on Instagram or Facebook and follow the instructions on the giveaway post. This week you need to enter win by 1117. And of course most people aren't going to win. You should come anyway. It's gonna be a great conference. It's well worth your money. You can use CME funds to pay for it. We're gonna have a great time. It's the best time of year to be in Vegas, and if you want the Vegas experience, you can get that. If you just wanna stay away from the Strip, you can do that too. We're at a resort hotel, not on the Strip. You're gonna love it. It's good times. Okay, free ticket for that. The second thing we're doing for free, coming right up is Thursday, November 20, Saturday, 6pm Mountain Time. This is a real estate webinar, for lack of a better term. So if you're curious about real estate but you're not sure if it's the right move for you, join us for that live session. I'm gonna walk through what physicians need to know before investing in real estate. We're gonna talk about the reasons it can fast track your path to wealth. The massive tax advantages most doctors don't. Take full advantage of the different types of real estate investments and how to choose the right fit for you, how to avoid common mistakes that derail returns, and some tools to evaluate real estate opportunities. So whether you're working for looking for passive income, a diversified portfolio, or a more hands on approach to investing, this session is going to help you decide your next steps and I'm going to stick around afterward and answer your real estate questions. Register@Whitecoatinvestor.com REI and three people who join LIVE are going to win our no Hype Real estate investing course $2,199 value for them. Register now whitecoatinvestor.com Rei all right, it's all the free stuff other than the rest of this podcast that's free too. One of the fun parts about doing White Code Investor over the years is 98% of what we produce is totally free to you. And we wondered a few times over the years, is this the right model? Maybe we ought to just get rid of all the ads and just have this be like a subscription thing. You guys pay us a subscription every month and you get the podcast or you get the blog posts as emails or whatever and and you guys let us know in a very resounding way that you do not want that. You're fine with the ads. You want this stuff to be free. So we've continued to produce it for free to you. 98% of everything we do is totally free. You're welcome. But yeah, you do have to listen to an ad every now and then. Heaven forbid. Okay, let's take our first question. This one was just emailed to me just this week and basically they say I'd love to write in to ask some questions about buying into a physician owned private practice. Can you do a podcast answering some of the following? Ask what are the questions you need to ask? What's a typical buy in and how best to do it? Take a loan, work for less pay. A few years after becoming an owner, what changes? How much should you expect pay to increase number of hours a week on administrative duties? Do I need to hire a lawyer? An accountant to review the books, pros and cons. Thanks for your time to hope to hear from you and your team. Okay, well that was a massive amount of questions and information being asked for. And the problem is every business is different and that's what a physician partnership is. A physician owned private practice is a business and every one of them is different. So the list of questions you need to Ask. There's not like 10 questions you gotta ask. I mean, I guess I could do a blog post. It'd be really Clickbaity, I'm sure. 10 questions you need to ask before buying indoor practice. But you basically want to know everything, right? You want to know why did the owner start the business? Why is the owner giving you the opportunity to buy into it or selling it or offering partnership? What craziness does the owner have in their head? Or do they have in their marriage or do they have in their family? What do they have in the way they practice medicine? Right? You want to know who are the employees? Are they planning to stay with the new ownership? How much are they being paid? What benefits are being offered now? What debt does this thing have? What kind of money does it make? How does it make money? What does the payer mix look like, what insurance contracts are in place, who's doing the billing, I mean, every detail about the business you want to ask about. So when you're at the level going, oh, what questions should I ask? You are not even close to being ready to buy this business. Even joining a physician partnership, a relatively straightforward one, like an emergency medicine group like ours, there's lots you want to ask. Well, how do you determine who makes partner? How much do partners get paid? What will I be paid until I'm a partner? How will it be decided if I become a partner? There's all this other stuff that goes into it. So the second question is, what's a typical buy in and how's the best way to do it? Well, it depends. Like most emergency medicine, all the business is is the accounts receivable. There's nothing else you're buying into. There's no practice real estate, there's really no equipment. There's nothing else you're buying other than the business itself and the ability to make money at maybe a little higher rate. And so the way most emergency physician groups are structured is a sweat equity buy in. Typically one to three years you work as an employee in a pre partner track. You get paid less than the partners are making and that's basically your buy in. So once you finish that period and you're made partner, you get your share of whatever it makes that month and you own some of the accounts receivable. So when you leave, you get some sort of a buyout, which is probably your share of the accounts receivable and that's about it, right? It's pretty simple and straightforward. But lots of practices own stuff, right? Maybe they own three different clinic Locations and the real estate there and an outpatient surgical center. And maybe there's a bunch of expensive equipment it owns as well. So maybe your share of ownership as the fifth partner is seven figures. And they're like, no, sweat equity is not going to cut it. You got to actually pay us something to buy in here. And for a lot of young docs just coming out of residency, you don't have much money. So what does that mean? It usually means another loan. Certainly that's how most dentists that are buying a practice buy it. They get a practice loan and they can take that from the partnership itself or from the prior owner. They can take back a mortgage essentially on the business, or you can go out and get another one from a bank or small business or your grandma, it doesn't really matter. They want cash on the barrel head and they don't care where you get the cash from. Sometimes it's a combination. You do sweat equity for a year and then there's a cash buy in you gotta make. There's lots of different ways to skin this cat. Every partnership is different. You want to understand what the structure is of the business you're buying into though. And like anything, it's negotiable. They might say it's not negotiable, but it is negotiable. Maybe they won't negotiate it because the other 15 partners came in exactly the same way. But you'd be surprised how much it varies from partner to partner when people come in. So what's a typical buy in? It's usually either cash or it's usually either sweat equity for one to three years, sometimes as long as five I've seen, but I think that's really a long time. One of the most painful ones I ever looked at in emergency medicine required me to work all nights for five years. That was a sweat equity buy in. I'm like, eh, I don't think I'm interested in that. But typical buy in, if you're buying into practice, real estate and outpatient surgical center and some equipment and stuff, it might be half a million dollars or a million dollars. Right. It can be a pretty substantial sum, but highly variable. Okay, the next question is, after becoming owner, what changes? Well, you're the owner. You're responsible if it loses money, you lost money. If it makes money, you made money. You're responsible to pay all the overhead. That includes any employees, that includes insurance policies, that includes utilities, that includes billing companies. You're responsible to pay all that. You're the last person to get paid, you're the owner, the benefit, you get whatever's left and that usually in a well run business, a well run practice means you make more money than if you're an employee. You should. You got more hassle, you're taking on more risk, you should make more money. So how much should you expect your pay to increase? Well, that's highly variable. Why not just ask? Just ask or calculate it out. You know, in a typical emergency medicine partnership, it's probably 50 to 100% more. You get paid, your pay goes up substantially when you become a partner. How many hours a week do you do on administrative duties? Well, it depends on, you know, in my partnership I do no hours a week on administrative duties, but I pay my partners to do them. You know, they might get the equivalent of two or three or four shifts a month for the administrative duties they're doing. And guess who pays them? Those of us not doing them. So it can be pretty variable. It wouldn't be unusual at all, I think, for a practice owner to practice medicine for 40 or 50 hours a week and spend another 10 or 15 doing administrative duties. That would not surprise me at all. The next question was, do I need to hire a lawyer and accountant to review the books? Well, using a lawyer is a good idea, right? There's a partnership agreement, there's a contract of some kind, there's an operating agreement for the business. You need to understand what it says. And for most of us that means hiring a contract review firm like some of the ones that advertise here, a white coat investor or maybe a healthcare attorney in your state to review those sorts of contracts. That's a good idea. Do you need an accountant to review the books? I don't know. Do you need an accountant to review the books or do you understand what you're looking at when you look at the books? Yes, you should look at the books. Before you buy a business, you should know what it's making, what it's costing, what the expenses are, what the likely sources of revenue are. Yeah, you need to look at the books. And if you need an accountant to help you do that, then hire an accountant by all means. What are the pros and cons? Well, the pros are more money, more control. The cons are, you know, more control. You're in charge. So all of a sudden, when the bad things happen, the bad things happen to you and you got a lot more work most of the time. So if you're looking to just punch your time card, ownership's maybe not the best thing for you, but if you're looking to, you know, do all you can with it and control as much of your work environment as you can control your employees and your future partners and those you work with. I'm a big fan of ownership. I prefer seeing docs owning their jobs. I think they're happier long term. I think they're less burned out. I think they make more money in general, but that's not an always thing. There are situations where owners are making less money than they would be if they were employees in a similar situation. Hope that's helpful for you. Okay, let's take a question off the Speak pipe. This one about net worth.
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Caller - Roy (Hospitalist)
Hi, this is Roy. I'm a hospitalist in California. My question is regarding net worth. The concept of it gets thrown around a lot on White Coat Investor and a lot of other financial sites. But what does it really mean? I understand it generally includes assets minus debts. But for example, people don't seem to agree on whether it should include your home mortgage. I'm sorry, your home equity. If you have a home mortgage because you don't own the home outright, should it include your home at all, since that's an asset that if you sell it, you're homeless. And should it include things like collectibles, cars, boats, and so on? Ultimately, I want to know, is it really a useful metric? Does it really tell us much? Rather, besides just a crude approximation of how much stuff you have versus how much you owe. So thanks very much. It's a topic that kind of confuses me a little bit, but thank you again.
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Dr. Jim Dahle
Good question. I think the main problem here is that you're confusing two terms. Net worth and investable assets. Or your nest egg, your retirement money, money you're going to live off. Whatever you want to call that other pot. Okay? Net worth is very simple. It's everything you own minus everything you owe. Okay? So with regards to your home, the value of the home goes in the asset column. The mortgage on the home goes in the liability column. So if you own a $700,000 home and you have a $400,000 mortgage on it, that's $300,000 to the bottom line, right? 700,000 in the assets, 400,000 in liabilities, 300 at the bottom. That's how net worth works. Everything goes into it. Your clothes, your jewelry, your car, your lawnmower, Everything goes into it. Now, do most of us, for practical purposes, include everything in it? No, we do not. We tend to include our home equity and we include our Investments and maybe our business and maybe somebody includes the car. But I don't even include cars when I calculate my own net worth. It's just too much of a pain to go look them up. And all that sort of stuff tends to be small potatoes at a certain point, especially if you've been successful with your finances as a white coat investor. So you just ignore all that other stuff. But most of us, our home is a pretty big chunk of our financial life. That one's worth using when you're doing your net worth. But the truth is your net worth is not a very useful number. What are you going to use it for? Nothing. I mean, maybe you can brag about it on an Internet forum. I don't know. That's about it. It's interesting to know. You want to make sure it's moving in the right direction. But the only thing that's really good for comparing to is what your net worth was last year and what your net Worth was 10 years ago. As far as a useful number for your financial life and for making decisions, we're talking about your investable assets, your nest egg or whatever, right? These are your investments. And the reason you don't put your home in there are some of the things you alluded. If you sell it well, you're probably going to buy another home. So it's really not going into your investable assets. It's not paying you dividends, right? Well, I mean, unless you consider a dividend the rent you're saving by not being in there. But don't put that into your investable assets. Likewise with your small business, you're probably not putting that in there, right? Some things are just better left outside of those investable assets. Because what you really want to do with those investable assets is you want to be able to rebalance them. You want to be able to make calculations like when will I be financially independent? You need about 25 times what you spend in there to be financially independent. Well, it's not 25 times your net worth, it's 25 times your nest egg. So what counts in the investable assets? Well, your investments, whether they're in retirement accounts or not. And I guess you could throw in some debts in there if you want, but typically I would leave those only in the net worth column. So maybe if there's some investment related debt, you can include that. Like you got a bunch of real estate rental properties, maybe you include the home equity from those in your investable assets. But for the most part, if you just distinguish between those two things, I think it answers all your questions and you won't be so confused when you hear the terms being used. Okay, our quote of the day today comes from Warren Buffett, who's been great, giving all kinds of awesome quotes over the years. He said the stock market is a device for transferring money from the impatient to the patient. And I love Buffett's perspective on this. His perspective is when you buy a stock, you are buying a business. Yes, it's a tiny little sliver of business, but you're buying a business. And if you don't want to own that business because of what the business is doing, it's earnings, right? It's dividends, it's whatever, right? Then you shouldn't buy it. Right? The stock market is not a place to go speculate on what something's going to be worth more in a year or two or ten. Right? If your favorite holding period, as Buffett says, is forever, you're buying it for its earnings. You're buying it because you think it's going to make profit this year, next year, the year after that, and have a good chance of increasing its profits as the years go by. That's why you're buying the stock. And that's the perspective to take is a long term one. You're not owning it for a month, you're owning it for decades. Okay, let's take a question from John. This one is about some Air National Guard stuff. I hope I can answer this one. Sounds complicated.
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Caller - Airline Pilot
Hi Dr. Dali. I'm an airline pilot and I'm on track to reach my retirement savings goals. I'm also a pilot in the Air National Guard about to retire after 20 years of service due to a few deployments, I will be able to receive my guard retirement starting at age 57. I plan on flying for the airlines until the mandatory retirement age of 65. My question is what is the best use for this Guard retirement paycheck from age 57 to 65? The best idea I've had so far is to save the money for those eight years and then live off of that cash Starting at age 65, the approximate three years that it will last me. All of this as a means of reducing sequence of returns risk. What would you suggest? P.S. if you answer this speak pipe, I will be the third of four brothers to have you answer a question on your podcast. Just some useless trivia and perhaps a WCI podcast record. Thank you very much.
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Dr. Jim Dahle
Well, you're certainly the first one that has let us know that three of the four of you have been on the speak pipe, so congratulations. I can't wait to get the fourth question first. Thanks for what you do. Thanks for your service, thanks for being a pilot. It's important work. But this is like any other money, right? You don't treat this differently. I mean, you treat this the same as if it was dividends from your taxable stock mutual fund. You treat it the same as if you got a raise at your airline job. You treat it the same as if grandma left you some money, right? You fold it into your financial plan. Whatever your financial plan says to do with your money that comes in every month, that's what you do. Like our plan says, well, we're going to pay. Everything we bought, we're going to pay for that. And then we're going to put the rest into a portfolio. Our portfolio is 60% stocks and 20% bonds and 20% real estate. So if I was getting a guard retirement paycheck from 57 to 65 while I was still working at another job, it would go 60% into stocks, 20% into bonds, or 20% into real estate. Actually, it'd be directed at whatever's not doing particularly well a couple of months before then, just in an effort to kind of rebalance the portfolio, that's where it would go. I wouldn't treat it as some separate fund of money or separate source of money or separate type of money. Money is fungible, right? Whether you save the guard retirement paycheck for retirement, or whether you save your airline paycheck for retirement, or whether you reinvest your dividends in your taxable account, it's all the same. It's fungible. So don't think of it as a separate pot of money. Now, your other question was, how do I deal with sequence of returns risk? Which is a totally separate question. And there's lots of ways to deal with sequence of returns risk. A common way to do it is just decrease how aggressive your portfolio is. Basically more money in bonds than you had before. You get into those sequence of returns risk years, which are really a few years before you retire and maybe the first five years after you retire. So people set up bond tents and they set up TIPS ladders and, you know, just have less aggressive asset allocation. More money in bonds, essentially. However you set that up, it basically makes it so the portfolio will not be so volatile. The idea with sequence of returns risk is you're trying to avoid pulling money out of your portfolio while it's falling in value, because sequence of returns risk Showed up a big nasty bear market. Showed up just as soon as you retired. That's what you're trying to guard against. And whether you do that by laddering out a bunch of tips, or whether you do that by, you know, qualifying for a pension, or whether you do that by buying a single premium immediate annuity, or whether you do that by just setting aside some cash for those first five years or whatever, all that's fine. Now, if you want to take that money and you want to just stockpile it in cash to spend for those first few years so you can let your investments ride, I think that's reasonable. But don't get caught in the trap of thinking that money's somehow different from the rest of your earnings. It isn't. All right, thanks everybody out there, whether you're a pilot, whether you're a doc, whether you're an attorney, whether you're a small business owner, lots of different types of white coat investors out there. And y' all have hard jobs. That's why you get paid a lot, right? When I get on that plane, I'm counting on that pilot being competent. When I go on the or, I'm counting on that surgeon being competent. And the reason you're competent is because you spend a long time learning how to do what you do and becoming good at it. So thanks for that. Okay, our next question comes from Bram.
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Caller - Bram
Hi there. Thank you for all you do at Whitecoat Investors. I had a question in regards to trusts and more specifically special needs trusts. We had a death of a family member and they set up a special needs trust for my brother who has intellectual disabilities. And I don't know what to do with the money in the trust. He likely won't be using the money significantly over the next 10 or 20 years. And so I'd like an investment strategy that will grow over that time period. But I'm not sure what makes the most sense. Some large banks offer wealth investment services, but they take about 1% of the investment to do that. Am I better off just opening some kind of Fidelity or Vanguard account? And if so, so is there a way to open up that account in his name with me as the trustee? And then should I just invest the whole sum of money into a VTI or some kind of whole stock market index? I would love some information about how best to manage this special needs trust. On behalf of my brother, thank you.
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Dr. Jim Dahle
We need to divide this into a couple of things. First, let's talk about some trust specific stuff, and then let's talk about Just investing. Right? Because a lot of this is just a regular old, boring investing question that we all ask every day about our portfolios. So first, the trust stuff. No, when you go to Fidelity or Schwab or wherever and open an account, you don't put it in his name. It's not his account. It belongs to the trust. A trust is a separate entity from your brother. It's a separate entity from you. So the trust should have its own tax number and it should have its own name, and that's what you open accounts in. If you're the trustee, you have to act as a trustee. You now have fiduciary duty to the beneficiaries of this trust, and you got to do it right. So if you have no idea how to be a trustee, you might need to hire help to do that. And there's lots of trust companies, banks, et cetera, that offer these sorts of services. Most of them charge a whole bunch of money for it. So it's good if you can learn how to be your own trustee. But somebody's got to be the trustee for this trust, and they got to treat it as a separate entity and follow the rules of the trust, et cetera, et cetera. Now, I function as one of the trustees for our trust, and so I know that can be a do it yourself project. But you also have to be capable of doing it yourself. And all I've heard from you is, you know, 30 or 45 seconds or whatever questions. I have no idea what your level of financial literacy or competence is, whether you are competent to be a trustee for this trust. That sounds like maybe somebody kind of dumped on you with or without checking on you. I have no idea. But. So if you need help, go get help setting things up. But yeah, it's open the account in the trust name. Okay, the second question is just general investing. What should I invest in? Well, if I knew what you should invest in, I would pick whatever's going to do the best over the next 10 or 20 years. And I just have you put all your money in that. Right. If we could go back in the time machine to 15 years ago, we'd say, oh, Bitcoin's going to do the best. Put all the trust money in Bitcoin. But you don't know that. So you're working with a cloudy crystal ball. So you have to pick a mix of investments that's going to do reasonably well under a wide variety of potential economic outcomes over the next 10 to 20 years. And there are lots and lots of different investments that probably meet that criteria. An easy way to do this though is, is to use something like a life cycle fund called Target retirement funds. At Vanguard. They go by different names, but generally you pick an age at which you think you're gonna retire, 2035, 2040, 2045, et cetera. And that's the fund you buy. And what the fund does is it's a fund of other mutual funds. It just rebalances for you each day and makes it less aggressive as you move closer to that date, but gives you a, you know, if chosen from a right company like Vanguard, you're going to get a low cost, broadly diversified investment that's going to be on autopilot for the next 10 to 20 years. Sounds perfect for someone in your situation. So maybe you're like, he's going to need this in 10 to 20 years. Maybe you go pick a Vanguard 2035 or 2040 retirement fund. You're going to get some stocks and some bonds. US Stocks and international stocks is going to be very broadly diversified. No one can say you didn't meet your fiduciary duty to the beneficiary by choosing an investment like that. It'll get less and less aggressive as you get closer to the time of him needing the money. And even when he starts needing the money, he's going to need it over time. So it'll remain somewhat invested over time to continue to help keep up with the inflation adjusted spending needs from that. So that might be the approach that I'd take is go to Vanguard or Fidelity or whatever, put it in a very low cost target retirement fund and let it ride. And I think that will meet your duty as a fiduciary to your brother and likely give him the financial outcome that he needs and deserves. Hope that's helpful. There's obviously lots and lots of ways to invest, but you need to do it in a way that's most likely to grow the money in a reasonably safe way because it really does need to be there in 10 to 20 years. It sounds like, as I mentioned at the beginning of the podcast, SoFi could help medical residents like you save thousands of dollars with exclusive rates and flexible terms for refinancing your student loans. Visit sofi.comwhitecodeinvestor to see all the promotions and offers they've got waiting for you one more time. That's sofi.com whitecoatinvestor Sofi student loans originated by Sofi Bank NA member FDIC Additional terms and conditions apply. NMLS 696891 don't forget about the Wcicon ticket giveaway, okay? Go to White Coat Investor on Instagram or Facebook. Follow the instructions there on the giveaway post this week you need to enter to win by 11 17. Thanks also for leaving us 5 star reviews and telling your friends about the podcast. A recent one came in from Qbrill said informative and entertaining. Great advice for physicians from a physician. Follow your doctor's advice. Listen to this show. It is informative and entertaining. 5 stars. Thanks for that great review. All right, keep your head up and shoulders back. You've got this. We're here to help. See you next time on the White Coat Investor Podcast.
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The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.