Doctors and dentists are some of the smartest people out there, but often make the dumbest investing mistakes. One of the biggest reasons for this is that they don’t have any time left in the day to learn about a particular investment, then once they buy it, they have no time to manage it. Another thing they have working against them is their income. Their income is often significantly higher than average and quite reliable. Lenders can afford to take on more risk when loaning money for a real estate or business purchase to a doctor. They know the doctor has the income to make the loan payments even if the business underperforms or flames out.
Here are a few purchases that doctors flamed out on:
- Bought a run-down Class C apartment complex because the gross rent multiplier looked good (overlooking the fact that expenses and vacancies were extremely high and the police frequently visited the complex).
- Bought a car wash that was constantly breaking down and located 45 minutes from their home and practice.
- Bought a dine-in pizza franchise even though the restaurant industry is one of the most management-intensive businesses around and one of the hardest to run on a passive basis. Also, this particular franchise had one of the highest SBA loan failure rates in the country.
All of these purchases required a lot of due diligence up front and a high level of management and monitoring after closing. Malcolm Gladwell famously said that it takes 10,000 hours to be great at something. These doctors didn’t even have the time to become mediocre or average at their niche investment idea before they sunk hundreds of thousands of dollars into it.
Here are a few smart investments that a doctor should have considered first:
- Buy an office building where their practice is the primary tenant; lease remaining space to complementary tenants.
- Buy another medical practice in their same specialty; they could increase the number of patients at their current office or open a satellite.
- Hire one or more doctors or physicians assistants in order to expand their business. Some doctors don’t want to own their own practice or don’t have the financial ability to buy one. Increase your income by having them work for you.
- Paying off loans on the practice or medical equipment. This is one way to truly get a guaranteed return on your investment because when you pay off the loan in its entirety, the interest you were paying goes away.
- Buy low expense, passive index funds that require no management from the doctor.
Doctors should avoid management-intensive businesses and investments in almost all cases. If the doctor really wants to invest in something unusual, like tax liens or hard money loans, they would be wise to utilize an expert in that field, knowing that they don’t have the time to become an expert themselves. Doctors should also be somewhat skeptical of any investment opportunity that is targeting other doctors. Intelligence and years of schooling do not make someone immune from too-good-to-be-true opportunities or scams.