THE BU$INE$$ of the BU$INE$$ of DENTI$TRY

Nov. 1, 2004
In the long run, ownership of a dental practice's facilities has its advantages as opposed to paying rent over the lifetime of a practice.

Alan Stuart Markoff, DDS, MBA

In the first article of this series, I discussed the four most significant areas of overhead: laboratory, rent, salaries, and dental supplies. In the second article, I zeroed in on laboratory expense, and how it can either be greatly reduced or eliminated completely. Let us now turn our attention to rent.

Rent

Regardless of where you are now in your journey in private practice, step back and look at this particular aspect of overhead—a macroscopic view, if you will— that allows you to see the numbers over the lifetime of a practice. The numbers will "knock your socks off!"

For example—in a very conservative model—if you pay $1,000/month for 40 years, you will pay out $480,000. In a more realistic model, if you pay $2,000/month for 40 years, you will have paid out $960,000. And, in a tougher scenario, paying $3,000/month during a similar time span equates to $1.44 million.

In the first article of the series, I made two suggestions relative to rent.

1)Share your space. Find another dentist from the "get-go" to share the rent and the space. Or you could purchase the equipment and the other dentist could pay a rental fee that covers your expenditures on the equipment, as well as a good portion of your rent.

I fell into this particular scenario about the 12th year of my practice journey. I expanded my office, equipped it, and installed the necessary cabinetry—all for a new associate. He left a year later. I was then stuck with all of the above, plus the improvements to the landlord's building.

Almost all of my advisors suggested selling the equipment and cabinetry, and returning the space to the landlord. Only one advisor, my insurance person, suggested renting the space "as is" and utilizing it as rental property. I shared the front desk, the hygiene area, the laboratory, and our private restroom, as well as the reception area.

Over a 26-year period, I had a number of different dentists working in my office. Some worked out well. Others didn't. There was always an "out" for me in the lease that I utilized in these agreements.

I checked with the landlords and they had no problems with this approach. The income from this space paid off all equipment notes as well as my rent. This approach is the second-best scenario.

2)Purchase land, early on, and build your own building. While this is the best scenario to follow, this approach is frequently easier said than done. In smaller communities, this is usually a more manageable model. In large, metropolitan areas, this model—while possibly a bit trickier—is still doable. Usually, the cost of land in larger cities is significantly more expensive, especially in a prime location.

Dr. Pankey frequently said: "If you are good, people will blaze a trail to your doorstep." He always followed up that comment with this one: "But, if you are on a good corner, you are going to sell more mousetraps." I sense we have to provide a warm, caring, trusting environment, and market our practices. Therefore, we don't have to be on the best corner.

The advantages of this second approach are many.

First, and most significant, you will never be sitting in a meeting with the owners and be told your rent is about to "go through the ceiling," and you now must pay for your parking spaces. How I despised those meetings. I was totally at the owners' mercy. Sometimes, the market was "soft" and I was able to cut a reasonably good deal, say for five years. Most of the time, though, the market was "hard" and my rent took a huge hike.

And, I felt I was "locked in" because I had invested so much of my money into someone else's facility, and I loved my location and the design of my space. If I had it to do over again, I would purchase land and construct a building that would have multiple floors (at least two but preferably three) in which I was the landlord.

There are major, favorable tax consequences relative to ownership, including significantly less angst. At the end of the journey, when you are ready to make the transition from your practice to another life, the building remains one of your biggest assets and continues to be a source of passive income for you.

In a worst-case scenario, if you no longer prefer to own, you can sell the building—along with your practice—and enjoy the combined income of your practice and the building.

The most poignant aspect of this, however, is that—when the journey ends—there is a pot of gold, and it is yours. When I added up the money that I had spent in rent for more than 38 years, I felt mortally wounded. Fortunately, for me, I didn't do the arithmetic until I was gone from private practice.

Stephen Covey has maintained in "The Seven Habits of Successful People" that we should always view the end, even when, and perhaps, especially when, one is at the beginning. There is no way to know for certain, at the beginning of the journey, just how much is going to be spent for renting and improving someone else's facility over a period of time.

But you can make an estimate, and that number should get your attention. You may argue that there is no way you could afford to do this (buy land and build) at the very beginning. You may be absolutely correct. It would be very prudent to at least familiarize yourself with the concept and the numbers.

You can attempt to find partners to join with you, but be very careful here because this can lead to serious problems. You also can compromise. Find a start-up location, perhaps even renting from another dentist for five to 10 years, knowing that you desire to own your own place eventually.

Think about this scenario: Rent from another dentist for five to 10 years, and live somewhat frugally during these years. Then find your dream location and erect your own building. You still have some 30 years to enjoy all the pluses of ownership.

As one financial advisor says: "Live the first 10 years of your life like no one else, so you can live the rest of your life like no one else." Financial security is all about living below your means, not beyond your means. Do this in the beginning. Have a plan. Save before you spend. Pay yourself first. If you do this with conviction and discipline, you will be able to chart your own course, and affect your own outcomes.

If you do choose to own, remember, you still make monthly payments representing your cost to do business in a particular space and location. The key to ownership is that the payments go to you, or your mortgage company, and you are accumulating equity. The checks do not have "wings" on them.

The thrust of this series of articles is to make you aware of the significant overhead factors, how you can modify them, or eliminate them completely. You may feel, as you read these articles, that these approaches take courage, and/or risk. Perhaps you are correct. Please remember, however, about Maslow's Ladder. The first step is always awareness.

If these articles turn on some lights for you, if you can, at least, consider some alternatives, if you can envision the end either at the start of your journey, or wherever you happen to be right now, your life can be/will be significantly different. You will be the captain of your own ship. As friend Bob Frazer laments: "If you are in a rowboat, adrift on the seas, without a rudder, you will head to the port towards which the strongest winds blow." If you desire to make the choices, develop your own mission statement and goals. Then you get to make the important choices that will affect your life. You get to choose the port. Seek out a snug harbor, but give yourself permission to fail, at times. The very best of us do, then redefine our paths and move on.

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