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Questions And Answers With The
Biggest Finance Geek In The Country, David Catalano
 Should
I Buy Or Lease My Dental Practice Office Building?
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One of the general
questions dentists ask me is, "Is leasing better than owning?" The answer is
usually, "It depends." It depends upon your unique situation. Here's a specific
situation I was asked about and my advice:
DENTIST: I am
in a situation where my existing dental practice building will be torn down
within the next 2 years by my landlord. A building just became available
approximately 4 blocks away.
The price of the
building is above the appraised value, but is in a much better (more visibility
and traffic) location then my existing location. What should I do? Is leasing
better than owning a building?
 DAVID:
In general, I would prefer to receive rents than pay them. Each situation
needs to be analyzed individually. An office building is really two investments.
The first is a real
estate investment in the amount of the cost of the building (or the shell of the
building). The second investment is in your dental practice. This investment
will equal the cost of the improvements, equipment and technology that turns the
building into your dental office.
RETURN ON
INVESTMENT: Based on the supply and demand in your area, will the building
(not including the improvements that make it a dental office) rise or fall in
value over your holding period? If you are in an area of the country that is not
supply constrained, then what will cause the value of your building to rise?
This analysis is less
important if the cost of your real estate is approximately the cost of renting
space. You want your facility expense to be about 6% of your revenue. If
it gets above that then you have to determine if that additional expense is a
good investment.
Will the investment in
your practice (improvements, equipment and technology) have a positive return?
If you add ops will they get filled?
 My
friend David Ahearn from Design Ergonomics tells me that in general
having more ops is better. David designs an incredibly efficient office and can
get more ops in less space than anyone I have ever seen.
Will more ops pay off
for you? If your design is efficient and you can get more ops in the same size
space then you are headed in the right direction. If your office looked nicer
would more people accept your treatment plans and refer their friends to you?
It is likely that all
of the dental office design firms have many clients that have increased their
production by over 25%. The question you have to answer is whether you are one
of those offices.
What you should know
is that we have helped clients just like you make these decisions. The math
usually tells the tale. We know how to do the math and can you through a
project.
What
Should I Do First? Pay Off My Debt Or Invest In My Retirement?
Another popular
question dentists ask me is, "If I have extra cash flow should I be paying
off my debt or investing in my retirement?" That depends on how much
you already have saved for your retirement.
It boils down to math.
If the returns on your nest egg are two times the amount you are annually
investing then you can start considering redirecting your funds to pay down
debt. At this point the annual amount invested becomes less meaningful to your
outcome. Since all finance is personal you should get a qualified professional
to help you with this.
Since most people are
not at this stage they need to have a debt management strategy. You want
all of your debt structured so that you can achieve your goals. One of those
goals should be to retire and maintain your lifestyle.
The math usually
points to a long term loan with low payments that allow you to have
plenty of cash flow to fund your investments. Naturally, the longer the loan
term the smaller the monthly payment and the higher the resulting cash flow. The
cost of delaying your contribution to retirement investing can be astronomical.
 For
example, if a 35 year old contributed $25,000 per year to an investment yielding
9.75% for the next 10 years and then stopped, by the time he was 65 years old
that investment would worth $3,048,278.
Conversely, if he
waited 10 years and then began making his ten annual contributions of $25,000
that same investment would only be worth $1,202,290. A difference of $1,845,988!
You need to also
remember that none of your debt tax is deductible. Only the interest you pay on
that debt is tax deductible. You may be in a situation where you are paying your
debt back quickly and end up with a huge tax bill that you did not consider. You
then borrow money, at a higher rate to pay your tax bill that arrived because
you paid off your debt. That’s called a tax spiral. And I find them all of the
time. Do you have one?
Are you making the
right decisions with your money? Are you maximizing the cash flow of your
practice? Are you preparing for your future and your retirement?
These are the
questions you need to ask yourself, preferably with a financial expert on your
team, to help you determine the right answers for you and your family.
I'm
building a new office, how much can I afford?
Here are 3 big
questions many dentists ask themselves as they build a new office for their
practice:
(1) How much financing
can I get for my project?
(2) How much debt can
I afford to take on for my project?
(3) Is there a
difference between those two questions?
The answer is simply
"Yes". Many of our past clients came to us because they did not understand the
difference. Often times lenders are willing to provide financing to dentists
without doing the analysis necessary to determine what the borrower can
actually afford to pay.
 Should
you take 5-year equipment financing just because you can get it?
Will your lifestyle
spending be adversely impacted because of the new financing terms associated
with your project?
Is your current debt
structured in a way that maximizes the additional debt you can take on?
How do you maximize your annual debt capacity allowing you to accommodate
all of your personal goals like retirement savings or collage tuition costs or
just your annual vacation(s)?
These are critical
questions that should be asked and answered BEFORE starting a building project.
For those dentists who
don't answer them beforehand, the answers are always revealed, many times, AFTER
they've gone down the wrong path and wasted tens of thousands of dollars on a
project they ultimately can not afford or can't find financing for once it's
started.
Have
a question or a comment for me?
Send
it to david@financegeeks.com.
Finance Geeks
provide unique wisdom and expert advice to healthcare professionals. Their
strategies help dentists create and maintain wealth. David Catalano has over 20
years experience dealing with dentists.
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UP TO $2,000 for your
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