We recently got a question here at Student Loan Planner® about how to save up to start a medical practice. It’s a great question and one worth looking into because owning a medical practice can lead to greater job freedom and potentially more income.
First we’ll look into why to start a private practice and what it takes to finance the purchase, then we’ll cover how to go about getting your finances in order and how to save up to either buy or start your own medical practice — and where you should put the money in the meantime.
Why own a private practice?
There are two reasons why a physician should consider owning their own practice: being their own boss and earning more money.
More than half of all physicians work for a hospital system instead of in private practice. Working for a hospital or academic system has its perks. The system takes care of pretty much everything and provides some nice benefits, including the ability to possibly go for Public Service Loan Forgiveness.
The hospital or academic system also calls the shots and sets all of the targets, however. There are also a subset of specialists who have limited employment opportunities there. A private practice can be great for physicians who don’t want to work in this kind of system or can’t find the work they’re looking for.
Financial benefits of medical practice ownership
Owning a private practice has some nice financial benefits. According to the Medscape Compensation Report 2019, employed physicians made $289,000 while self-employed physicians made $359,000, a $70,000 or 24% premium.
Not only can the income be higher, but owning a medical practice allows physicians to take a bunch of legitimate deductions to lower their taxes and the cost of paying back their student loans if they’re on an income-driven plan.
Owning a medical practice can also be looked at as an investment. Buying a practice can cost anywhere from one to four times its net profit. That’s a big range but essentially it means that it will take one to four years for a physician to recoup the investment. Using those numbers, that works out to a 25% to 100% return on investment.
We often get questions from physicians about how to invest while paying off student loans. Fairly often, physicians can overlook owning their own private practice as an investment, but it could offer returns well in excess of most traditional investments like stocks, bonds, exchange-traded funds, mutual funds and real estate.
If you look at buying or starting a medical practice as an investment, physicians need money to get it started. Usually, that amount is more money than a doctor might have on hand at the moment, so it often requires getting outside financing to make it happen. Let’s take at what it would take to start your own practice and then how to save up and get in a position to make the purchase.
How to get a medical practice loan
Most physicians won’t have the amount of cash on hand to buy or start a medical practice. If they really want to get going, it will require taking out a medical practice loan. Not only can these loans be used to cover the purchase price, they can also be used to start a practice, purchase equipment, cover initial expenses, overhead and more.
Getting a medical practice loan is similar to taking out other debt. A physician can get a loan through a bank or can use the Small Business Administration to facilitate finding a lender. The lender will take a look at your credit score, the detailed business plan and the profile of the practice being either acquired or started, including financials and financial projections.
Medical practice loan down payment and interest rates
Unlike for a home loan, lenders may not require a down payment to get the loan but they do want to see that the physician borrower has assets that can be used as collateral to protect the bank’s investment. We see that trend changing, however, as some lenders require a down payment of up to 10% of the loan amount.
When looking for a medical practice loan, it would be best to have the 10% cash on hand, whether it is needed as a down payment or not. If the lender doesn’t require it, the physician might want to keep it to cover working capital — the money that is used for day-to-day operations or one-time “small” and possibly unforeseen expenses — especially in the first year or two of business.
For more details on getting a practice loan, check out our Medical Practice Loan Guide.
How much cash you need to save to start your medical practice
The interest rates on medical practice loans are kind of high right now, in the 7%-8% range, so it’s best to save up as much cash as possible. At minimum, a physician should save up 10%.
How much you should save up depends on the size and specialty of your practice, but $50,000 should be a good start, especially for a primary care physician. That amount could buy a practice up with about $1,000,000 in billings and selling for $500,000 or less. Specialists might need to spend more money than that and should target building up closer to $100,000 in savings.
If you’re interested in what practices are going for these days, take a look at these two websites that list medical practices, including stats like their annual billings and offering price: Medical Practices USA and Tinsley Medical Practice Brokers. Keep in mind that the prices listed are not the actual sales price.
How to set up your finances to become a practice owner
In order to save money to buy a practice within five years, it’s really important to maximize savings. It would also be a good idea to keep fixed expenses low and reasonable while minimizing debt.
Let’s first talk about student loans. Lenders are very aware that the average physician will have around $200,000 to $300,000 in student debt. That debt generally ends up being a minor factor in determining whether a physician is eligible for a medical practice loan.
That being said, it might make sense for you to go on an income-driven repayment plan leading up to buying or starting the practice to maximize savings. The proper repayment strategy will depend on your situation as well as your spouse’s situation if you’re married. If you want to get a plan specific to your situation with practice ownership in mind, schedule a student loan consultation with us.
Smart financial goals to prepare you for successful practice ownership
The main focus when getting your finances in order is setting up good habits. Physicians who are currently employed should work toward these goals:
- Being credit card debt free
- Having six months of expenses in cash
- Contributing to retirement plans to get the maximum match from an employer
- Setting up a brokerage account with monthly recurring investments, starting with small amounts
Anything that could be automated, should be automated. Determine the amount each month toward these goals, then set it up through your bank, app or other means.
Physicians who want to save up so they can start or buy a medical practice should also set up an automated transfer into an account that they can access at any time, not a retirement account or any type of investment product that puts restrictions or locks up the money for any period of time.
Take, for example, the shortest time frame that you want to buy a practice in and the amount of money you want to have for the down payment. Let’s say it’s five years from now and you want to have $50,000 saved up. That’s 60 months to save $50,000. That works out to $833 per month. This recurring savings should be in addition to the other savings and investment milestones listed above.
You should also make sure that this savings isn’t taking on risk. In other words, this money should go into a savings account not an investment account.
Saving money vs. investing to get cash for buying a medical practice
The stock market has offered very good long-term returns, well outpacing cash. The problem is that the short term is wildly unpredictable. For example, the market sold off more than 30% within a month’s time during the beginning of the COVID-19 impact. It lost more than 50% of its value during the Great Recession. The last thing a physician would want is to reach the time when they’re ready to buy a practice only to have 30% less money than they need.
The purpose of the cash savings is not to earn a big return while it’s sitting there; the purpose is to have it available to invest in the right opportunity at the right time. Having that cash available could work out much better than investing.
Pretend that $833 per month is going into the stock market and the stock market goes crazy, returning 12% returns each year for five years, which is above the S&P 500 historical average. After five years, the $833 per month turns into $68,030 instead of having $50,000 if just put it under a mattress. If another physician plunked down all $50,000 at the start, that would grow to $90,834 after five years at 12% annualized returns. Not bad.
But, if the market is cut in half just before the end of the five-year period, the $68,000 turns into $34,000 and the $90,000 becomes $45,000. Not good for starting a practice.
Here’s how saving it in cash could be a better option:
Remember how buying into a practice could yield a 25% to 100% return on investment in the first year? Even if we’re more conservative and say that it would return 10% in the first year after purchase, that outpaces the return achieved even in a hot market.
A practice purchased for $500,000 would spin out $50,000 in profit at 10%, turning the $50,000 investment into $100,000 after one year.
If we used the information from the Medscape survey, assuming the average self-employed physician makes $70,000 more in income than an employed physician, then $50,000 will create a $70,000 annuity, a 140% return on the $50,000 each year. That would be a much better return than even a hot stock market.
The point here is that there’s no reason to take risk in the market with the money being saved for a down payment on a practice. The greater opportunity is having the money available to buy the right practice at the right time when the opportunity presents itself.
Use a student loan repayment plan while saving up for a medical practice
Buying a medical practice can be a game-changer. It’s a major decision that requires a lot of research. The same is true in finding the right repayment strategy for your student loans.
We’ve done over 3,800 individual consultations advising on over $960,000,000 in student debt, and we can help any physician looking into private practice. We can analyze and optimize student loan repayment strategies while working toward that goal. Take a look here for more details on how we can create your customized plan.
We understand how important it is to realize your dream of owning a physician practice. I hope this has helped you better understand how to set yourself up to reach your financial and career goals. If you have any questions, feel free to email me at [email protected].