Discussing the possibilities and future at the intersection of healthcare and commercial real estate
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Trisha’s guest this week is David Denniston, CFA with Centurion Financial Strategies. David’s wealth management firm advises a lot of physicians, and many happen to be in the first 20 years of their career. My takeaway from this interview is that real estate, especially healthcare real estate with its long-term leases and tenants who are not able to work remotely, is an investment to consider.
[2:29] David’s professional path to investment management and helping physicians build wealth
David had been working for a gentleman, and he helped to grow that company from about $30 million to $100 million in assets. He really wanted to strike out on his own, so he made an acquisition that brought him from Seattle to Minnesota. He didn’t have physician clients before that, and fast forward a few years – in 2012 David and his wife had their youngest daughter and she is their little miracle girl. She was born at less than a pound – she was 12.4 ounces. She was in the NICU for about five months as she was getting stronger. When she came out, she wasn’t able to breathe on her own. Her skin was translucent. There was a very small chance that she would make it. Thank goodness, she did.
David got to talk to a lot of the doctors, nurses, and medical staff helping them in the NICU, and he wanted to be able to give back. He started writing a few books and hosting his podcast, offering financial advice for medical professionals.
[5:26] Focusing on physicians in the first 20 years of their careers
David’s company is Centurion Financial Strategies, and many of his clients are residents, fellows, and attending physicians in the first 20 years of their careers. That population is more likely to listen to his podcast, so they are drawn to work with him through that. In addition, David is about to be 41 so he is in a similar stage of life as many of his clients. Student loans can be different for doctors than they are for other professionals, so the typical financial advisor may not be knowledgeable about different programs offering loan forgiveness for doctors. David was able to really specialize and help this specific group of physicians.
[7:12] What David is advising his clients to invest in during this uncertain financial climate
Interest rates are anticipated to rise, and we are experiencing some high inflation. In the current financial environment, however, interest rates are still historically low. David shares that, if someone came to him with a million dollars in cash, he would certainly advise them to invest in stocks, bonds, and mutual funds. That is what he calls a “piles of cash mentality” where you save a couple million bucks and then draw off a certain percent of that in retirement.
David also believes in the importance of having other streams of income. He is a land investor, so he buys and sells vacant land. He also owns an online business called City Building Kit. There are so many opportunities out there, so he encourages his clients to bring in multiple streams of income.
When it comes to bonds, David’s opinion is that it is wise to stay on the short end of the duration curve. He suggests looking at bonds or ETFs that mature within less than three years, because as interest rates rise those might go down – but not as much. If you go for a long duration bond, like 20-year maturity treasuries, those people are down like 20% for the year right now. That trend is probably going to continue, so David says being on short on the bond curve is a very wise idea right now.
He also mentions that someone might look to gold or precious metals. He wouldn’t recommend people putting a lot of money there, because over the long term gold generally matches inflation. David personally believes this inflation is transitory, but it could be a year or two. It might be okay, but he wouldn’t put it more than 10% in your portfolio. Gold may be up right now, but it can go down.
Regarding stocks, David says you have to consider your risk tolerance. A ton of the stocks that were high-flying have come down in price. We have seen a flip-flop in the market, where energy was mediocre for a long time. David positioned some clients to invest in energy during the pandemic, and now that has risen a whole bunch and he has been selling clients out of it. It could absolutely get higher, but David says he would rather sell high and find something else to buy low. If your risk tolerance is high enough, you could consider something like tech stocks. You can look at indices that are in the cryptocurrencies, or you could look at biotech. A lot of high-flying stuff that was up 50% is now down 20-30%. It could go lower if interest rates keep rising, and the lower they get the better it gets to be. David encourages people to make a contrarian bet if you have the stomach to tolerate it.
David shares that there is never anything wrong with stocks, and he will release an episode on his podcast (The Freedom Formula for Physicians) about the difference between corrections and bear markets. He will discuss when to invest and perhaps increase your risk tolerance to the broader market.
[12:52] Whether physicians coming out of residency and fellowship should purchase a personal residence
So many people come out of residency and fellowship and they think they know where they want to be. They get a job, and then they find out that they don’t like the town. Maybe they are starting to have kids and they want a better school district. He has seen a lot of physicians in their late twenties, early thirties, and mid-thirties that move at that point.
Generally, David encourages physicians to wait two years before purchasing a personal residence, unless they know for sure that this is where they are going to practice. For example, he has a client that just finished her anesthesiology fellowship. She and her husband are from Minnesota, they have family there, they have had their first child, and they know that it’s where they want to be. They bought a house.
David also points out that interest rates are still relatively low. Ten-year treasuries were at half a percent, and now they are at 2.5%. Mortgages were at 2%, and now they are at 3.5-4%. Relative to even 15 years ago, these are great rates. You might have been paying 6% at that time, so these rates are still very good in the long term. Real estate could go down, and you might be buying high, but it’s a competitive market out there.
David does not anticipate a banking crisis like we saw in 2008-2009. If one did occur, then real estate might collapse. Certainly he thinks we could have a recession, but we may not. There are still a lot of unknowns. We can all hope that with employment being so good right now, the demand out there and all the supply chain issues, there is a lot of need for investment and capital. There are a lot of good reasons to think that this economy could continue chugging along. If we get into World War III, a lot of assets will come down in price. It’s always good to have some cash ready to deploy to buy stuff – whether it’s real estate, stocks, or bonds – because if we get to a wholesale fire sale that is the time to leverage up, put money to work, and buy stuff with it.
[16:08] When to move into private practice as a physician
This depends on the person. While David would love for everyone to be a business owner, not everyone is a good fit for private practice. He places importance on paying down student debt, which a lot of physicians can refinance today. It’s a great time to refinance, and you can get low enough payments to where buying into a practice makes a lot more sense. He thinks the earlier you get started in a private practice, the better (rather than being in a hospital system). When you have $300,000-$400,000 in student debt, however, that is a big but to overcome. If you’re single and don’t have kids, maybe you can take on the risk of having a private practice more than someone who already has a family. You may not be able to take the risk in that situation, because your family is relying on you to put food on the table and you can’t live in a studio apartment. It all comes back to your family situation and the risk you are willing to tolerate.
[17:48] When to purchase a property for private practice rather than renting
This depends on your cash position. You will probably want to improve the property, and it is unlikely that you will have the cash to buy the whole thing outright. You will have to have a down payment in addition to money for renovations. If you are buying a practice building or a surgery center, the size can really determine what you can and can’t do.
In David’s opinion, you probably need to get your feet wet in practice before purchasing a property. When I was a guest on his podcast, we talked about starting with renting so you can get familiar with running a business. After doing that for 3-5 years, David thinks you will have a pretty good handle on what you can and can’t do. Hopefully the practice will grow and you will have capital to afford a real estate investment. It’s better to pay yourself than to pay rent to someone else, if at all possible.
[19:27] Working with a team to make investment decisions
David sees it as all stakeholders being part of a team. The client is the head of the board of directors, and his wealth management company is on the board with them. They all have to work together to figure out how their decisions impact taxes, cash flow, and the practice. The team needs to talk through what they can afford.
It’s important to have a solid team around you, including a financial advisor, a real estate advisor, a CPA, and an attorney. People might have different opinions, and it’s ultimately up to the client to figure out what sits right with them. If you look at that board of directors, particularly when buying a medical practice or a building around a medical practice, having a trusted physician mentor who has been through this before is also extremely important, because that person will relate to you better than anyone else on the team. “As much as we love helping doctors,” David says, “We are not doctors.”
[21:05] David’s outlook on the 1031 exchange
David thinks that the government is in a lot of debt right now, and inflation is good for that in some ways. The government may be in a position where they will soon have to figure out what to do about all the entitlement programs, with social security being a big one. They will have to reckon with where they are going to get the money to keep it funded. Will they increase FICA taxes? Will they eliminate the cap? Will they look at other revenue streams, like 1031 exchanges? There are currently a lot of tax-free exchanges. If you have lived in your primary residence for two of the last five years and you are married, up to $500,000 of equity is tax-free. There are all these breaks and loopholes right now that certainly could be trimmed or eliminated in a revenue grab from the government.
By 2030, David predicts we will see some major legislation changes with taxes – whether it’s entitlement programs or additional changes to the tax code. He suspects there will be major changes, and at the minimum we know that many of the provisions passed by Trump and the Republicans in 2016 are sunsetting in a couple years. Automatically, then there will be more revenue coming in pretty soon. Based on our current level of spending, however, David thinks there will have to be more involved.
He imagines, as important as real estate is, there would be a lot of pressure not to remove a 1031 exchange or the caps. He thinks it is more likely that FICA taxes will get raised or they will raise the retirement age.
[24:29] David’s first job
David’s first job was pulling carts at Costco in southern California. It was the summer after his senior year of high school and he was getting paid $10/hour. It was a hard job working outside in the California summer heat, but at least he got a great farmer’s tan!
[25:17] What David would be doing for a living if he wasn’t in wealth management
If he could not work in wealth management anymore, David would do more land investing. He is also personally interested in leasing self-storage facilities and farmland, so he would likely explore those opportunities more as well.
[31:46] What David is reading for news, information, or inspiration
David is currently reading The Promised Land by Barack Obama. He considers himself an Independent with Republican leanings, but this is a good inside look at politics that he recommends reading. David tries to get news from a variety of sources, so he is often on Yahoo, CNBC, Fox, and Bloomberg. He gets a variety of opinions so he can weigh the information and think about it.
[33:06] What David does for self-care
David exercises 4-5 days a week, and he sometimes meditates. He is a Christian, and he enjoys listening to praise and worship music as well.
[33:37] Whether leaders are born or trained
David thinks it’s both. Some people are born with natural abilities, but you can work into it as you develop as a person as well. Certain leaders are born, and others are not.
Links to resources:
David Denniston, CFA
Centurion Financial Strategies, LLC
Podcast: The Freedom Formula for Physicians
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