Strategies for Investing Profits from Dental Practices to Build Wealth

You can make a lot of money as a dental practice owner.

But making money is only half the battle. You also need to invest and grow your assets to build a solid foundation of wealth.

Otherwise – all your profits will get eroded by unnecessary taxes, expenses, and inflation.

Thankfully, there are many ways to invest your hard-earned dental profits.

By having a mixed portfolio of assets – you can spread your risk and maintain consistent returns over time. 

In this article, we discuss our recommendations for investing profits from dental practices to build wealth.

We also highlight helpful tax strategies and common mistakes people make when investing profits from dental practices.

Types of Investment Strategies

Real Estate

By investing profits from your dental practice, you can buy the building and land on which you operate your business.

This helps you maintain control over the building quality and rent expenses. You can also depreciate and capitalize renovation costs over time, adhering to IRS guidelines.

You might also want to own a traditional investment property, which brings in a rental return.

The good news is real estate usually increases in value over time. This means you can earn a capital return on your investment, whenever you decide to sell your property.

Alternatively, you can use the equity in your investment property to buy other properties, and expand your wealth portfolio.

Having a mix of residential and commercial property in a variety of locations helps to reduce your risk, in case of market fluctuations.

Benefits:

• Lower risk than other investments
• Rental return and capital return
• You can use existing equity to expand your property portfolio
• Control over your own space
• The ability to sublease to offset financing costs
• The ability to expand
• Adding to your overall wealth and retirement nest egg, with high likelihood of the real estate value increasing over time

Disadvantages:

• Generally lower returns than other investments
• Harder to liquidate into cash
• Higher barrier to entry due to property costs 
• Having to take on additional debt can add to financial stress in the short-term
• Real estate market fluctuations. If timing lines up poorly, you could end up losing money
• When selling the property – desired locations, look, feel, and size of dental practice spaces change over time, and there is a remote possibility of a decline in value

Stocks, Bonds, or Index Funds

Many dental practice owners invest in stocks, bonds, index funds, or cryptocurrency.

These investments are usually easier to manage than real estate. You can also invest with less capital and make higher returns, and they’re easier to convert into cash. 

However, there’s a higher level of risk involved. Many people lose money, especially when they manage these investments themselves.

Because the market is constantly fluctuating and changing, it’s important to hire an expert dental financial advisor to help manage your investment portfolio. 

Here at DrillDown, we have a great network of financial advisors we can refer you to.

Having a diversified asset portfolio helps reduce your risk. It also ensures you’re getting the best return when investing the profits from your dental practice.

Benefits:

• Higher returns than other investments
• Easy to sell and convert into cash
• Easy to have a diversified portfolio of assets
• Tax advantages by investing in qualified retirement plans

Disadvantages:

• Higher risk than other investments
• Can be quite complex to manage effectively
• Ongoing advisor fees, unless they are adding value to your returns

Reinvesting Profits Back Into Your Business

Another way to grow your wealth is to reinvest your dental practice profits back into your own business.

You can do this by expanding your current premises, hiring the best staff, educating yourself to offer more services, increasing marketing and technology budgets, and investing in innovative equipment.

You could also expand your dental practice to a new premises and service more customers in a new location, but not before maximizing profits at your primary location.

Benefits:

• More control over the investment process
• Multiple profit streams
• Specialized in your area of expertise

Disadvantages:

• Higher risk than other investments
• Can be quite complex
• More of a management role vs. dentistry work

When investing profits from your dental practice, it’s important not to invest all of your profits. Keeping a reserve of cash is crucial in case of emergencies or market fluctuations.

Tax Strategies for Investing Dental Profits

Ownership Structure and Asset Location

We recommend working with a specialized dental CPA when investing profits from dental practices.

A dental CPA can advise you on compliance and avoiding IRS risks. They can also advise you on the best ownership structure and tax strategies to help you pay the least amount of tax legally possible.

It is generally advised to own your assets in a separate corporate structure.

If you keep your assets in your personal name or in the business trading entity, you’re exposed to much more risk in the event of a lawsuit.

We also recommend balancing your portfolio with a mix of tax-deferred accounts vs taxable accounts, depending on your investment goals.

Using Qualified Retirement Accounts 

An individual retirement account (IRA) is a great initial way to save tax on your investments. You can save and allocate money for retirement with tax-free growth or on a tax-deferred basis. You can contribute funds into an IRA and invest in your preferred assets. 

401(k) plans allow employees to defer wages – up to $22,500 in 2023, and more if you’re 50 or older. Employers can make additional matching or profit-sharing contributions. 

There are a range of investments available – depending on who your plan provider or sponsor is.

If cash flow allows, you can substantially reduce your current tax burden with defined benefit plans, such as a cash balance plan. This allows much higher contributions.

The downside is that if you withdraw qualified retirement funds before retirement age, you may face a 10% penalty on the amount you withdraw.

1031 Exchange – Real Estate

You can get a tax break through a 1031 exchange. A 1031 exchange is where you swap one real estate property for another, which allows capital gains tax to be deferred.

Taking Advantage of Capital Gains Rates

The capital gains rate only applies to assets that have been held for more than a year. Under current U.S. federal tax policy, these are long-term capital gains, taxed at 0%, 15%, or 20% depending on your tax bracket for that year. 

Buy-and-Hold Investing

Buy and hold is where you buy stocks or securities and invest in them long-term.

It’s about selecting investments that have a strong long-term potential, rather than focusing on short-term price movements or market fluctuations.

Common Mistakes With Investing Profits From Dental Practices

• Choosing the wrong ownership structure for tax and liability purposes
• Building dental practice real estate for today, instead of future-proofing for expansion
• Choosing a real estate location with limited exposure
• Buying a dental practice without owning the real estate – or being locked into a long-term lease
• Having an undiversified or high-risk portfolio of assets
• Hiring the wrong advisors, or trying to self-manage investments

Conclusion

Because of the complexity with investing profits from dental practices, it’s important to put a trusted dental CPA, attorney and financial advisor on your team. 

Trusted advisors can help you earn a higher return on your investments. They also help to lower your risk, avoid costly mistakes, minimize tax, and protect you from liability.

If you want to learn how to make more profits to invest, check out our book Dental Profit Amplifier.

When investing profits from your dental practice, it’s important to consider the level of risk you’re comfortable with.

Having a diversified portfolio with both high and low risk investments can be a great solution.

If you want expert strategies for investing profits from dental practices to build your wealth – contact us today.