Howard Speaks: Get Active About Passive Income by Dr. Howard Farran

Howard Speaks: Get Active About Passive Income 

by Howard Farran, DDS, MBA, publisher, Dentaltown magazine

A while back, a Townie asked me how they could know if they were ready to retire. There are several elements at play in this decision, but here I’m going to talk about the financial readiness aspect—things dentists should be doing today in preparation for when it’s finally time to hang up the white coat.

I’m a huge believer that, in addition to running your practice, you should be finding and investing in good sources of passive income—things like real estate and dividend stocks.

Real talk about real estate
Let’s say you bought all the gold in the world and put it in your backyard. (It’s rare enough that “all the gold in the world” would fill two Olympic-sized swimming pools.) When I came back one year later, you’d still own all the gold in the world, but gold is a nonproductive asset. It didn’t do anything; it only has value if you can find someone who’ll pay more than what you bought it for. (The same principle applies to Bitcoin.)

On the other hand, let’s say I bought a farm. The money-making element of farm ownership could never be just the profit I expect to make when I sell it—every year I owned the farm, I’d be earning revenue by selling my harvested crops, too.

The same applies to rental properties. The building’s resale value isn’t the only draw; there’s also the income earned from monthly rental payments. And even if you spend some money on improvements, that investment should lead to higher monthly rental fees, which means more income over the long run.

A dentist we’ll feature in the February issue of Dentaltown has found success in buying commercial real estate, including office and warehouse buildings. (When he started out, some buildings were in states he hadn’t even visited in person!) The right places have high demand for occupancy, and once the passthrough expenses are taken care of, anything above that is net profit.

Investments that pay dividends
A simpler way to boost your passive income is by purchasing dividend stocks. Most of the ones I own are big brands such as Apple, Costco, Home Depot and Kraft, because they almost always pay dividends. When you buy stocks like these as investments, you don’t need to keep checking the price every single day, because you know over time you’ll see growth. There might be downturns or crashes, but generally these types of stocks earn 5% a year—a nickel for every dollar you put in.

I’m 60 now, and I’m thinking about my grandchildren, the youngest of whom is about 7 months old. Do I think Coca-Cola and Kraft will still be around when Audrey is my age? Of course! And chances are, you’re already supporting the companies you’d invest in: You’re shopping at Costco, your practice financing is with Bank of America, and your kids have Apple phones and are watching YouTube. If you reduced your spending now and built passive income instead, five or 10 years down the road you’ll be reaping the rewards, with zero effort. If you skipped a $10,000 family trip to Hawaii and invested that money in big stocks, you’ll earn more down the road—even at a conservative 5% annual growth rate, that $10K would be worth more than $15K after nine years.

Find the right combination
I’ve always preached that dentists of all ages need to live below their means and spend less than they earn. Bolster that by buying shares in companies you know will be around when your children and grandchildren are adults, and investing in properties that pay rental revenues, and these productive assets will pay you over the long run. Then you won’t need to rely only on what you can sell your dental practice for.

Dentaltown founder Dr. Howard Farran would love to hear your thoughts about the ideas and suggestions in this column! Verified members of Dentaltown can post their questions and comments below.
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