Helping Healthcare Scale
Imagine you're friends with multiple CEO's of billion dollar organizations. You can call them anytime you like and ask them all that they've learned about real estate and investing, including some of their biggest mistakes.
That's the mission of this podcast, to teach the insider strategies used by the big guys to everyday healthcare operators in order to get access to the best strategies and real estate at the best prices.
If you need help finding the perfect location or you're ready to invest in commercial real estate, email us at podcast@leadersre.com.
Helping Healthcare Scale
The Art of Building a Dental Legacy and Achieving Financial Independence
Embark on a transformative tale with Dr. Henry Ernst, who climbed from humble beginnings at a fish market to the pinnacle of financial and entrepreneurial success in the dental industry. Through anecdotes and insights, Dr. Ernst maps out his remarkable journey, highlighting the pivotal role of hard work, mentorship, and the often-overlooked power of passive income. His story isn't just motivational—it's a practical guide to navigating the complex waters of building not just a career, but a legacy.
In the heart of our episode, we unlock the secrets behind starting and nurturing a flourishing dental practice. Dr. Ernst, once a high school jock with dreams as big as his athletic prowess, breaks down the essential strategies that morphed his career ambitions into a reality. From the strategic choice of location to extending office hours and offering niche services, our conversation reveals how these smart decisions can differentiate a dental practice in a saturated market. For anyone considering a venture in the healthcare industry, Dr. Ernst's firsthand experience is your roadmap to success.
But it's not all about the grind—there's gold at the end of this entrepreneurial rainbow. We dive into the financial wizardry that Dr. Ernst employed to expand his wealth beyond the confines of his dental empire. From significant practice sales to shrewd investments in diversified portfolios, he shares the switch to passive income streams that solidified his financial freedom. Real estate investment strategies, the resilience of certain markets, and the anticipation of investment opportunities arising from market shifts—this episode is the blueprint for those ready to pair their passion with business savvy for extraordinary results. Join us and let Dr. Ernst inspire your next bold move.
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I already seen the value of what they call mailbox money Money that comes in, that you didn't have to do anything for, and so that really helped me, because I already knew that. Gosh, if you give me this and let me do this on a larger scale, I can keep up these numbers.
Speaker 2:The goal of this show is to help health care organization scale by leveraging real estate strategies and interviewing high level health care executives in order to pull out lessons learned along the way. If you'd like a free site selection analysis from our team, or you'd like to learn more about how we're acquiring real estate through our fund on the blockchain, visit us at wwwreuniversityorg and drop us a line that's reasnrealestateuniversityorg. Hello everybody.
Speaker 3:Welcome back to Helping Health Care Scale. I'm Austin Hare. I'd like to welcome our guest today, dr Henry Ernst. He started his group practice in 2014 and less than five years later, he sold it for eight figures. So now he still practices part time because that's what he loves to do, and he also does dental practice consulting, helping people with their businesses. Dr Ernst, thank you for coming on the show. Thank you for having me All right, so let's dive right in. I love getting people's back stories, and so, when it comes to your story, is there anything that may shape you early on in childhood, anything that was entrepreneurial, any lessons or experiences that you had that you want to?
Speaker 1:talk about. That's a great question, I would say. Probably the thing that first opened my eyes was my family was all car enthusiasts. My father is a mechanic. His father was a mechanic. All down the line, I was the first one that wasn't. But I do remember being young and my family sold their business when I was young and I remember my family opened up a fish market and my father, my grandfather, used to take me to the fish market on Saturdays and they take me in the back and they taught me how to filet fish and I would filet fish all day long and at the end of the day I'd probably get like 20 bucks, which was probably very low labor for me, but I loved it. It was so awesome. I got $20., it was so cool and I saved it up and, looking back, it probably enhanced my surgical skills from doing all that at that young age without cutting my fingers or my hand.
Speaker 3:Yeah, that's hilarious. Yeah, probably one of the things might not quite be legal in terms of the amount of money to actually pay to you, but that's okay, that was dad and grandpa, so they could do that.
Speaker 1:And I learned that. I learned the value of money, that, hey, I had to do all this hard work and this is what I got at the end so I could see, hey, there's a reward for hard work, so I appreciate those lessons yeah was there anything so like, aside from actually earning you're allowance was there anything that you learned about business during that experience how to talk to customers or vendors, or negotiations or anything like that?
Speaker 1:Yeah, that's a great question, and I never really had any of that growing up because my family was blue collar growing up and I just learned the value of hard work. It wasn't until I was in actually after dental school is when I learned being an entrepreneur being the definition of what a true business is, until I was really out of school and I really got some amazing mentors.
Speaker 3:Yeah, it's interesting there's. I think that being an entrepreneur is not common sense at all. It's like the opposite of common sense school a lot of times, because you have to do things that just go so against the grain, which is why so few people actually excel and actually succeed at it. But in your situation it used to be very common. You did this meant you owned your practice, you owned your real estate, both those things together, and that's changing a lot now with those coming in and the cost of school is just so high Like you have to bring on partners in order to pay down your student debt. But what was your story? Going into college, going into dental school? What made you decide to change or to follow that route? And like, how did it actually unfold?
Speaker 1:So when I was in high school I would be the quintessential definition of a jock. I loved playing football. I grew up in South Florida. I loved playing football, ran track and I just always loved athletics and wasn't really the greatest student in high school and stuff like that. Going on to college I went to study sports medicine and I went to the University of Alabama because they had a great program for that. And about halfway through I said to myself being an athletic trainer is a hard gig to have a family because you're just like a coach. If you look at the resume of a coach they're moving all the time from one place to another and athletic trainers oftentimes are like that also. Halfway through college I said to myself I'm pretty good at math, pretty good at science.
Speaker 1:Once I got out of the jock mode and gotten to the focused student mode and that's where I decided to either become a doctor or a dentist. At that time all the doctors, when I would meet with them, would be miserable. They would say do something else, don't do this profession. All the dentists were happy, go lucky. And they would invite me into their practices and say hey, see what a normal day looks like. So that's what led me to dentistry and going from high school jock to becoming a student and having a driven profession and just saying, hey, maybe I can go to next level. And that's where becoming a dentist came into fruition.
Speaker 3:Okay, I love that, but even then, starting a dental practice is one thing, making it successful is another thing. You had a phenomenally successful practice. What do you think accounts for that? Like what do you think that you're doing so much more production than the average dentist single private practice?
Speaker 1:So coming into doing a startup when my wife and I decided to move to North Carolina a few years into my career. We love Southern hospitality. You don't get into that in South Florida. We love having change in seasons.
Speaker 1:So we came to Charlotte, didn't know us all, and it was just really obvious that I needed to do a startup. Even though it wasn't in my comfort zone, I had to do a de novo. I didn't really know how to do it, so probably a good advice life lesson would be hey, if you don't know how to do something, find somebody who really is good at it, vet them, make sure you do your due diligence on them and follow what they tell you to do. Don't think outside the box. If you've already got the expert and you've already vetted them, follow their advice to the letter of the law. And I found an amazing consultant. That was that. All they did was start up. We followed everything from the following finding a location, doing all the demographic studies to follow, saving money on this and that and we just found the perfect spot. And I followed all the business advice too, and that's what really led us to just take off the price took off.
Speaker 3:I think it's 100% true. It's like a lot of times we'll read a book, right, and then for two books, if we're really ambitious, and then we think, oh, we know so much about business, but it just they help, but nothing replaces hands on doing. And how did you know? Okay, I need somebody, I need a consultant to advise me on this thing, because a lot of times we think we can do it ourselves. We're going to pull a book, we're ready to go, and then life beats us up. Right, the market, the free market beats us up. We realize it's not as easy and I have a saying everybody has to believe you're going to earn twice the amount of money and half the amount of time, or you'd never get started as an entrepreneur. They want it to actually take. This is always so much harder. Like how did you know I got to have a consultant? You know what I mean. Going into this day, day one, or however early on it was.
Speaker 1:So I knew what I was successful in the past. In the past I was one of these dentists who did a lot of specialty type procedures, things that most dentists don't really do, most general dentists. So for me it was easy to come into an existing practice where the doctor just did basic things and I would come in and all of a sudden, boom, there was so many patients who were leaving out the door and now they were staying in the door. So it was like low hanging fruit. It was very easy and I was very good at that. But I had never done a startup and I have seen people always try to scare you away. Startups are the most risky things, oh my God. And I knew that and I knew that I was going at that time in my life. I was. It was very risky. I was essentially playing poker and putting all my chips at the table into this business. So I found somebody who really was good at it. I looked up their results, I looked up their track record and I didn't. I always look for, kind of in real estate, what are your sob stories? Where did you fail? And this group didn't have any. Everything was perfect. So after I did all that due diligence. I took all their advice, followed it to the letter of the law.
Speaker 1:Some dentists sometimes I don't get along with dentists because something is always question, everything, and they always think outside of the normal box. So I followed everything and it went just perfect. It really went well. And then I learned some other lessons along the way that I weren't. I didn't train with this mentor, but business lessons. What is a true business? Cause most dentists hang their shingle up and the old thought was like oh, I'm going to practice and fix tea till I'm 65 or whatever, and then maybe I'll have enough money to retire, or maybe not. So I learned some lessons on the way business were up wise.
Speaker 3:Yeah, I'd like to dive into that. First, you mentioned site selection. Right, and that's what we do here at leaders is we really focus on the site selection part, specifically the focus of like retailization, meaning moving away from those back office medical locations to like those front and center ones, because the most successful DSOs in the entire world have all done that? And so Tony Robbins says success leads clues, right, and so there's a reason why they're doing that, why they're paying the extra rent and or paying the extra cost to acquire this. So was that like when you were doing your site selection component, what specific criteria were you guys looking?
Speaker 1:for that's a great question. So some of the things that my dental consultant had honed in on was, we would find I would go around driving around and they gave. After we had the map. They had what they call hot spots. These are the spots where they're ripe and ready for a dentist, because the studies show that most people choose their dentist because of what's close to me. Yeah, I want what's close to me. Some of the other parameters we want to have major site, so another one. We're driving on a car, we should be able to see it. We actually want a grocery store. We want a major grocery store or something where people will come. That goes against the old ad used to be. I'm going to be in an old building and I'm in in suite 304. Right?
Speaker 3:She's as rent possible. Yeah, no matter what you need to do to cut down your rent. Yeah, do that and then they'll come.
Speaker 1:Things have changed. So one of the spots that I had and this is actually one cool thing that I love that my consultant did that you never would think of. Once we had all the specific spots I want you to give these spots to a commercial real estate agent that has never worked with a dentist before. That seemed weird to me. Why would I want somebody that's never worked with the dentist before? Because if I give it to somebody that's very familiar with Dennis, they're going to take all my research, all the money that I spent and then they give it to somebody else. So just, I thought that was cool.
Speaker 1:But one of the big, one of the big parameters that we looked at was a specific metric and I believe it was families that make $75,000 or more. That ratio Dentist to family ratio and there were a lot of great places that looked really awesome in like the primaries of town and it was like one dentist for every 300 families, 500 families. The site that we saw at this time in 2014 was 5,600 families or something like that, so it was off the charts.
Speaker 1:And when you looked at it. When you looked at it, it would say, wow, this place doesn't look super nice. There's like a really low and more low end grocery store, there's a liquor store, there's a Dollar Tree. You know what I mean. It didn't look like really aesthetic and the spot that we picked was vacant for 10 years. It was never anything for 10 years. So when I showed my wife all that, she said this is our future. This and I said trust the process. We went through these a lot of work. Trust the process. It has to work. The numbers say, even though in my own heart I was like I hope it works. I've done all the demographic studies. You have to just trust the process.
Speaker 3:Yeah, honestly, you're like pretty ahead of the curve. 2010 is when the banks started really moving into this main and main thing, and then it was dentists were like right after that, and so it was great. You can clearly see that you roofed the benefits of adapting a location that had good visibility, good signage, paying attention to the demographics, because, it's true, you get referrals, but, at the end of the day, it's just all about convenience, right? Like? People, unfortunately, are becoming less and less loyal, and so that means that you just have to make it more and more convenient for them, and so sometimes you have to do that via paying for rent.
Speaker 1:And one of the other things that was really led to our success was we did a study on our own and we reached out to all of the dentists within a certain range and we made a list what time are they open, what procedures do they do, when can I get in for a hygiene visit? And we took all of those and we made like a master list and we did all the stuff that they didn't do. So we were the opposite. So they were all open from nine to five, never open on Fridays, never open on Saturdays. So we said strategically right from the beginning we're going to be open until eight o'clock at night. We're going to be open every Friday, every Saturday and we're going to do what others don't. We're going to keep people in house, in one stop shop for doing specialty procedures. So it was easy a little bit and just do it, find out what they're doing and do the opposite.
Speaker 1:Was it hard to recruit associates to work till eight o'clock? So when we first started, that was the biggest thing that everybody told me You're never going to find people. You're never going to find people. The way that I sold it was like this I like to have less days and more hours, I would much the worst part of the day. This is how we sell it. The worst part of the day is getting up, getting yourself ready for work and driving to work. If I could take away two of those days for you and you just work three days a week, how much? So that's a selling point. And once people get into our system and get involved, we don't really have that much turnover as far as like. A lot of our employees have been there for a long time because they love having a few regular business days off so they can go to their doctor appointments or do this or do that. So that's the selling point, yeah.
Speaker 3:I love that. And then, were you guys focused on buying the real estate at the time, or did you just lease the space so that you can get proximity to that grocery store?
Speaker 1:So you got to remember is, back then it was like survival mode and I think it takes a lot of fruition to say to yourself I have to assume this is going to fail, because that drives you so much, because the fear of failure is a lot harder of a driver than the success. So, back then, to keep our cash flow, really well, we, we lease, you know, we rent the space. Yeah, I still do to this day.
Speaker 3:Yeah, I don't think there's a right or wrong answer, because it just depends. I think it really comes down to the speed at which you want to grow and scale. And if you want to do one location a year or less, it makes sense to try and buy the real estate. If you're trying to grow fast, then it just doesn't make sense. Right, and as long as you just know the trade offs like there isn't a right or wrong answer I totally get it.
Speaker 1:The advantage to us too is the they really value having a dentist client in there because a lot of the stuff come in and come out, and that's how we essentially grew to three three locations. But the beauty and I was really fortunate is we grew to three locations but all under the same roof, because each time it was a business next door that went out of business and the landlord came to us first. Hey, let's ask the dentist, maybe they want more space, right? Because they sign a longer lease, they're more stable. So each time when the consignment store went out of business, a scrub store went out of business, we were always there to pick it right up. Yeah, I love that.
Speaker 1:So how many locations you were just expanding your footprint right On either side essentially we're like three locations, we are five doctor practice, but we're three locations, but in one roof, okay so site selection, very important.
Speaker 3:The competition analysis figuring out whether or not we're doing longer hours, Very important. Anything else that comes to mind in top three in terms of being successful?
Speaker 1:marketing. So with the marketing also, same premise find out what everybody's doing and do the opposite. Every single dentist sends out a mailer that says oh, new patient, special $99, or something like that. What I focused on is hey, how is my marketing going to be different from others? How is it going to jump out to others? So, even though when we first started I was the only dentist there, we still had a marketing piece that said open every Monday through Friday and Saturdays.
Speaker 1:And what we did here's the secret sauce is I was there like one week Monday, tuesday, thursday, saturday and the alternating week I'd be there Monday, wednesday, friday. So within a two week period we were always there all the days. And when somebody called because if this is the mistake that I feel like new practices make is okay, we're going to start. We're going to be Monday, tuesday, Thursday, but Mrs Jones can only come Wednesdays. Your practice is close to her. I don't want to close my business to Mrs Jones, I want to capture everybody and everybody.
Speaker 1:But we did marketing and we said we're open all those days till 8. So I'm trying to capture the soccer moms. There's a good market. The soccer moms. Hey, we're open till 8. You don't have to miss school, right, you can come after work. We're capturing people on Saturdays that don't want to miss work at all. We and then I also had another bullet point sedation by do Ivy's sedation can find normal surgeon to have a tooth removed and get you sedated, but good luck trying to find a dentist to do fillings and crowns and normal stuff where you get sedated. So there's another low hanging fruit point. So we really honed in on those things, on our marketing, whereas it would stand out as opposed to the person that just gets though $99 new patient special yeah, no, I love that.
Speaker 3:That's especially the part about staggering your work days to fill every day of the week. That's something that I never thought of and hopefully anybody listening that's getting started can take that into effect too. Okay, so we had talked about the paradigm of selling off camera, and essentially it's just the decision of selling versus holding, talking about the time value of money, because I think originally, when you started this, you're just planning on holding it indefinitely.
Speaker 1:Right, that was the intention, so I hit a reflection point, probably around January of 2019, where the business grown really fast and really fast and it's a not a bad problem that, but almost people would say too fast where it was becoming stressful, where, if you thought about how our hours operate and you were to the point where every day there was at least two, sometimes three, doctors during even those long days, what happens when a doctor got sick or this or that happened. I always had to be the one to jump in and step in. Now I'm working crazy hours and also I had to have a reflection point. I looked myself in the mirror. I was like, well, what's the end game here? Is there an end game? Why are we growing? Are we growing just to keep growing or is there an endpoint?
Speaker 1:And I met with a really good man who's a good friend of mine and a mentor of mine now and he owns a business mastermind group that helps dentists. And at the time we sat down and I told him my problem and I just had the one one train thought of was like, okay, I need to make my dentist partners and then I'll capture some equity along the way. And he made the one interesting comment that said, do you know what the business is worth. Do you have any idea what this is worth on the market nowadays? My answer was no idea. I never thought of that. So he said in 90 days from now, I want you to do this, I want you to do all the work that's required, but I want you to come back and we'll talk in 90 days and I want you to have three offers on the table. Not saying you're selling it, but I want you to have three offers on the table so we can use metrics and make a good decision. And because essentially I know some of your listeners may know this already but if I sell the practice to a dentist at a time, they're only going to get qualified for maybe 80% of the total collections, like that percentage. So I'm not getting a multiple, I'm just getting the value. And I would have to my practice sell it four or five times to get those equal partners and stuff like that.
Speaker 1:So when I found out how much the practice was worth, I was astonished. I was completely astonished. It never hit because the historical values of dental practices and all the money metrics at that time. So we looked down and then we made a good decision like, okay, I'll take the time value money and take one of these deals in 10 years. Here's what your net worth will be if you do a modest portfolio, very conservative. Here's what your 10 years will be if you did the partner aspect and you sold it to four or five different partners and it's like getting married right.
Speaker 1:I'm a happily married man. I really out kick my coverage. My wife is awesome, but to get married perfectly four or five times is not easy. And even after that, looking at that at 10 years, if you take the two, the 10 year model of selling it and taking the time value money was so many more multiples higher. So that was really what led to my decision and also learning at that. It's not just what you think, it's not. Oh my gosh. I sell it and some big bad company comes in here, changes everything, and then it's not like that. I still have my own input in there and, like I said, that's why, to this day, I still practice two days a week, because I enjoy it, and sometimes I enjoy it more than I did before, because I'm not dealing with all the mundane stuff that I did before.
Speaker 3:So let's dive into a little bit about the time value of money. Can you share some of the actual calculations that you were doing?
Speaker 1:that helps you make this decision. So essentially we were mentioning when we started, the sale was about eight figures, and so there's a good portion of that right up front and then the rest of it is some of it is what's called earn out. The business is making sure that I don't walk out the door. They're making sure that I keep the business going as normal, so you collect those little coins along the way. And then there's also equity in the company and the big company, so each time they sell it to another company, you're collecting those coins. Also.
Speaker 1:That, as I looked into that just always important to just be super conservative. One of my mentors said here's the deal. Assume that you're just getting that first chunk of us, just assume that you're not getting anything else and you should be okay with that. And so just taking that money and saying, hey, we're going to invest in a portfolio, we're going to create a portfolio that's not in the stock market, that's alternate, investing a lot of real estate, a lot of operating businesses, oil and gas like a lot of stuff, little angel investments and very conservative. Let's see what that portfolio looks like Looking back now. That was five years ago, the conservative numbers that we had. What we're really doing is outperforming that, for sure, but anything else in life, you always have to be conservative. Those are the numbers that led to my decision.
Speaker 3:So did you you took the lump sum you're going to get, which is maybe like half or something like that, and then you extrapolated using an IRR and compared how it would look like you can take this money now, today, and what interest rate were you or what IRR rate were you assuming?
Speaker 1:So, if I go backwards a little bit, I had been in real estate type masterminds before all of this happened. So I was already comfortable with first position lending, syndication deals, whether it's self storage or regular real estate, or buying, owning into single individual family homes, and so I was really comfortable in that. So that really helped me because I already saw it wasn't that I had to see the proof of concept. I had already seen the proof of concept and I already seen the value of what they call mailbox money money that comes in, that you didn't have to do anything for and so that really helped me because I already knew that, gosh, if you give me this and let me do this on a larger scale, I can keep up these numbers and I could see that the best way that I could describe it to somebody is it's like Indiana Jones. Remember Indiana Jones the first one? Do you have seen that movie before? I'm assuming.
Speaker 3:Is it Raiders of the Lost Ark or is it yeah?
Speaker 1:Raiders of the Lost Ark, the very first one In the beginning, where he's trying to get that gold idol and he's taking it and he knows that it's based on weight and he's trying to replace that gold idol with a bag of sand. That's essentially what people should be thinking of when they're trying to get into that replace my active income with the passive income. So essentially I was saying to myself all right, I'm going to take away this idol and put this sandbag you know the passive income. And that's how I really look at it, because I hit that point a while ago and now I'm just doing what I want to do when I want to do it.
Speaker 3:So, yeah, it's a combination of not only could you potentially make more money, but you'd also be working less. Yeah, yeah getting that lump sum yeah, you get to do all the time.
Speaker 1:And the other thing that kept me up at night is there was a lot of risk on the table. Every single time that we expanded or we did this, there was another bunch of equipment that had to be paid for, oftentimes another loan that had to be taken out, and everything was in my name. I had zero partners, which sounds great, but it also is. Great power comes great responsibility. Everything was on my shoulder. So it was nice also to have that non money thing where, hey, once this deal is done, it's not your name anymore, but we kept the name of the practice and everything for marketing purposes and everything. But I'm not like all my loans are done, I'm not. I'm not responsible to any bank for anything anymore. Just that was a nice feeling too.
Speaker 3:Yeah, no, we were running these calculations in these metrics all the time. Real estate we do we do a lot of soloist backs, we do a lot of new construction developments, and yet the time value of money is a consistent question, because you're always looking at, the question that I used to ask myself is if I could afford to buy a building and cash like, why would I take out a loan to do it? And the answer is because your rate of return is greater than the interest rate. And so when you start to think about these things and you assign an IRR to them, you can see how it really starts to snowball and compound. And so it's interest rates are definitely making it tougher to hit the metrics that we'd want to hit in the past, but still, if you can buy at a cap rate that's above the interest rate, you've got positive cash flow. And then you start to add all the tried and true principles when it comes to real estate and the thing that's a little bit different is just the fact that you're not really, when you own a triple net building, you're not operating a business in the same extent, right, like your responsibilities are, like, very minimal, like when you own triple net lease.
Speaker 3:The building that has a triple net lease to a dentist they're paying for. Whoever has on the triple net lease is they're running all the maintenance right, like they're responsible for everything except maybe the roof, or like parking lot. But very much like what you're doing is you're putting down that capital, that kind of capital, because commercial real estate requires a little bit higher than your average residential house, and in exchange they're not doing that. They're paying you the rent so they can hold on to their capital, so they can grow, but they've got to manage everything. And so in that sense it is nice to know hey, I'm not worried about these operations, I'm not worried about staying up at night like you were, because it's a triple net lease. And so when you start to really get into the financial engineering, like doing refinancing, you can pull a lot, sometimes all of your money out, and then it's a very, almost infinite IRR.
Speaker 3:Yeah, you're playing with house money at that time, basically, yeah, and so I think the time value of money is like a really, and then also not even to consider. You got to consider inflation, right when you're doing that calculation, but when you use leverage you can start to get, you can start to get really creative and you can start to make really good returns For sure. So, on that note, I know that you mentioned alternative asset classes, that you mentioned real estate investing, so what specifically were you did you start investing in at that point?
Speaker 1:So when I first started. Like I said, when I first started getting to investing groups, the first thing that I really was open to was single family houses, just buying single family houses. But I learned some things that were really important that these are mistakes that dentists will usually make when they try to do this here. They'll usually do it in their same neighborhood. They won't have a property manager, and so where are the mistakes there? They're getting calls for tenants and toilets why they just essentially created a second business for themselves. So the thought, the process that I learned hey, you can do this where you're doing it with a great property manager, somebody you trusted and vetted, and you can do this and do 20% down and just see the money coming in every month. And that was the initial things that I started doing.
Speaker 1:I think over a year, a two year period of time, I bought about seven or eight houses and I learned some important points is hey, the best places are like in your working force areas, like. I bought seven or eight houses in Northwest Indiana Northwest Indiana because it's a great place for working class workforce housing. A lot of people would commute to Chicago, but yet they don't want to live in Chicago because it's everything. It's like they call it Illinois because all the taxes and everything. So the point that I'm making is here, outside the box, right, and the masterminds that I was and really taught me this is I did about seven or eight of those and then I saw the proof of concept.
Speaker 1:I saw that you know what, every first of the month I'm getting all this money in it's paying for the mortgages and I'm getting money on top of it. And then the next thing I got myself into was a first position lending, which I really love To this day. I love it because it's such a safe asset class, because I always think of an asset or an investment Like what's the worst thing that can happen? If you loan money to somebody in trust to rehab a house and eventually sell it, what's the worst thing that can happen? You're the bank. You can always take over the house. So first position lending has been a big part of my portfolio that I've done a lot of.
Speaker 3:And then, on that note, have you seen interest rates change? First position lending and specifically, is like back when the Fed had a funds rate of zero, the ZERP environment you could easily get money not easily, but you could cheaply get money from banks. And so if you wanted to be a hard money lender, you had to or whatever first position lane, your rates had to be a little bit competitive. So have your interest rates gone up, as bank rates have gone up, that you charge?
Speaker 1:That's a great question and I had that conversation with one of my lenders that I've been lending with for about five years now and basically we decided that we've kept the rates, have stayed the same, but like anything else, there's negotiation. So I've got more back end where I get more shared appreciation on the back end perhaps, but just keeping the front end the same. Just like the same concept of me renting when we started the practice keeping your cash flow position good. So at the end, when the deal is done, most of these deals will be like six or eight months kind of turn around deals, and so the difference is I'll get more shared appreciation on the back end. So if you do the internal rate return, it ends up being like a higher percentage, but just not on the front end.
Speaker 3:So you get like a guaranteed percentage by being the lender, but then also a little bit of equity on the back end. Yeah sure.
Speaker 1:A lot of the lenders, most of the time, like the standards like 12 and two, as they say, 12% interest and two points. But then I, like I said you're a smart guy, I said the same thing a few months ago. I'm like you know what, with all this interest rate, shouldn't I get me be getting more? And oh, that's a good question. Here's what we've been doing is that we're giving you more shared appreciation on the back end. So at the end when it sells.
Speaker 1:maybe I share 20%, 25% of the appreciation, so I get a reward on the back end. That's cool.
Speaker 3:Okay, so that's the single family, when the first-line position also you're owning, being the landlord yourself. What are the type of real estate assets for you investing?
Speaker 1:or just any assets in general. So we got, we talked about single family homes and actually once 2020, 2021 or a time come, I basically sold most of all of those because the market gave us a big present, so I just took that present and ran with it.
Speaker 1:Other assets, a lot of syndication deals. I'm a big believer in self-storage. I love self-storage. I tend to go with stuff that's recession resistant because I started practicing right around 2009, which we all know that was a really hectic time in life. So I think that really honed in on the type of person I am. I want to make that consistent money and cash flow, but I don't want to be risky, but I'm just happy with consistent things that are recession resistant. That's where self-storage comes into play. I love self-storage. They say it does great all the time, but when times are really tough it actually does better. Like, when times are tough, people have to downsize their house, they have to downsize their business. Maybe it causes stress and there's a divorce. That all leads to self-storage Workforce housing, apartment complex syndications. I love those two Operating businesses.
Speaker 3:Are you still doing?
Speaker 1:apartment syndications. Right now I have a bunch of them. The most recent one was middle of last year, I think. A lot of them I still have. Some of them have sold. So there hasn't been that many opportunities that have come to my doorstep from my usual circles and I know it's been a big stress point just because the interest points and stuff like that. But I have noticed that a few of my trusted people have told me hey, listen, we've got some things in the hopper. We've got some things coming on, because there are some people that are very have distressed assets right now because the interest rates have creeped them up in the backside and they're like trying to figure out what to do with it and, like they say a lot of times, the money is made on the sale. So I think there's going to be a lot of opportunities coming in that specific space because people that maybe did not do all their due diligence or getting caught with adjustable rate mortgages are going to have some troubles coming up.
Speaker 3:Yeah, yeah, it's funny. I can't tell you how many people just say real estate and it means real estate means explicitly almost single-family houses. Commercial real estate almost means explicitly like office space which there's, and then if you get technical, then you say might also encompass multi-family, right, but like that's, there's so many other classes. There's industrial, there's self-storage, like you said, there's medical which we dabble in, but really we're mostly in retail and a lot of times people think, oh, you're in real estate, isn't it about? Isn't it bad, aren't they? Isn't real estate going to zero, it's maybe office space in San Francisco. Yeah, that's in trouble.
Speaker 3:But retail in Texas or Orlando or any, any march, any Metro is, uh, it's totally fine. And I remember looking at some of the multi-family deals a couple years ago and I had no interest. These guys, they're trading at two and three caps, right, which just like it it would be. If you equated that to a multiple, I don't know, I can't do the math off the top of my head It'd be insane, right? And the price that they're paying and then they're underwriting them with two fallows.
Speaker 3:Number one rent increases were at 10%, so therefore they're going to be at 10%. So they think, okay, buy a two cap, it's going to be a three and then a four, and then a five, seven, eight, really quickly. And then there's, they didn't account for interest rates, and so when you have interest rates go up massively and now in commercial you have to refinance every five years and then you have rents completely dropped You're stuck in a really bad position. So I think that multi-family is not a good place to be in right now, but it's a good place to get into Because, like you said, I think there's a lot of distress coming into that marketplace.
Speaker 1:Yeah, and the other thing that I learned from doing and I learned this from the beginning, but I'm going to add a point that I learned from doing in the middle of all this is I always was taught not to get political here, but always invest as an investor in your landlord friendly states.
Speaker 1:So not California, not Illinois, like typically a lot of your Southern states are very landlord friendly. But here's the thing that caught me off guard is within a state, make sure the municipality, because I'll give you an example I had two multi-family deals in Atlanta, georgia, and those with a great operator, still a great, but they got caught in all this COVID stuff and nobody could get evicted and it was just horrible. And those investments stopped distribution payments for a year and a half. In the end, both of these are sold now and it all came. But I said to myself you know what? Forget about just the state, look at the municipality, because if you're in a municipality that is, the state could be a red state, but that little pocket that you know, especially in a big city, is very liberal and they want to not let people get evicted or not let people go by without paying rent for a long time. That's not a great place for an investor.
Speaker 3:Yeah, no, it is crazy. Personally, I've never really invested in long-term residential rentals. I've always been short-term and commercial real estate just because the returns were a lot more exciting. Now, short-term rentals are a little bit different for combining the operations and the real estate asset together, because you do own a hospitality business at that stage. But it's either a very you can look at it as like a very complex real estate play or a very simple business play. Sure, of course, like a mix of both. But yeah, when you think about like that, how that affects the IRR right, somebody stopped paying rent for a whole year. That's money that you can never get back.
Speaker 3:And I think I personally like the idea of holding on to these assets forever because you can always refinance and get the value out and refinancing is not taxable If you own something, for it could be in our case, like if we do development, when we're finished with the construction we sign a 10 year lease.
Speaker 3:That's we've created a huge value add right 50, 60, 80, 80% return on equity, like we're on that down on terms of increase of the down payment, and so you can refinance right there. Or sometimes it's just you got your five year rent bumps or your annual rent bumps and you have a renewal in five years and then you can refinance. And so you can when you pull out this debt, given interest rates aren't too high, which, like we talked about, right now interest rates definitely suck. But if we assume, even if they stabilize at six, they got up to eight, let's say they stabilize at six and you can still continually pull out that money forever. Eventually you'll be made whole and you have an infinite IRR and then you can just take that money tax-free because it's debt, it's not a capital gain, and go out and continue to do more deals.
Speaker 3:So, that's why I'm excited about real estate, even in a high-interest rate environment. But, all that being said, I don't think we're in for a massive correction because interest rates are already peaked and we didn't see it. So I'm still bullish on it moving forward. Yeah, I agree. All right, we talked to you about the three questions. Let's go back a little bit. But what are you good at? What do you love to do, and what could I do and make money? So I know that was like an influential inflection point in your life. We'll just hear a little bit more about that decision-making framework.
Speaker 1:Yeah. So when I got to the point of the sale, it's now what is what's nice? To have options. And one thing that was told to me which is really true is, if you're an entrepreneurial spirit and you're entrepreneurial you're not going to be the dude who sits on a chair drinking lemonade. You're going to be miserable. You need to do the next, what's the next? Part of me was just like wow, I build a dental business, that's what I do, but that's not should be what's on my tombstone. I need to do things that are going to make me happy, make me make my mind working, and stuff like that. So I knew that I was going to still practice, maybe on a smaller scale. But I had to say to myself what's the next? And that's exactly the questions that one of my mentors asked me it's a good thing for anybody that's listening to this is, if you're figuring out what to do in business or life, one circle, what are you good at? Make a whole list. Two, what do you like to do? And then, if you can take those two and have another third, one and it's all goes together, can you do both and make money? That's where dental consulting came in.
Speaker 1:A reflection point was one one I had a lunch meeting with another dentist at one of these mastermind meetings and about six months later he was telling me about his business and his problems and I was just giving him off the cuff of advice and about six months later we were at another meeting and he thanked me and he told me you know what? That lunch, that we had increased my practice revenues. It's going to be about $300,000 this year for that lunch meeting. And that's when it hit me. I'm like you know what consulting? I do this for fun, like it's a fun conversation with me.
Speaker 1:Why can't I do this and help people? And it makes me happy and gives me, it gives me happiness to see others be successful, and maybe they were miserable before and now they're successful and happy. And so that's where I've devoted some of my time to doing dental practice consulting for people that are either having trouble with their businesses, they want to take their business to the next level, and some people do acquisitions. I think the people that I see the most problems are people who have acquisitions. Believe it or not, they're buying somebody else's problem. A lot of times they think it's cash flow and it's a simpler route, but oftentimes it's not because you get the old. We always did it this way, or?
Speaker 3:you buy it. Hired the toxic employee that stays on, that knows everything and has all the passwords.
Speaker 1:Yep, and then a week or two goes by, a month goes by, half the staff is gone. Now you got a de novo that you didn't even thought was it? We helped those patients, we helped those clients, but also we helped the new ones too, because I feel like that's what I had experienced and people hear my story and they want to say, wow, how'd you do that? I can give you some advice on how you can do it. I will say it's a little harder nowadays, post COVID, post interest rates and stuff like that, but it could still be done because all of the principles are still there, I think they're both harder, right, Like acquisitions are harder because multiples went up in a Zerb environment and then when interest rates came way up, they didn't really come down that much.
Speaker 3:And you do see the same thing having a real estate. But real estate you're not buying at the same multiple as you are in practice. And so that's why the de novo is make more sense. It's still expensive. You've got cost of land is up, cost of supplies are up, cost of capital is up, everything right.
Speaker 3:And so one of the strategies we're doing is where most people historically doing a de novo would love a single freestanding building. Right, Like that. You get signage on all three sides, it looks great. But are you really going to pay that extra rent right now with everything that is as high as they are in costs? And so we're doing a like multi tenant strategy where, if they need 5,000 square feet, we might develop 10, bringing like a Starbucks, search of potlare, even auto zone in one situation. Have them pay the retail rent and then we can help them get their cost basis lower for their rents, make it more affordable. And so people in the past who only wanted to do freestanding buildings are now like but you know what? Maybe I'll take a lose that visibility on one side so I can lower my rent to a more affordable rate.
Speaker 3:But just back to your point, yeah, there's like acquisitions. You don't know what. It's a mixed bag. There's always skeletons in the closet. You don't know what you're getting, and it's really when you're playing. It's usually a lot of them are PE backed or your goal is to get to PE and so they're driven by IRR, which is time driven, which means like the least amount of money that you can put in and the quicker you can get out of the deal, the better.
Speaker 3:And you saw a lot of these people. They were just consolidators, Like they weren't really operators, and what happens is like they said, they come in, they take over and they try and just package as many as they can as quickly as they can, because then they can buy them all for six, sell them for a 10 or 11 or 12 or 13 multiple, and the quicker they do it, the more they get paid. And so a lot of times the stuff isn't really even getting fixed. And yeah, we like the Novos for multiple reasons. Like doing the site selection component is really fun for us, but I think that it is, and even just we're at a vet conference talking to guys, every single group that was strictly acquisition two years ago. Every single one of them now has it, which I think is crazy.
Speaker 1:Yes, so I've seen associates that have left practices to start their own and you fast forward two years later and they're making less money than they were as an associate and they're doing 10 times the amount of work dealing with stress and dealing with employees and stuff. So it's a hard thing nowadays. It really is.
Speaker 3:What would be your top one or two pieces of advice, like maybe the most common mistakes people make are the most common advice that you give that really helps people like that? $300,000 lunch.
Speaker 1:Any examples of that. This is really dentistry specific, but people don't look ahead. Oh man, the practice is starting and we're full and everything's great. Look at your schedule. Eight months from now You're going to have a problem eight months from now that you don't even realize that you could start taking care of now.
Speaker 1:So one thing that we always teach our clients especially the new, the startups is block out time, because what's going to happen is, six months from now, you got your hygiene visits, they're all going to come back. If you do a good job, they should be all coming back six months. In six months, you're not going to have any room for new patients, zero room for new patients. So what you do now is you block out time. You put like, typically a new patient is 90 minutes, you'll put out time. That's a block, maybe one or two in the morning, one or two in the afternoon, and those times are not to be filled by anybody but new patients. So you're intentionally creating capacity, because if you don't do that, then you're just going to be seeing the existing patients and because new patients typically have the more four times more revenue per patient than an existing patient, and if you start having zero new patients, you're going to choke the office revenue wise. So we always recommend blocking scheduling. You don't think about it until it's already problem and then even when you figure that out, it's going to take eight months to figure to solve that problem.
Speaker 1:I think the other mistake that people make is hiring hygienists should be done quickly because they're a provider they're going to. There's only three ways that you can produce revenue in a dental practice the dentist stuff that a dentist does, the stuff that a hygienist does, or x-rays. Those are the only three things you can charge out in an office. And if you're on the fence of hiring hygienists, they're like oh, it's going to add to my payroll, it's going to add to the revenue, so do it. I love that.
Speaker 3:All right, as we get close to wrapping our time, is there anything that you want to go over that we didn't get a chance?
Speaker 1:to discuss. No, I think I enjoyed the conversation and it's all stuff that's in my wheelhouse and I'm very blessed. A little fun fact about me is my wife and I were recently on a house hunters episode, oh yeah. So when we did all this one week my wife and I did this is a good exercise for couples is when I got to that part where we were about to sell and figure out like what's our next, my wife and I did an exercise that somebody gave me an idea for. She sat on one side of a table, I sat on the other, blank pieces of paper. We wrote down what are some bullet points, what are some things that you like bucket list items that you want to do in life. And it was so cool because there were certain things that were on hers and on mine and I was just like a stepbrothers moment.
Speaker 1:Did you just become best friends? Like? She wanted to learn how to play the guitar, so did I. She wanted to live on at a beach house, so did I. So when we went through this process, one thing that we said is let's make this happen, let's live by the beach. So we went into the process over a few years and we bought a beach house and near the end our realtor came up to us and asked us would you like to be on house hunters? They've been asking me for a while and I told them that when I had a couple that came through, that may be good. You know I introduce you and here we are, so if any of your listeners are interested. It was episode. It was season two, 38, episode one. It was. We were the two 38.
Speaker 1:Crazy two, 38. Yeah, two, 38 episodes. We were the first episode, so we were the premier episode of the most recent season. Great.
Speaker 3:Little fun, so cool. I'll have to check that out. I love that. Okay, and if anybody is interested in learning more about what you're doing, is there a good resource?
Speaker 1:for getting in touch. Yes, there's two main avenues that I do for dental practice consulting. There's the dental heroes podcast that we're on, so we do what's called hot seat models, where we bring on an anonymous dentist and they'll give us their problems and we give them advice. It also gives the information for myself and the other doctor that gives consulting, or just direct with me personally. My personal email is hernst at hotmailcom. I know everybody. Oh, you got an old hotmail account, but I've had it since I was in high school.
Speaker 3:That's what happens when you sell your business.
Speaker 1:You get to use whatever email account you want. Yeah, so that's a direct line and basically with our consulting that we do in both avenues. It's there's no contracts and I look at it as a positive. We do a monthly call and during that call we go over action items. The dentist tell us their problems and then we go month to month. If the dentist are getting value, they keep going Right and it's a blessing because they keep coming. So I keep saying to myself we're getting value If we're we keep coming every month and we give action items and the action items are getting done and we're seeing the actual improvements to make the dent. Everything's not. It's not a one size fits all. One dentist maybe wants to make a lifestyle practice where, hey, I want to keep this thing going for the longest time and I want us to. The other dentist maybe wants to build it to sell, to create the most equity and create the most of the value and then prime it for a sell. That's going to be different advice.
Speaker 3:I love that. All right, hey, this is great. Yeah, thanks so much for your time and I'm looking forward to connecting and getting the future Sure thing. Thanks for having me.
Speaker 4:If you need help finding the perfect location for your practice or you're ready to invest in commercial real estate, email us podcast at leaders readcom RE as in real estatecom, or go to leaders readcom and fill out our form. See you next time.