Graduating from veterinary school and managing to get established financially can be a pretty tough accomplishment—especially once the student loan payments start rolling in. Of course, there are thousands of websites that offer reasonable and sound (if somewhat intuitive) financial advice for young people, including the newly minted and fairly impoverished health professional.
These sites advise being thrifty, consolidating debt and delaying large vacations—the usual suspects. In my experience, though, anybody with a fresh DVM degree who hopes for a future home and well-educated children probably needs to be a little more daring and a bit more clever than the typical financial-blog reader.
With these thoughts in mind, I decided to devote this month's column to exploring a pair of very powerful financial strategies that will help young professionals prepare for their own economic futures. I not only believe in these tools, I've used them both myself.
1. Invest in a duplex
The route to long-term financial prosperity involves both thinking outside the box and a willingness to take on some degree of reasonable risk, even when others are unwilling to do so. The traditional "safe" route followed by most professional school graduates is to take a job, rent an apartment and pay the bills as they show up in the mailbox. And there's nothing terribly wrong with this strategy—for one thing, it lets you file the "EZ" version of your income tax forms in April.
The downside? Well, every month you spend following this well-beaten path, you delay contributing to your future financial well-being. Rather than maximizing your savings, you immediately begin paying interest to lenders. Rather than contributing to your personal wealth, you begin paying rent to a landlord. All the money you're bringing in goes back out and into the bank account of "the Man" (yes, I grew up in the '70s)—and "the Man" probably never broke a sweat over organic chemistry or spent long days keeping pet owners satisfied.
So how is it that an early foray into the residential real estate market can help the fledgling veterinarian? Consider the financial benefits of a strategy that many immigrants to the United States have used to obtain their piece of the American dream: the owner-occupied two-family home.
While the concept might seem foreign or complicated to a neophyte property investor, the process is actually elegantly simple. In an economic period such as now, when mortgage rates are very low, purchasing a small house can actually pencil out to be as cheap as renting—sometimes even cheaper. Extrapolating that reality forward a bit, it's quite possible for a single person or couple just starting out to acquire a modest two-family house.
The young owner rents out the unoccupied half of the building, which allows him or her to make the mortgage payments almost entirely out of rental income. The owner then makes extra payments toward mortgage principal from his or her own income, which builds up equity in the property quickly. That equity can later be borrowed against to retire student loans ahead of schedule.
You don't have to be a lawyer or investment whiz to do this. And there has never been a time like the present. Here are just a few reasons why the purchase of an owner-occupied two-family duplex can work out well in today's wacky world of failing banks, incomprehensible derivatives and credit default swaps:
> Take interest in property. Interest rates on residential properties are extremely low on a historical basis. (I bought my first house after graduating from veterinary school in the '80s and got a conventional mortgage at about a 10 percent rate—and we had to pay points to get a rate that low!)
> Get great rates. Interest rates on rental property mortgages can be significantly higher for mere "investors." But owner-occupied duplexes often qualify for rates far closer to those for single-family personal residences.
> Not so risky business. Banks see veterinarians, even those with significant student debt, as very good credit risks. This is especially true if you walk into a bank with a clear and well-thought-out business plan on how you intend to use your duplex to reduce your monthly expenses relative to renting. Banks are now desperate to make good loans to high-quality borrowers.
> Take advantage of the perks. There are a number of tax advantages to owning a two-family home compared to owning a single-family house—especially compared to renting a house or apartment.
> Enjoy short-term gratification. Even if you're not sure you plan to live in a specific region of the country for a long time, a duplex purchased at the right price can generate significant income even in the short term. Then you can sell it later. You can use the profit to pay down that pesky student loan.
2. Adopt a "stealth IRA" plan
You're probably familiar with a traditional individual retirement account (IRA). You may even know about the Roth IRA and the simplified employee pension (SEP) IRA. Well, get ready for what I like to call the "stealth IRA"!
Congress passed a widely overlooked yet powerful saving tool years ago and it still doesn't receive proper respect from newly graduated doctors. It's the so-called "Section 529 College Savings Plan," which is offered by most states and offers myriad saving and wealth-building opportunities.
Ordinarily the two biggest future expenses that young professionals save for are a house and college education for future children. Meanwhile, the two biggest obstacles to setting aside money for those objectives are federal income taxes and state income taxes. The good news is that the 529 stealth IRA provides relief from both of these obstacles. Here's why it's so terrific:
The 529 College Savings Plan allows folks to deposit money into a low-management-fee investment account for future education expenses. Unlike a traditional IRA, the contribution limits are extremely generous. Unlike a Roth IRA, the 529 plan generally provides a state income tax deduction for contributions. (Check your state's policy online to be certain.)
These accounts work well for health professionals because they permit a nice, early start for saving toward a future child's education. You don't even need to have children to begin the program—you can be your own beneficiary until the little ones come along. When you start contributing early, your money begins the process of tax-free compounding for a nice long time. Then later, you can use accumulated principal, interest and dividends for education expenses for children with no income taxation on the withdrawals.
It's tough to find drawbacks to these investment programs. Here are more reasons I support them:
> The investment options are easy to understand. Your state doesn't leave you at the mercy of some marginally qualified stockbroker or inexperienced financial planner. You pick from a reasonably sized list of professionally managed mutual funds. You don't need a finance degree to start accumulating a return, which can be several times what banks pay.
> Withdrawals for educational purposes are tax-free. This is usually true at both the federal and state level. And qualified tax-free withdrawals can be used for many other expenses beyond just tuition.
> College not in the cards? No problem. If your children decide not to attend college, you can use the accumulated account yourself. Or you can send your spouse to graduate school. Or you can help out some other relative—all different types of family members can qualify, and the money still comes out tax-free.
> Better safe than sorry. Even if you withdraw the money for a nonqualifying purpose, you might still be better off than if you hadn't used the plan—the growth of the funds in the 529 plan over time can far outweigh any taxes and penalties you pay. (Note: A 401(k) or other employer arrangement may still offer a better option, particularly if your employer matches contributions. Be sure to check with your accountant regarding your individual circumstances.)
In the end, we all realize that veterinary school tuition isn't going to come down any time soon. And we are acutely aware that new-graduate salaries have been stunted—along with so many other professions—by the Great Recession and its ensuing aftermath. But I suggest that rather than see that combination of disappointing realities as a reason to throw your hands up in helpless despair, develop a creative—even aggressive—strategy to use all means available to achieve personal financial prosperity. It will take more creativity than just eating out at restaurants less often.
Dr. Christopher Allen is president of Associates in Veterinary Law PC, which provides legal and consulting services to veterinarians. Call (607) 754-1510 or e-mail