What Most Dentists Get Wrong About Real Estate

On this episode of The Dentist Money Show, Matt is joined by real estate expert, Adam Watts, to break down what dentists need to know before leasing, buying, building, or investing in real estate. They discuss how to evaluate opportunities, common mistakes that can derail long-term success, and why your practice should always come before your real estate ambitions. Whether you’re considering purchasing your first dental office or exploring real estate as an investment, this episode will help you make smarter, more informed real estate decisions.

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Podcast Transcript

Matt Mulcock: Welcome back to the Dentist Money Show. We help Dentist make smart financial decisions. I am Matt and excited to be joined here and having a really a family hang out today ⁓ with real estate expert Adam Watts. Adam, how are you?

Adam Watts: Good, Matt. How are you today? know, it’s just like a different Saturday or Sunday. It’s just chap.

Matt Mulcock: doing great. I know we are going to get the nepotism ⁓ caveats out of the way. If anyone accuses me of nepotism by the end of this episode, they’re going to realize that it’s not even close to true. But we will get the disclosure out of the way that Adam and I are family. ⁓ Adam is married to my sister. I’ve known Adam for 20 years. 20 years, maybe long because you guys are coming up on a 20 year anniversary. Yeah, so longer than that, because you guys dated for a little bit, too. So so, yeah, really glad to have you. We were we were reviewing. I was telling you before we jumped on, we are our team always comes together and we’re constantly trying to make our you know, all of our content is as relevant and valuable as possible.

Adam Watts: Make 20 this year, that’s right. Yep, that’s

Matt Mulcock: And we constantly are doing reviews to say like, what are we missing? Where are some gaps? What topics have we not hit for a while? And we realized real estate is a huge hole for us. We just don’t talk enough about real estate. It’s such a pertinent topic for dentists. And then we had you on to teach one of our classes for our first cohort of Launchpad. And it was so good. We finished and I was like, dude, we just need to do that as a podcast.

Adam Watts: Yep. Yep.

Matt Mulcock: So here we are.

Adam Watts: Perfect. Well, I appreciate you, you know, having me on and letting me chat a little bit about medical and dental real estate.

Matt Mulcock: Yeah, yeah, it’d be great. let’s start with just kind of give us a rundown of who you are. Again, we all know you’re now we’re family, but professionally, who are you? ⁓ How’d you get to this point? Just kind of give us a summary and an intro to start.

Adam Watts: Yeah, thanks. So I am one of the owners of a company called Rigby & Watts Company and we do real estate, ⁓ early stage venture and financial advisory. ⁓ My background and what I focus on every day is the real estate piece. And it’s not just real estate. The only thing I do is medical and dental real estate. So it’s hyper niche, hyper specific. And ⁓ my background quickly is I grew up in a real estate family. My father’s a real estate developer, grandfather’s an architect, and just spoke about real estate around the dinner table. We didn’t talk about stocks and bonds and any of that stuff. It was always dirt and projects. so… Growing up, I got my real estate license when I was 18. I didn’t want to. My father forced me to get it and I got it. And then got my undergraduate at the University of Utah in economics while I worked for his development company. And then I went on and got a master’s in real estate at Georgetown and then got my law degree at the University of Virginia. And after law school, went and joined… what I call a big man-eating sweatshop in New York City, where they grind you up and spit you out. And all I did was real estate law ⁓ pretty much all day and all night ⁓ with very few breaks. And then eventually ⁓ moved to San Diego, did more real estate law, made my way back to Salt Lake City, where I’m based now, and ⁓ joined a… construction company and started to sort of build out their development platform on the medical side. And over the last nine years, I’ve done 24 ground up medical office deals or acquisitions, right? Where we purchased buildings and have done about a hundred million in development value and about 230,000 feet of medical or dental office. And we’ve got three buildings under construction right now. We’ve got three in the pipeline and we just sort of slow and steady. So that’s very high level.

Matt Mulcock: Yeah. Yeah. Yeah. I mean, I’ve, I’ve, I’ve been there witnessing. We could talk for a lot longer about your background. do want to ask who was New York a bigger grind for you were Aaron. Cause what people need to realize is you’ve also got four rambunctious boys and you were living in New York with them. That was quite the journey.

Adam Watts: Yeah. Yeah, great question. So the only thing that saved my marriage ⁓ during the New York years, as we call them, ⁓ is we implemented a rule and it was a don’t ask, don’t tell. She never asked me when I was coming home and I never told her when I was coming home. ⁓ There was no expectation mismatch and hurt feelings. And so, you know, I’d show up at 10 p.m. or 1 a.m. or never.

Matt Mulcock: Yeah

Adam Watts: And when I was there, it was great. When I wasn’t there, she never called and said, when you coming home? ⁓

Matt Mulcock: She would just call us crying and saying, saying someone come out and come hang out with me. ⁓ No, just to the quick side note too, was really cool when you lived in San Diego at the same time that I lived in Southern California as well. And we were able to hang out a lot down there. So that was a highlight for sure. so with that background again, it goes without saying that

Adam Watts: That’s right. Yes. Good time.

Matt Mulcock: the experience level that like, there’s a reason you’re here, the experience level that you bring what truly one of the most knowledgeable, if not the most knowledgeable people I know in real estate. And so again, that’s why you’re here to bring, bring that knowledge to the dental space, because this comes up a lot for us around, you know, from our side at dentists advisors around buying, selling a building, whether it be their own practice or

Adam Watts: Yeah.

Matt Mulcock: You know, every dentist, we joke around a lot. like dentistry is a long road and a lot of school ⁓ to come out and become a real estate mogul. But for some reason, every dentist wants to do that. It’s like, why’d you go to dental school? You didn’t need to go to dental school. You could have just gone the path of Adam, but.

Adam Watts: What I’ve found is there’s this interesting thread where, ⁓ you know, most of the dentists I’m dealing with, right, are in their, I would say late 40s, 50s, some in their early 60s, but there is this strange thread that all of them have read, rich dad, poor dad, and for some reason, ⁓ they think that they can go do

Matt Mulcock: Yeah, yep.

Adam Watts: Rich Dad Poor Dad ideas on dental office and Newsflash, that book is so out of date. And dudes buying houses for 70 grand. It’s like, it’s so bad. There’s some things in it that are good, but like, for some reason, like people just like have got that in their mind and it’s like, well, I can go and do this and it’s gonna be super easy, right?

Matt Mulcock: Yeah, it’s like 1994. Yeah. Yep.

Adam Watts: I’ve seen a lot of dentists really put themselves in a bad situation because they just don’t know what they don’t know.

Matt Mulcock: Yeah, totally. Yeah. And we want to, we want to get into that today too. ⁓ fun fact, side note, which is funny. Rich dad, poor dad, talks a lot about like buying homes at auction. You know this Watts. I, did that for in a whole nother life for a year, year and a half, literally going to auctions and buying, buying up these homes. ⁓ yeah, it’s not as clean and easy as what he highlights in that book 30 something years ago.

Adam Watts: Yeah, yeah, never is. It’s always super complicated and you know, if it sounds easy, ⁓ you’re probably being sold something that’s actually not worth its weight.

Matt Mulcock: Yeah. Yeah, totally. So what I want to go through today, again, we’ll kind of follow a similar track we did or similar kind of agenda we did for the the class Launchpad, which, by the way, if you’re listening, second cohort comes out starting in September. Early bird special right now. You can go to dentistmoneylaunchpad.com if you want more information. But we’re going to kind of follow the same agenda. So kind of four main kind of points here we want to discuss.

Adam Watts: Yeah.

Matt Mulcock: And go through with you. So the first one being kind of broadly ⁓ the two kind of tracks we talk about when it comes to real estate for a dentist and the difference there. I want to talk about buying versus building when one makes sense over the other or maybe doesn’t make sense. And then thinking about like how to evaluate real estate deals and then just how to make smarter decisions around real estate. Each one of these is probably its own episode, right? But we, we’re going to go high level and we kind of have to give general advice here and go through things generally. But let’s, let’s talk first about the first track. I think we’re going to spend a lot of time on this around not thinking outside of your building, thinking like the first decision most dentists have to make around real estate is going to be their building. You know, the practice owner and then deciding, do I buy my building? Do I lease?

Adam Watts: So I checked. Yes.

Matt Mulcock: So, and then we’ll talk later about that, you know, I want to get into real estate type decisions. ⁓ Let’s talk first about owning versus leasing. I just start off with kind of broadly, these are questions we hear a lot. So, but let’s talk broadly. When a dentist says, am I missing out financially by not owning my space? What is your thought around that?

Adam Watts: Sure. Yeah. So the answer would be yes, but with major caveats to that. So what do you miss by leasing? Number one, you miss the forced savings. So a lot of times I see dentists that are buying condos or buildings and it almost acts as a forced savings account, just like your personal residence would. And most people The reason their house is their number one largest asset isn’t because they were brilliant, it was because they were forced to pay their mortgage over a 30 year period of time. And so you lose out on this sort of forced savings account for your commercial practice. You do lose out on tax depreciation, right? Real estate has an enormous benefit.

Matt Mulcock: Yep, yep.

Adam Watts: with tax depreciation, right? Which helps offset your income. And then sort of that long-term wealth building of appreciation that you are getting over time with inflation and paying your mortgage down, right? You’re not getting that. Now. The golden rule, what I tell every single provider that we partner with, that we own buildings with is never let the real estate tail wag the practice dog. If you can only afford to buy a Class C location, right, the location sucks, but you can own it, or you can lease a Class A location, lease the Class A location. Right? Because your practice income will far outweigh the real estate gains that you’re going to make. So you want to buy real estate? Awesome. Like you can invest in real estate in a hundred different ways, but your practice, which is what makes you 90 % of your income, like get the class A location regardless of if you can own it or lease it. That’s always what I tell my providers.

Matt Mulcock: Yeah. Yeah. that’s such a good point that we talk about this ad nauseum of your practice is the main, it’s the cornerstone of your wealth and what’s going to generate all your wealth over time. Everything else, whether it be real estate, other private businesses or the public markets. And that’s all de-risking your future, right? Because you’re being able to pull out You’re using your human capital to generate profits and then put it elsewhere, diversifying and able to eventually not rely on your human capital anymore. But to your point, I love that you brought this up when we started here because we’ve seen and heard from so many dentists that don’t actually think about these as two different things, meaning their practice as a business and then the real estate in which it sits. And I love that you’re saying this because I think there’s a lot of dentists out there listening that either are at a stage of thinking about this or they’ve maybe done this around just assuming, well, it’s always better to own the real estate, but it’s like, no, there’s some there’s some nuance there.

Adam Watts: Yeah, mean, we’ve seen so many and I’ve consulted so many, hey Adam, but my guy that I bought the practice from is selling me the building. Okay, great, the building is garbage, right? And in fact, the growth pattern of the population of where you’re located is actually dwindling. So if you wanna grow your practice, why would you buy this building? Well, I wanna own real estate, dude.

Matt Mulcock: Yeah. Yeah.

Adam Watts: There’s a hundred ways that we can, you have extra cash? Yes, we can find places to put your cash in real estate, right?

Matt Mulcock: Yeah. Yeah. And I think you’re, it’s funny. I think you’re pointing to something that happens a lot in real estate, whether it be personal residence or this building conversation or whatever, there seems to always be, well, I want to get your insight in this, but it feels like to me, there always seems to be this idea around like, want to get into real estate. And if I don’t do this opportunity, if I don’t take advantage of this, there will never be another one ever again. Do you feel like, mean, what, what do you think that is around real estate specifically?

Adam Watts: I think it’s just lack of experience, right? And to be fair, right? When I started my career doing what I’m doing now, which is development and acquisition of medical and dental office, I would go after every deal, every single deal. We’ve got to get it. We’ve got to get it. We’ve got to get it. And now I’m at a point in my career where I’m like, literally I’ve been working on this one deal for eight months. Hasn’t felt right. It’s been super difficult.

Matt Mulcock: Yeah.

Adam Watts: I went to my business partner and said, you know what? I’m not doing it. He’s actually serious. I’m like, yeah, there’s another deal around the corner. We’ll find something that’s even better. It’s just, there’s always another deal. Always. Forever. There will always be another investment opportunity that your buddy who you golf with has a buddy who’s a sponsor who sent you a deal to invest in Florida. There’s always another deal.

Matt Mulcock: Yeah. Yeah. What I think the other string to pull on here for a second is when you say like the way you’re framing it and the way you come at it because of experience and your expertise, you’re thinking about it through the lens of what’s going to build my wealth, my portfolio and make us more money. I think what you’re speaking to a lot of times when it comes to dentists that we talk to and you talk to, when they say like, well, I want to get into real estate.

Adam Watts: Yeah

Matt Mulcock: I think sometimes that where they’re coming from and the lens they’re looking through, whether they want to admit it or not, is status chasing. It’s kind of just this idea of like, I just want to say I’m in real estate because it’s easy water cooler talk.

Adam Watts: Yeah, and look, I totally get that. Like, I totally get that. There is this psychic income that comes from saying, hey, I own real estate. And yes, that feels good. ⁓ It does boost the ego. But at the end of the day, like, it could actually be a really bad investment that you just made. And so the psychic value or income outweigh the fact that you just put yourself in a really crappy real estate investment for the next 10 years, right? And you’ll never admit that to your friends on the golf course or at the pool or at the club. But man, there are so many different opportunities out there that we can talk about later, right? Like how do you think about them?

Matt Mulcock: Yeah. Yeah. Yeah, for sure.

Adam Watts: If it doesn’t make sense, it’s fine. Practice first, real estate second.

Matt Mulcock: Yeah, love that. What other factors do you think about, Adam, around deciding between ownership and leasing? So we’ve got the obviously everything should be practiced first. Anything else that you’re thinking about when it comes to deciding between ownership or leasing?

Adam Watts: So there’s really three things that, three simple things that everybody listening, right, who’s a dentist, should really take into consideration. It’s location, capital, and timing. Again, is the real estate that you can afford to buy actually good for your dental practice? If the answer is no, don’t buy it.

Matt Mulcock: Don’t buy it. Yeah, there you go.

Adam Watts: It would be like, hey, this house is too small. I’ve got four boys and there’s only two bedrooms. And it’s like, well, why the freak would you buy it? Because it’s available. Just because it’s available doesn’t mean you should buy it. Number two, capital. Do you have the cash reserves? Right now, I’m thinking about you requiring a building, right? It’s existing. It’s likely 20 years old. Do you have the cash reserves and the time for a new roof?

Matt Mulcock: Yeah, yeah, yeah. Doesn’t mean it’s the right fit, yeah.

Adam Watts: A new HVAC system, tenant vacancy, right? If you’re buying a building that has another tenant or two tenants without stressing the cash flow that your practice is producing. Okay. And then number three, timing, right? Are you five years from retirement? Are you 20 years from retirement? Right? Real estate again, rich dad, poor dad, real estate is a long game. It is not a fix and flip kind of thing. Not what we’re talking about. There are those opportunities out there. If you have a short time horizon, sort of the churn and the fees of getting in and getting out might actually eat the profit that you were planning on, you know, sort of, sort of reaping after that three to five year period of time.

Matt Mulcock: Yeah, that’s a good point. So thinking again, practice first timeline. What are your growth objectives or goals is probably a huge factor there as well. But yeah, like to your point, if you’re five years from exiting, it’s like you got to be thinking about that versus a 40 year old who’s got a 20 year time horizon.

Adam Watts: Totally or or is there are there two of you? Are there three of you in the practice, right? There’s all these different factors that come into

Matt Mulcock: Yeah. Yeah. Let’s think about Let’s go down the road of leasing. So let’s say a dentist out there listening is faced with this and they decide leasing for now for whatever reason is the way to go. We see this a lot. Like maybe it’s buying in the future, but right now the best fit to your point is for the practice is leasing. what are the biggest, again, we’re going to speak generally here, but what are the biggest like terms dentists should pay attention to when it comes to the lease? Just when they’re negotiating, what are the big that it’s like, you can’t miss these things.

Adam Watts: Yeah, I would say first and foremost, try and get as much tenant improvement allowance as you can, right? Now again, it depends. Are you going into a new building that’s just a gray shell where you can kind of design your world? Are you buying an existing or leasing an existing practice? Either way, you’re likely gonna be negotiating for tenant improvement allowance. so dental space is really expensive. So your goal is to try to get as much money from the landlord as possible while keeping your base rent as low as possible, right? And then we’re talking high level, but that’s like kind of the thing that you’re thinking about. Number two is the lease term. You’re going to invest as a tenant, a ton of capital into a space. And what you’re trying to figure out is, how long is it going to take me to recoup my buildup costs? So if you’re gonna sign a three-year lease, but you just injected 300 grand into the space, you might think that you’re giving yourself optionality, which you are, but remember, based on how your lease is drafted, that landlord might not renew with you after three years. And so now you’re out of pocket and now you gotta go do the same thing again, right? So number three, would say exclusivity clauses.

Matt Mulcock: Yeah.

Adam Watts: Depending on how big your practice is and how important you are to the building that you’re in, I would try to get an exclusive use on orthodontics or oral surgery or whatever it is, right? Your GP practice. ⁓ And then the last one, which I think is really important, most landlords won’t allow you to sign a lease without providing a personal guarantee. And what that means is if your dental practice fails and no longer has capital to pay the lease, me as the landlord can come and sue you, Matt Mulcock as the dentist, forget your dental practice, sue you and go after your house and your cars and your cash and whatever else. So the idea is how can I limit the scope of my personal guarantee? Maybe you give a full personal guarantee for the first three years, then it burns off. Maybe you say, listen, I’ll give you a personal guarantee. It’s a hundred percent for the first three years, but for the next three years, it’s only 50%. And then the following three years, it’s nothing. burns off. So you’re trying to sort of figure out how to get out of that to limit your liability and experience.

Matt Mulcock: Yeah, I’m sure that’s one that not a lot of dentists are thinking about. How critical is it from your standpoint for a dentist who’s entering or renewing a lease to have representation of some kind? what, I guess, put another way, where can things go wrong if a dentist is kind of just like shat GPT on this thing?

Adam Watts: Chat GPT is helpful from a standpoint of what does this mean? Write it to me as if I’m in fifth grade and I’m not bad mouthing dentists or demeaning them. I say this to my engineers all the time guys, treat me like I’m in fifth grade. I don’t understand what your electrical engineering speak is. Helpful.

Matt Mulcock: Yeah, it’s enhanced Google.

Adam Watts: But the problem is, is you don’t understand what is standard in the market. So we just got a lease draft yesterday. Orthodontist wants a 2 % increase in their rent every year after year, not a 3%, which is what we offered. I have not signed a 2 % inflator for probably eight years. And so I’m just not going to give that.

Matt Mulcock: Yeah.

Adam Watts: Right? So I think representation on the way in is super helpful. On a renewal, helpful, sure, but what you’re really after is almost three things. What’s my extension for my term? Is my rent gonna stay the same? And can I get some tenant improvement dollars from the landlord? I mean, it’s like, those are the only three things that you’re fighting.

Matt Mulcock: Yeah, yeah. ⁓ What about situations? think maybe this is too specific, but you can tell me if it is. But a lot of situations where it’s like I’m going to lease now. This is the building I want to end up in. What should Dentist be thinking about around like a lease to, know, lease to eventual buy? Like, is there any nuance or things that they need to be thinking about there?

Adam Watts: Yeah, there’s a ton of nuance with, you know, at least with an option to purchase. ⁓ You know, the question is, again, we can go super deep, but when you sign that, is the purchase price fixed day one? Likely not. If I’m a landlord, I’m not going to fix my price. ⁓ When can you exercise? Is it a floating option? So again, we have a building up in Idaho. One of our tenants has a floating option to buy into the building, meaning he can exercise at any time with a 60 day advance written notice. So that floats, he’s got a floating right for five years. We’ve got another tenant in our building here in Mill Creek. He’s got specific strike points where if he doesn’t exercise within a 30 day window, it expires until the next year.

Matt Mulcock: Wow.

Adam Watts: So the question is it’s very nuanced, right? And you’re gonna wanna really understand how does that work? Are you actually buying the building? Or are you buying into the ownership interest of the overall building itself that has multiple tenants, right? So there’s all sorts of nuance that goes into

Matt Mulcock: Yeah, there’s a lot of again, we have to speak high level here, ⁓ but they’re good, good things to to be thinking about there. ⁓ So let’s think so let’s get on the road of of a dentist who’s maybe leasing and now wants to buy or get into their own building. ⁓ What what things kind of speaking broadly here, what should a dentist be considering when they’re deciding between purchasing an existing building versus ground up construction. What are kind of the big takeaways or things that a dentist should be thinking about?

Adam Watts: Yeah, so do I buy an existing building or do I go out and develop a building myself? So I think of this as sort of a simple trade-off between control and convenience, right? So three questions. one, do I want it done fast or do I want it done my way? Buying an existing space gets you as the dentist in the chair faster. Right? Because the building’s already there. Right? You’re typically six months to 12 months after you purchase. And why do I say that? Because I’m assuming that the building that you’re buying probably doesn’t fit your flow and your needs. And so you’re going to have to probably remodel. Now, of course, if you’re just buying the building as is and it’s perfect, well, then, yeah, obviously you’re

Matt Mulcock: Yeah, if you’re buying a practice from an older doc and the building’s ready to go, yeah.

Adam Watts: Right. Building from scratch obviously gives you exactly what you want, but you’re 24 to 30 months before you see your first patient. So. Again, do I want it done fast or do I want it done my way? Number two, is there something worth buying in the market, right? If a good existing space is available at a fair price, buying almost always wins due to speed and getting patients in the door. The problem is that most dentists can’t really find the right space in the right location. And so maybe they start to think about building as an option. And then number three, Can I afford the uncertainty? And what do I mean by this? Buying has a known price on day one. Building’s a million dollars, I’m gonna pay a million dollars. Building does not. And you say, why doesn’t building have a known price? Well, interest rates fluctuate every day. Construction costs fluctuate. Every week, I just got a notification that copper is going up, that structural steel is going up 10%, that our HVAC units on our new builds that we’re underwriting today are going up by 8%. It’s a constant influx of change and there’s time lags, right? Is my project going to be 10 months like the builder said, or are we going to a freak snowstorm and have a massive amount of snow this year? that now pushes me back another 60 days. Or a global pandemic where my provider partners are freaking out and telling me to, can we just push pause on the building? And I’m like, dude, there’s, we can’t just push pause, right? Like, guys are not showing up. Yeah. So if you have the capital reserves, you have the patience, you can deal with some uncertainty.

Matt Mulcock: COVID, you know, we’re gonna have a global pandemic. Yeah.

Adam Watts: then basically building lets you design the perfect clinical environment and can produce so much more wealth for you in the long term. So what I like to tell Dentist is first and foremost, never do this alone. You are a dentist, you are not a developer. If you can find it, buy it. If you can’t, and you have the time and the capital, and the stomach for surprises, I would say go and develop and build more wealth.

Matt Mulcock: Yeah, that was going to be my next you just hit it around. We were talking about, do you feel like a dentist needs representation on the least side? I would imagine based on what you just said and what we’ve seen, I’m kind of leading the witness here that. It just to it’s always to me sounded insane when a dentist claimed they were, they didn’t need to quote unquote, pay someone to help with that. And I just, again, knowing you so well for the last 20 years, I’m like, This is all you do. This is your full time profession and you’ve taken years and years and years to develop this expertise. It’s just it to me it is literally the equivalent of you telling me you’re going to do your own crown. And like what are you talking about? You’re insane.

Adam Watts: And of course I could get on YouTube and there’s probably some step-by-step videos that you know an amazing provider has put out there. I could probably work my way through it. I’d likely make some mistakes. There’d be a lot of pain. There’d be a lot of pain. There are some things I would like to do wrong. I could likely figure it out. But like why? So and I think

Matt Mulcock: Yeah. Yeah, yeah.

Adam Watts: There’s this misconception that, real estate is easy because look, I bought a house. ⁓ I bought a townhouse and I have a renter in there. Development is so far above and beyond. I can’t even begin to explain to you the amount of items you have to track and the things you have to know. And I’ve been doing this now and I’ve done 24 buildings. And I am still surprised on every deal I miss something. Something is coming up, right?

Matt Mulcock: Something’s coming up, yeah. For sure. I think the other thing here, you were speaking of like even something as simple as like, I have a townhome and a renter in there, or I have a couple rentals here, there, whatever. One of the things that happens even in that scenario, because we’ve uncovered this for Dentist before and shattered some dreams, when you actually run the numbers and show them their true ROI, even on something as simple as like a townhome to your point, but times that by a thousand when it comes to a development of just even understanding the ins and outs of the figure and the pro over the figures and the pro forma and you know, all the little details there of like, is this even going to make us money? Does this even make sense? Like that’s a whole other beast just to understand those.

Adam Watts: Bye. whole other beast and I’ve seen guys basically hang themselves so to speak and they are so upside down in their real estate that yes, they make it work but they’ve inflated their rent 50 % over and above what the market is because they had to. They could never charge that rent to me or any other provider.

Matt Mulcock: Yep.

Adam Watts: Because they’d be like, why the hell am I paying that when this building that’s three blocks down is a third of that price? ⁓ You’re right, it just gets more complicated. It’s way more expensive. Failure rate is a lot higher. And you can really do a lot of damage to your future growth and earnings if you don’t do it.

Matt Mulcock: Yeah, yeah.  I always tell that it’s to Dentist when it comes to you have two or three, ⁓ massive transactions. Usually we’ll say three to five, depending on the Dentist and the 10th career. But the two biggest transactions in your life are going to revolve around your practice. And if you do a building, whether that be ground up or purchase, and we’re talking hundreds of thousands, if not millions and millions of dollars at stake. I just don’t see a world where you’d ever want to cheap out on that. I get, well, I’m saving a fee here or there. It’s like, yeah, but you’re going to end up, that is the epitome of tripping over dollars to save a couple of cents.

Adam Watts: Yeah, and what I found is there’s a lot of dentists that have this DIY mentality. And it’s just like, don’t understand. They find the cheapest builder, right? It’s their front office manager’s cousin who got into construction two years ago and now wants to build their building and he’s super cheap because he self-performs all the work. Well, there’s a reason he’s cheap. It’s just mind-boggling that you’re going to spend this amount of money and you’re concerned about saving, you know, a hundred grand here when your project’s going to cost you three to four million bucks. It’s just wild.

Matt Mulcock: Yeah, yeah, definitely. ⁓ Speaking of you, you mentioned earlier surprises that come up and you have to be able to handle the surprises and deals are still surprising you when it comes to ⁓ building. So at ground up construction, what are the what are the things that you’ve seen or that are most commonly brought up as far as Dentist didn’t think about, you know, this surprise or this cost overrun?

Adam Watts: Yeah. Yeah, I think the biggest, so there’s two. Number one is a thing that most dentists from the jump don’t realize. There are these things called impact fees that must be paid when they go to pull a permit to build a building. And so what does that mean? Well, you’ve got to submit your plans to a city. Well, A city is going to levy fees on you. What does that mean? There’s a sewer impact fee, right, for connecting into the new sewer. There’s electrical fees for getting a transformer on your site. There’s water connection fees. There’s county fees. There’s parks and recs fees. There’s fire impact fees, right, to service your building. There’s police impact fees. There’s road and transportation fees. There’s bonding fees. There’s plan review fees, there’s building permit fees. On and on and on it goes and some of the are like, wait, what? I thought I just would submit my plans and you guys would stamp them and I could go build. I’ll give you an example. We’re working on a building in Hurricane Utah, just north of St. George. My current impact fees to build a core and shell building, forget any tenants. Just to put a shovel in the ground, I have $493,000 impact fees. Yes. And that’s for a 21,000 square foot building. Now, the dentists that are coming into that building will also have to pay their own impact fees when they go to submit their plans to the city. Right? So,

Matt Mulcock: Whoa! Holy cow! Wow.

Adam Watts: You missed that on your pro forma that you are putting together on your own and you forgot to borrow an extra half a million dollars from the bank. Well guess who’s going to be funding that in cash? You are. You’re cooked. You’re totally screwed. And so then number two, the biggest cost overruns we see is basically from a failure to plan upfront.

Matt Mulcock: Yeah. Yeah. Or it’s going to kill the deal right from the jump. Yeah.

Adam Watts: Most dentists are time poor. And so they are so busy in the chair. They get done at five, 5.30, six, whatever. They’re exhausted. So what they say is, listen, just give me a budget for my cabinets. Just give me a budget for my flooring. Just give me a budget for my countertops. I’ll figure it out later. Builder has no idea. So Builder puts in 15 grand for your flooring. Well, it turns out your flooring is 40 grand.

Matt Mulcock: Yeah.

Adam Watts: You stack that one decision on top of another another, you’re 100, 150, 200 grand over budget because you fail to plan upfront.

Matt Mulcock: And then you’re yelling at the builder as my.

Adam Watts: Then you don’t want think stuff that the builder, as if it’s the builder’s fault that he couldn’t read your mind, that you didn’t want carpet squares, but you wanted real hardwood. Well, how’s he supposed to know that? Right? So that’s what we see a lot is just failure to plan upfront.

Matt Mulcock: Yeah. Yeah. Yeah, I’ve heard a lot of stories around this between you and ⁓ for those of you that don’t know, ⁓ my brother, Adam’s other brother-in-law, who’s a builder as well. So we’ve talked a lot about this, around him getting yelled at by people. ⁓ Yeah, that’s good. The impact fees to me, just mind boggling. That’s a whole other conversation around the legitimacy. The thing that comes to mind is like how

Adam Watts: Yeah. Yeah don’t even get started.

Matt Mulcock: None of these can be legitimate.

Adam Watts: You know, one of the jurisdictions just raised their impact fee by 180%. Can I say, hey, that’s stupid or I don’t want to pay it? They’re like, we don’t give a rip. Don’t be a parallel.

Matt Mulcock: Yeah, yeah, wow. They just, yeah, what do you do? That’s gotta be a huge factor when that alone has gotta be a huge factor when considering building an existing building versus buying.

Adam Watts: Right? What do you do? Yeah, and this is why you’re running April Forma. Can we get the rents to justify the costs? And will we make money when the building is done, right? And I’ve turned a lot of deals away because after running the numbers, it just doesn’t make sense, right? And I told Dentist, hey, I don’t wanna partner with you on this building. If you wanna do it, knock yourself out. But as a real estate operator that does this every day, I’m not.

Matt Mulcock: Yeah. Yeah. Yeah.

Adam Watts: Comfortable doing this deal.

Matt Mulcock: Yeah, it doesn’t make sense. Yeah. Are you looking at each of these deals uniquely as far as ROI or ⁓ is there a benchmark that a dentist should be thinking like you need to be hitting X percent or you need to be hitting these figures on a pro forma to even make this viable? How do you think about that?

Adam Watts: Yeah. Yeah, we typically look for, ⁓ you know, we run our models on a 10 year sort of basis because most of our tenants coming in are signing 10 year deals. And so what we look to achieve is around, you know, anywhere from a nine and a half to 11 % average cash on cash return over the 10 year hold period. And what does that mean? That means year one, your cash on cash return, right? is going to be a lot lower than year 10 because your lease today is going to increase 3 % compounded annually over a 10 year period time. Your lease payment in year 10 obviously is a lot higher than in year 1. So your returns year 1 might be 6.7 % but year 10 you’re hitting a 15%. So when you average the 10 year hold period we look to try to achieve that

Matt Mulcock: Yeah.

Adam Watts: High nine to 11 % cash on cash. And then there’s another term in the world here of real estate called internal rate of return, IRR, right? How much is your investment growing year over year? And we try to hit anywhere between a 17 % and up that your investment is growing year over year. If we can’t hit those metrics, we just don’t do the deal.

Matt Mulcock: Got it. That’s really good to know. So Dentist out there listening, he’s maybe running their own model. A, don’t, but B, ⁓ if they are, it’s good to have just some benchmarks there and things to consider. And they might hear that and think, I RR, that’s insanely high. But I think what you’re speaking to is the power of leverage in these deals and the equity you can build using the bank’s money.

Adam Watts: I’m out. Yes. Yeah, and that’s right. And thanks for that clarification. That’s on a leveraged model, right? And unleveraged meaning we have no debt on the properties, totally different. Or again, there’s so much nuance that goes into this, ⁓ but that is on a leveraged model.

Matt Mulcock: Yeah. Yeah, again, just just highlighting those general terms and then all the endless things you have to think about to get to even understand what a pro former would look like on a deal. I just think it’s and I like what you said, the dentist being so time poor, it’s just impossible for me to believe a viable that there’s a viable scenario where a dentist would go out and and do this on their own. ⁓ Shifting gears. So I said, we’d spend a lot of time on the actual, the number one decision that dentists have to make, which is usually around like their building, whether they’re leasing, buying or building. ⁓ Let’s shift gears for a few minutes and just talk about investing, getting into real estate, right? As we hear outside of that decision. So saying, I want to go buy some townhomes or I want to go do some fix and flips, or I want to go do some commercial stuff, whatever that looks like. I want to ask generally, because we come across this all the time, we’ve had some pretty hard, fast opinions on this, pretty hard lines on opinions on the term. I have personal opinions on this around passive income and how that gets thrown around. ⁓ How do you define passive income? I’ll phrase it another way. Do you ever consider real estate truly passive?

Adam Watts: If you’re doing it yourself, right, and you’re buying residential and you’re going to be the guy that rents them out, you are up in the night, high as a kite, to think that that is passive. You are dealing with people who are in your properties every day every night and they are calling you and you’re dealing with plumbing issues and broken windows and landscape that’s dying. It’s a freaking nightmare. There is an entire sector of the real estate world called property management. So seen a lot of dudes who want to get into the rental game. That’s awesome. It is not passive. In fact, that’s where I started.

Matt Mulcock: Yeah.

Adam Watts: And said, this has to be the worst thing in the world and sold four of my properties, right? So the only thing that I would consider truly passive, and it’s not even 100 % passive, would be if you’re a limited partner or an investor in a real estate fund that is going out and buying apartment units or medical office or industrial.

Matt Mulcock: Yeah.

Adam Watts: You are one of a hundred investors and you’re not having to do anything. You are having to like pay attention to it. You’re having to file taxes on it. You’re having to have some upkeep with the general partner sponsor who’s running the deal. That would, to my mind, be the only sort of kind of passive where you’re not really involved, right?

Matt Mulcock: Yeah, yeah. And the irony there is that mechanism going investing in real estate in that manner is the same mechanism as investing in, let’s say, a mutual fund that’s investing in public companies. Both passive. Yeah.

Adam Watts: It’s in an ETF. Yeah, ETF that’s taking, you know, the NASDAQ or the S &P. It’s the same concept.

Matt Mulcock: Yep. Yeah, yeah. I’m glad you highlighted that because it’s I’ve said this and I stand by this that passive income is the most overused, oversold and misunderstood financial term in the history of finance.

Adam Watts: But it’s amazing clickbait for Instagram and stuff. Follow me, smash that subscribe button, like and subscribe and you too can own passive real estate just like me.

Matt Mulcock: It is. Like and subscribe. Yeah. Yeah. It’s so true. Yeah. Just a side note on that. If you ever want to get some, some proof on that, you should go look up some, the, the evolution of Grant Cardone. it’s really interesting of like what he used to pitch, that he realized, ⁓ wasn’t selling, which is ironically everything that we quote unquote sell, which is like, be disciplined times diversification, be thoughtful with your spending. Like this is his old videos. And then he realized.

Adam Watts: Huh. Yeah. that doesn’t work.

Matt Mulcock: very quickly, can’t really build an audience around that. So then he completely shared, he went to get total side note, but you’re right, passive income is really easy to sell, difficult to implement.

Adam Watts: That’s too bad. Yeah, The stuff you just talked about is too boring. Right? Too boring. I want something. I want to hack. I want a trick. I want to get rich quick.

Matt Mulcock: Yeah. Yeah. Yep. Yeah. Me too. Let’s, let’s figure that out. Can we? Yeah. Let’s all get rich quick. Um, generally speaking, uh, and I don’t want to take up too much more of your time, Adam, I know, I know you’re a busy guy, but, uh, let’s maybe just, uh, hit a, just generally speaking, um, how, what do you think about it when evaluating a deal? So again, totally like a dentist, not talking about their own building.

Adam Watts: Let’s all get rich quick. Yeah.

Matt Mulcock: deal comes to them, their buddies, buddies, cousin who’s doing these things in Florida, as you mentioned. How do you evaluate that? And two part, second part, like what are mistakes you see Dentist make when investing in these real estate deals?

Adam Watts: Thank you. Okay, so we see this, we deal with this with our clients all the time. And I tell every single one of them, listen, I’m not like, I don’t know everything, but I’ve seen enough deals and I’ve analyzed enough deals for myself to put my own money in that please just send me whatever it is that you got sent. Well, here are basically, five things that I sort of think about every time we see a deal, right? So dentists are high earners, they’re time poor, which often makes them a target for really bad deals, right? Because they don’t have the time or the knowledge to analyze them. And so they’re like, ⁓ well, if John is putting in 100K, I’ll put in 100K, right? So number one, right? The source of the deal. Why is this deal coming to me? Newslash great deals are rarely shopped around to everyone. So before looking at the numbers and the huge return that’s pasted across page one, ask yourself what’s the origin of the opportunity, right? Is this an exclusive opportunity that’s through a trusted network or is this like a mass marketed grant cardone syndication that’s going out to like 10 million people?

Matt Mulcock: Yeah. Yeah.

Adam Watts: If it’s the latter, I would proceed with a ton of caution, right? Number two, the sponsor. Now, when I say sponsor, it’s who is steering the ship, who is in charge of the investment. The operator, I eat the sponsor, right? Matters almost more than the real estate itself. And you might be shocked by that because a great sponsor can save a mediocre deal, right? But a bad sponsor can ruin a great one. And so the question you need to ask when that PDF comes into your inbox is, what is this sponsor, this operator specific track record with this exact asset class? I.e. Adam Watts, myself, sends Matt Malkaka deal and it’s for a ground up industrial development.

Matt Mulcock: Yeah.

Adam Watts: my own track record, I’ve done zero ground up industrial. So Matt’s gonna be like, whoa, wait a minute, you’ve never done this before? So, and then have they successfully navigated a downturn? Or is this like a new fund? Or is this like deal number one? I’m not saying don’t invest in deal number one, everyone’s gotta start somewhere. But again, proceed with caution, right? And then number three, the downside.

Matt Mulcock: Where do I sign? Yeah.

Adam Watts: What is the risk of my investment going to zero? Right, you work super hard for your capital. Don’t lose it on super speculative plays, right? Focus on capital preservation first and then return second. So what are the questions you need to ask? How is the deal being financed? Is it short-term floating debt? Is it interest only debt? Is it seller financed?

Matt Mulcock: Yeah.

Adam Watts: Debt, all of these play into that. Number two, what’s the break even occupancy, right? If you’re buying a multifamily deal and it’s at 70 % occupancy and the strategies, they give it to 96%. Well, are you only cash flowing at 96 %? That’s a massive hurdle. And then number four, sort of the fundamentals, location and timing. Everybody that’s listening on this podcast,

Matt Mulcock: Yeah.

Adam Watts: You know that real estate is local and it’s cyclical. I don’t know anything about real estate in California. Right. I just have no clue. So my model that we deploy likely wouldn’t work. I have no idea. So is the area where you’re buying, is it experiencing job growth? Is there too much supply? What’s the population influx? Right. Are people leaving? What’s the age demographic?

Matt Mulcock: Yeah.

Adam Watts: And you’re going to say, Adam, how do I know that? Well, it’s probably in the presentation itself, right? And if it should be, and if it’s not, it’s a simple question, right? And then is the business plan realistic for the current economic environment, right? Like, is there a massive supply in downtown Minneapolis of, even better, in Austin, Texas. Someone pitches you a deal today in Austin, Texas that has a ton of multifamily, it’s a new-

Matt Mulcock: or should be.

Adam Watts: Why would you ever do that? Right? You’re never going to do that because there’s a massive amount of supply of multifamily in Austin right now. It’d be really stupid. And then number five, really, really, really importantly is the alignment. How does the sponsor get paid? Do they make money when you make money or do they make money regardless of if you make money? The number one question I always tell my providers to ask every single time.

Matt Mulcock: Yeah. Yeah. Yeah.

Adam Watts: Hey John, who’s my buddy, who pitched me on the deal. If the deal is such a great deal, are you also investing? If the answer is no, red flags, right?

Matt Mulcock: Yeah. red flags. Because they’re getting paid another way that’s not aligned with how of you making money. Or not.

Adam Watts: That’s right. And then you need to ask how much money is the sponsor, the operator, co-investing in the deal, either from a fee standpoint or a cash standpoint. If the sponsor is putting in zero dollars, also probably a red flag, right? So, and then just to your second question of what mistakes do I see? The number one mistake, I literally just dealt with this ⁓ last week on a new deal. Dentist approached us.

Matt Mulcock: Yeah, yeah.

Adam Watts: Hey, I wanna build a 6,000 square foot facility. Awesome, this is down in Southern Utah. Cool, send me what you got. Send it over. He bought a three acre piece of property for 6,000 square feet. Now again, I can’t get mad at him. He doesn’t know, right? But rule of thumb guys is that one acre should yield about 18 to 20,000 square feet of dental office or medical office space. So in order for that dentist to make money, Matt, he’d have to build 60,000 square feet of medical office space and he wants to do six. totally screwed. So that is the most common mistake that I see dentists make is they just can’t, it’s really hard to find the right amount of space.

Matt Mulcock: Yeah. Yeah. It’s a tiny building on a big plot of land. Yeah.

Adam Watts: for the billing that they need.

Matt Mulcock: Yeah. Yeah. Yeah. I mean, I think what I’m the theme of this, ⁓ that I’m hearing is all of these mistakes come from not having the right team in place, not being organized, not planning, not being intentional. Those are kind of the broad strokes. ⁓ you said something earlier about like where the, or the sponsor and their track record. One thing we see a lot in dentistry that I just wanted to highlight really quick is.

Adam Watts: Yeah.

Matt Mulcock: The dentist who is a really successful dentist and sold usually the like corporate and they made a bunch of money Let’s say and now they’re really liquid and they’re like I’m gonna go try my hand at real estate and raise a fund and Like that’s there. We see this all the time Just be careful. Be careful. They were really successful dentists they made a lot of money and They now want to take your money to go do real estate deals doesn’t mean they know anything about real estate

Adam Watts: Yeah. Yep. Sure. Yeah, and if you are that guy, and you’re about to have an exit, and you’re about to have a bunch of liquidity, sure, you wanna go start a real estate fund doing this. Absolutely. What I would say is go find a real estate partner that has some deep experience and knowledge doing this. when you go to present to the dentists, and they run through these five lists of questions, They’re not saying, red flag, red flag, red flag. They’re saying, sponsor, i.e. one of the partners has done 30 of these or 50 of these or whatever.

Matt Mulcock: Yeah. Yeah, definitely. This is great, Adam. I think we could easily do a part two. There’s more questions we didn’t even get to. ⁓ But super, super insightful and informative for the dental community out there. Where can people find you? know, well, I guess I’ll just say this. ⁓ You can find Adam at the very least if you just want to reach out to us. We’ve taken things to you over the years, like countless times.

Adam Watts: For sure.

Matt Mulcock: from clients or, you know, dentists looking for things, but how do people find you if they’re looking for, if they want to ask you more questions or they want to utilize your services?

Adam Watts: Yeah, Adam at Rigby Watts, R-I-G-B-Y-W-A-T-T-S dot com. ⁓ Not a lot of dentists are on LinkedIn, but you can follow me on LinkedIn. I a lot of posts there. ⁓ And I would just say generally reach out, you know, happy to answer questions. We didn’t even cover financing, which is one that we get asked all the time. We didn’t cover build out and build out costs and how you should think about that.

Matt Mulcock: Yep. Yep.

Adam Watts: how you should navigate. mean, there are so many things. ⁓ But yeah, generally reach me there at my email, check it all the time. And just obviously here to help answer questions. And I’ve been through the ringer and have a lot of deep scars to show for it. so, yeah, I just want to help other dental providers not make the same mistakes I’ve made.

Matt Mulcock: We’ll do a part two. Get the bruises and scars to show, yeah. Yeah, this is great. Well, and again, worst case scenario, reach out to me. I see Adam all the time. We were hanging out on the weekends all the time. So really appreciate it, Adam. Everyone, ⁓ thanks for listening. Until next time, take care. Bye bye.

Keywords: dental real estate, buying vs leasing, practice growth, real estate investing, development, lease negotiations, passive income, real estate tips for dentists

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