In today’s economic environment, a greater number of physicians are becoming aware of the potential to build wealth through commercial real estate investments. Nowhere is this trend more pronounced than in the ambulatory surgical center industry. With reimbursements shrinking and costs rising, it is sound and prudent business sense to look to alternative ways of supplementing those declining revenues.
The following portion of this article will outline a few of the benefits of owning the real estate where you operate your ASC.
I. Cash Flow: One of the biggest advantages of owning real estate is its ability to produce positive cash flow month after month. In its simplest form, this means that more revenue is collected than it takes to pay for and operate the property. The end result to the Physician/Investor is that income is created passively each month and this income grows with time as mortgage debts are reduced and rents are raised. With time, these cash flows should be large enough to invest in other properties, donate to the charities of your choice, or spend more time with family.
II. Appreciation: In many circumstances a Physician/Investor will see immediate appreciation in the real estate asset that they acquire. If they have negotiated properly for a property or if they work with a skilled developer, they will bring significant value to the property by the rents they will pay from their ASC operations. The price they pay to acquire or build the real estate should be significantly lower than the market value of the property after the business entity begins making rental payments. This is an economic benefit in addition to the monthly cash flows.
III. Tax benefits:
A. Depreciation: Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for wear and tear, deterioration, or obsolescence of the property. This can be used to the Physician/Investor’s advantage come tax time. The end result is that the amount of yearly taxable income will be substantially lower than the property’s actual cash flow. In practice, a portion of the yearly cash flows would be tax free further improving the investments return.
B. 1031 Exchange: Without going into the very specific details, a 1031 exchange allows an owner of property to defer paying tax on the sale of their investment property by rolling the proceeds into the purchase of another investment property. This technique can be used to purchase larger more valuable properties on an ongoing basis while limiting the equity investment to the initial amount made to purchase the original property. The key here, from a wealth building perspective, is that the 1031 tool allows for the investor’s capital to compound tax free over time resulting in expedited wealth creation.
C. Refinance: One more advantage of this investment over other investments is the ability to refinance and withdraw cash from the property. This is a tax free transaction that restructures mortgage debt based on the added value of the property. The withdrawn cash can be used to pay back the equity investors, provide a return on invested capital, or invest in another property.
IV. Control: The ability to control your investment is of particular relevance in today’s economic environment. While many investors today are feeling that they have little to no control over their investments in the stock market, commercial real estate investors have a tangible asset that they are able to control operationally.
V. Leverage: The central point here is that a Physician/Investor can minimize the amount of capital they need to purchase real estate by using other peoples money. Typically the additional capital would come from a lender but there are circumstances where equity partners can be brought in to substantially minimize the amount of equity required of the Physician/Investor. Not only does this tool free up cash flow for the Physician but it also substantially increases the return on investment for the Physician. The reason for this is that the appreciation of the property’s value is based on the total value of the building and not just the equity portion. This cannot be done with other traditional investments.
VI. Hedge Against Inflation: Since real estate is a tangible asset-a good-it’s value will generally rise either at the rate of inflation or much higher. Today, there is a very serious inflationary concern caused by the feds need to print more currency to cover the costs of our increased national debt. In times like these, it is prudent to look at investments that will hedge this risk.
The foregoing are just a few of the main benefits that Physicians should consider when contemplating whether or not to invest in the real estate they use for their surgery center operations. If done properly, this investment can be a powerful tool to aid the Physician/ Investor in creating sustainable long term wealth.