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Investing in a Dental Practice
It would be wonderful if we could all go through life completely free of debt. There are a fortunate few who are born into wealth, who have enough money to provide for themselves and go through life without debt. Then there are the rest of us who face debt as a fact of everyday life (something you learn to contend with, live with, and yes, for many of us, die with). Unfortunately, it's even something we can pass on to our children someday.
If you are already wealthy, then you may want to read this article just to see how the rest of us live. If you are not one of the wealthy, then you should read this article closely.
It's true that having no debt is the ideal, but if it is a fact of life for you, then it's important that you keep certain things in mind when you consider debt. There are basically two kinds of debt: bad debt and good debt. What kind of debt could be good? Good debt is debt for an appreciating asset; bad debt is for a depreciating asset. Good debt provides income; bad debt provides expenses. Educational debt, for example, is a fact of life for many of us, but we should view it as an investment in our future. We'd like to think it will provide us with an opportunity to increase our future income.
Debt for an unaffordable expensive car would be considered bad debt since it is an unnecessary expense that provides no income and depreciates in value. Debt for something that depreciates and provides no income would certainly be considered bad debt.
An education is an investment that appreciates in value by increasing future income potential -- the car is a depreciating expense that will provide no income and will rapidly depreciate in value (use up income instead of providing income). The expensive car may be more fun to have, but the education will be the better investment.
Now, let's take a look at good and bad debt for the average doctor who is ready to enter private practice. Many new practitioners get caught up with opening brand new, shiny offices with all the latest and expensive gadgetry. This idea is promoted heavily by those who profit from the sale of such gadgetry.
Tens of thousands of dollars can be invested by a new practitioner for equipment, furniture and leasehold improvements before the first patient ever walks through the door.
Interestingly enough, I've never heard of one patient who was ever drawn to a practice because of the equipment the doctor was using. I've never had a doctor tell me that a patient was passing by and looked in his window, saw his new equipment, and decided to pay a visit. Indeed, I've heard as much praise by patients for 20-year-old reconditioned equipment as I've ever heard for the new, incredibly expensive equipment recently purchased for a new office.
Now, if you think cars depreciate quickly, wait until you see the resale value of healthcare equipment. The resale value of a car may depreciate up to 30 percent the first year, but healthcare equipment will depreciate up to 90 percent of its original cost the first year! So since new, expensive replacement equipment does not produce patients, it is a non-income producing expense. It is a rapidly depreciating expense to boot ... all of which adds up to "bad debt." New equipment required for new procedures, however, can increase income and therefore is considered "good debt."
Now, what is good debt for a doctor? Where can one find investment or income-producing debt? Where can one invest in an income-producing asset that appreciates in value, not depreciates? The answer -- buy an existing practice. You incur debt, but the current income stream of the practice exceeds expenses and debt service (the money required to pay off the debt), thereby providing income (income-producing debt).
Good income-producing practices do not depreciate in value; they appreciate. It is not an expense; it is an investment. You will almost assuredly be able to sell it someday for more than you paid for it (if you don't pay more for it than you should).
Buying a practice is similar to buying a bond or a bank Certificate of Deposit. Both are income producing investments (the C.D. pays interest, the practice provides income). Both appreciate in value (the interest accumulates in the C.D., the practice increases in value over time). In addition, they both are considered a sure and safe investment, provided that research is done as to fair market value of existing practice.
The biggest advantage a practice has over the C.D., however, is that the IRS allows you to depreciate the cost of purchasing the practice even though the practice appreciates in value! This represents a pre-tax investment, which is considered the most desirable by astute investors. Of course, you cannot depreciate the C.D., so this represents an after-tax investment which is far more costly, and the income from the C.D. pales when compared to the income produced through the practice investment.
Income-producing debt is good debt; non-income producing debt is bad debt. It's a simple rule based on logic.
Think about it!
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