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 www.realestateout.com 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.