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Thoughts on investment

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Publius
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Thoughts on investment  Reply with quote  

I have a decision to make on how to fund an investment and would like to get the board's thoughts on the different scenarios that I am considering.

First, the investment: This is a portion of a partnership buy in for my wife's surgical practice. She has been a partner in her practice for three years and this fall, the ownership in the building that the practice leases is up for renogiation. The partners that have a share in the ownership of the building are refinancing to remove their equity and restructuring the debt to allow newer partners to buy in at a resonable rate. There are 11 docs that will be buying in, so the share in ownership is 9%. The buy in cost is $140k. The practice (25 surgeons across three clinics and surgery centers and very stable) leases the entire building, so the rental income is guaranteed as long as the practice is alive. Based on the interest rate the partners are paying, the equity that is being purchased and the monthly lease, the rate of return is just shy of 14%. The revenue is paid quarterly to partners.

The options for financing it:
1. We have enough in our brokerage account to just sell funds and write a check for the $140k. This would incur some taxes, but not a huge amount as there is enough that would be taxed at long term capital gains and the majority of the account is cost. Since this account is part of our long term savings, the revenue that came in quarterly would just go back into the account and we would be realizing a safe 14% on the investment.

2. The bank that handles all of the finances for the practice has offered partners 4.25% fixed for 60 months on the buy in, so I could just borrow the money, leave the money alone in the brokerage account and pay the monthly note out of a portion of the money we would deposit in the account each month. The scenario comes out ahead $ wise, but I am have some concern about the extra leverage.

So, thoughts?
Post Sun Sep 21, 2014 4:09 pm
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oldguy
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That's easy - of the 2 choices, #2 is best. You don't want to disturb the compounding in your brokerage account nor do you want to prepay a bunch of cap gains. A fixed 4.25$ is a great rate, I'll take that deal all day long.

I assume that 'don't do it' is a third choice? Regardless of the terms of the ownership partnership - death, divorce, a desire to move to australia, yada - your ability to unwind from this and ultimately realize your capital gains is almost impossible at best. So, IMO, this should be thought of as an irreversible, for life, forever deal. This building will be in the family for generations. So - in my mind, you are comparing 11%/yr returns (w/ mobility, flexibility) with 14%/yr forever (but with new roofs, new AC, refurbs after 15 yrs, yada). Is that worth a +3%? (I don't know, just asking).
Post Sun Sep 21, 2014 5:33 pm
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Publius
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Yes, there is the option to turn down the investment as it isn't a required part of the partnership, but if the other ten partners in this clinic buy in, there will be pressure to join in. Not enough that I am going to let it push me into a bad decision, but pressure nonetheless.

They are discussing an exit option if a partner leaves the practice (there is a similar buy back structure for the buy in to the practice itself) in the case of retirement or just moving on. And that piece is important to me as the illiquidity of this has occurred to me. I think the stipulation would be that if you were to insist on leaving before a refinance was triggered, the exiting partner would be bought out for the initial investment and therefore forego any profits from appreciation. But would have realized their 14% from rental income all along.

So my main concern is that I am simplifying this too much in looking at it as a very safe 14%? Is there some area of risk that I am ignoring that makes this anything other than a no brainer (specifically option 2 above)? I understand there is always the risk of orthopedic reimbursements being tanked by Medicare or something, but that risk is there in or out of this investment.

I appreciate the feedback.
Post Mon Sep 22, 2014 1:36 am
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oldguy
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quote:
So my main concern is that I am simplifying this too much in looking at it as a very safe 14%?


The law of investing applies - risk and return are directly proportional. When it appears to be otherwise, it usually means that you just haven't identified/defined the risks yet.

As a landlord since 1975, I can tell you that the list of unexpected events is endless. Both on the lost income side and on the unexpected cost side. Your 'reserve' covers the usual stuff - new HVAC, new roofs, paint, plumbing - and insurance covers most disasters such as wind, trees, car bumps. The lawsuits are for falls, slips, etc. On the income side your 'reserve covers vacancies. A major sector economic shift in the far-future - such as a bio-medical breakthru that makes the practice obsolete can drive both income & costs to intersect. All unlikely - but don't make the mistake of counting on a "safe" 14%/yr as far as you can see - cuz it ain't gonna work that way. Very Happy
Post Mon Sep 22, 2014 3:01 am
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