Real Estate Investing for Dental Practice Owners

Dentists are some of the few medical practitioners who have the unique opportunity to invest in their own business. In addition, a lot of business purchase opportunities come with the opportunity to purchase the Real Estate associated with the Dental Practice. We at Commonwealth Transitions LLC. consider the ability to add a Commercial Real Estate component to your portfolio of Assets is essential for increasing your portfolio's diversity and net worth in addition to increasing your ability to attain financial Independence if you have not already. In this article, we dive into the purpose, structures, and benefits of the Commercial Real Estate Transaction as it relates to the Dental Practice Transition.

Buying Assets with minimal cash injection "Invest a loan"

Dentists are quite fortunate in the fact that a majority of Dental practice lenders typically will lend to a Dentist 100% of the Dental Practice Purchase price to acquire the practice. What many do not know is those same lenders very much so prefer the purchaser of the practice to also purchase the Real Estate associated with the practice. The reason is, that this gives the buyer and lending institutions more security in the way of long-term control over the location of the practice. In addition, for the highest qualified buyers.... those same lenders will offer a mortgage on the Commercial Real Estate without any money down!

Lending institutions will first consider the cash flow of the practice being purchased, then the cash flow of the buyer/purchaser (called the global cash flow perspective). In some cases where the practice has an excess of cash flow and the buyer has strong credit with solid liquidity (approx. 5-10% of total Practice and Real Estate Value), The lender can use the excess cash flow to support the total down payment requirement on the Commercial Real Estate Loan. This means the buyer can potentially receive 100% of the Loan from the Lender on both the practice and the Real Estate. It is widely understood that acquiring assets with other people’s money called "invest a loan" is considered smart when the ROI is high and the Risk is Low.

Risk and Reward of Commercial Real Estate

Commercial real estate investment returns come from two sources: income and price appreciation. Income usually accounts for a small, but stable part of the overall return. However, price appreciation is where the largest component of commercial real estate return can come from.

Commercial real estate returns can vary widely based on the property type, location, and market conditions. Overall and over time, the average return on investment for commercial real estate assets has been ~9.5%, This is generally in line with returns offered in equity markets. However, commercial property returns tend to be inversely correlated with equities, which means that they add an important layer of diversification to a portfolio of risk assets.

Simple Reasons To Consider Real Estate Investing

Tax Advantages - Capitol Gains/1031 Exchange

Capital gains are taxable income derived from the sale of a capital asset. While a large majority of a Dental Practice Sale is considered Capital gains...100% of Commercial Real Estate Sales profit is considered Capital Gains.

In addition, According to the IRS, as a commercial real estate investor, you're in a unique position. What further differentiates the tax burden of a practice sale from a Commercial Real Estate sale is the gains do NOT have to be realized and taxed at the time of the sale. When you sell your Commercial Real Estate asset, you can exercise a 1031 exchange into another property without paying taxes at all!

To put it simply, this section allows you to avoid paying capital gains taxes when you sell a property and then reinvest the proceeds into a property of equal or greater value – if you locate and purchase the new property within a specific time frame.

Tax Advantages - Depreciation

One of the many reasons commercial real estate is so profitable is the ability to take advantage of depreciation.

Commercial buildings begin depreciating the minute you acquire them. The asset may not be “physically” depreciating in terms of its usability or aesthetics, but make no mistake: every day, the building does get older and, therefore, “less valuable.”

As buildings wear out over time, the IRS allows owners of investment properties to deduct a certain amount from their income every year before tax is applied as “depreciation expense.”

Since this is an imaginary or paper expense, in that you’re not actually paying for it out of pocket, the more that you claim in depreciation, the more you can walk away with after taxes.

Essentially, you get a write-off just for owning the property!

The Basic Structure

Dental Real Estate Investing requires proper legal and operational structure in order to be successful. Ideally, you would establish your Real Estate purchase as its own LLC entity. Then your business (structured as a separate entity) will pay the established market value rent which should at a minimum equal to 1% of the purchase price and or the total monthly cost of your PITI (Principal, Interest, Taxes, and Insurance). Therefore, your business takes a write-off expense of "Rent" to your other business entity that receives rental income which in turn pays off the loan to that asset!