Take out loan to invest in ASC?

[abds]

I have the opportunity to invest in an ASC... I have done my due diligence and it is a sound investment. Dividends have been 18-22% per year in addition to share value increasing by an average of 2% per year. My accountant says the books are good and I have no reason to suspect anything will change in the near future regarding dividends.

The shares available to purchase are basically equal to my annual income. I do not have anywhere near that amount of liquid assets but I have found a bank willing to give me a loan at 4% interest for 5 years. I can cover the monthly payments even if I don't take into account my quarterly dividends.

It seems like a no brainer to me (that I should take out the loan to invest as much as possible)... what am I missing? What kind of risks am I overlooking taking out a loan to make an investment (I understand and am accepting the risk of decreased dividends and/or share value)? Would you do it?

 

[lost]

One alternative is to ask your partners in ASC if they're willing to offer you a loan on a lower but reasonable interest rate?

[kuma1212]

How long has the ASC been in existence.  With more high deductible plans, we are seeing more patients simply not paying and then accumulating bad debt, thus decreasing the profitability in the center.  18-22% seems low to average return for an ASC.  I assume this is before tax?  Also consider how the ASC is managed, what surgical specialities are present (some cases and specialties are more profitable than others).

Whether or not to do it also depends on your other assets, asset allocation, risk tolerance.  Are you maxing out all tax deferred options?  I have about 12% of my assets in ASC which I use for diversification and increased cash flow.  I only did this after maxing out my other options (401k, HSA, backdoor Roth).  My returns have been in the 15-35% range and looking back I have zero regrets about it as an investment.  If I had to take out debt to invest, I would probably still do it since I've nearly gained back all my initial investment in a few years.

Hope that helps a little

[kuma1212]

lost wrote:

One alternative is to ask your partners in ASC if they’re willing to offer you a loan on a lower but reasonable interest rate?

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That's an interesting thought!  I think if I was an existing partner, I'd want to see your case volume and profitability, as well as try to determine your likelihood to increase your volume.

[startupdoc]

Pretty large investment into a surgery center (year salary). Not sure I would jump into it that quickly unless I have a pretty strong footing in all other financial aspects. I would not invest more than 20% max of my net worth into it.

[Molar Mechanic]

Assuming you are far enough from retirement to absorb a deal gone bad, then I'd be all over that!  Talk to your accountant about how to set it up.  You will likely even be able to deduct the interest paid on the loan as a business expense, but listen to the professional, not me.

[abds]

lost wrote:

One alternative is to ask your partners in ASC if they’re willing to offer you a loan on a lower but reasonable interest rate?

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I could be mistaken but I think a loan from the ASC shareholders or the ASC itself--for the purpose of investing in said ASC--would violate stark law.

[Eye3md]

Yeah, the loan amount being equal to your salary is mind blowing. I'd love to see what kind of income this is spitting out for the partners. I'm an owner in a small ophthalmology only ASC.  My buy in costs were very low.  I would have to look it up but I believe I had to write a check for about $27,000 and I make around $60-$70,000 on my share every year. Another friend, also owns a share  in an eye only ASC and she paid $150,000 and makes $100-$150,000/year from her ASC share (much busier ASC).

[ENT Doc]

How is the ASC being valued on a per share basis? Where are these shares coming from? What's the buy-out process? Is this an after-tax income assessment of 20% returns? I've seen per share investments of a year or more in salary, but it's not the amount that matters. It's the price you pay and cash flow streams that matter. That being said, if there is more risk to those cash flows you need to account for that in your discount rate.

[q-school]

do they force people out of the asc as they retire?  short term plans for expansion?

i don't think loans violate stark laws.  at least i hope not as the asc's we've been involved with have always offered internal loans at the most competitive rate.  they all wanted payback within one year however to get that rate.  slightly higher rates for longer payouts.  why not?  they know you are good for it and they control your paycheck.

[Hatton]

You very definitely need to know what happens if you move, retire, or become disabled.  Why are you being offered this investment?  Do you do a lot of cases there already?  Look at the ages of partners.  If it is near retirement all those shares must be bought by the center or other new docs.  I was forced to sell my shares in an ASC when I moved.

[q-school]

hatton1 wrote:

You very definitely need to know what happens if you move, retire, or become disabled.  Why are you being offered this investment?  Do you do a lot of cases there already?  Look at the ages of partners.  If it is near retirement all those shares must be bought by the center or other new docs.  I was forced to sell my shares in an ASC when I moved.

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+1

the buyouts can be substantial.  i specifically didn't buy into one because the number of looming buyouts was going to be crippling imo.  i tried to negotiate a loan to buy down the share value so that everyone could share in the joy of buyouts but they refused (which was obviously their right to do).  some of the early investors had 4 shares each, while i was offered a half share at a very large sum.  no way would the math hold up if every year for ten years, several million in shares had to be repurchased.  ymmv.

 

[ENT Doc]

Request and/or do a pro forma on these buy ins and buy outs after knowing the ages of everyone involved.

[Hatton]

I have invested in a local small hospital now owned by CHS twice.  Made some money each time but not a tremendous amount.  The early investors in the local surgery center here made millions.  The early people continued to get checks after they retired.  Those sweetheart deals evaporated.  The last hospital investment I paid cash for the shares.  I think the people who borrowed did not do as well.

[kuma1212]

Eye3md wrote:

Yeah, the loan amount being equal to your salary is mind blowing. I’d love to see what kind of income this is spitting out for the partners. I’m an owner in a small ophthalmology only ASC.  My buy in costs were very low.  I would have to look it up but I believe I had to write a check for about $27,000 and I make around $60-$70,000 on my share every year. Another friend, also owns a share  in an eye only ASC and she paid $150,000 and makes $100-$150,000/year from her ASC share (much busier ASC).

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These annual returns of 100-200% are amazing!