Buy-in Loan

[cozmopak]

I've been saving for a downpayment on a house this past year, but now I'm considering applying this money toward my practice buy-in.

I'm one-year out of training and currently have 90K saved in cash, and will likely have a total of 200k saved by the end of next year, which is close to the total amount of the buy-in.  My current salary is 325k, but will jump up into the 600 to 700k range after buying into the practice and attaining partnership.

My wife (who is also a physician) and I are itching to move up in the world and buy a nice house.  Our current rent is 1500/month and we are reasonably comfortable in the rental, but we're approaching our mid-30s and have never owned a home.

I figure that even if we use up all of our savings on the buy-in, we'll be able to save quite a bit for a house downpayment in a very short period of time, especially as her salary increases to the 300+ range.

Our total student debt is about 140k, which I refinanced with a family loan at an interest rate of 3%.

Thoughts?

[Hatton]

What exactly are you buying?  Accounts receivable? Equipment? Real estate? Is 200k it?  Have you looked at the books?  Make sure you are totally happy with the group and the contract before you buy-in.  If all is ok then buy a nice house.

[childay]

So your alternative would be to take out a loan for the buy-in?  What would the rates be like for that?  Presumably higher than mortgage rates?

In long run you should be able to easily save up enough for both with your two incomes.  Just don't go too crazy on the house..

[jfoxcpacfp]

So many unknowns. Timeline for buy-in? For house purchase? I second hatton1's advice to know what you are getting into and be absolutely sure this is what you want before you buy in. $200k is a big chunk of change - easier to put it in than to get it out and you're only 1 year out of training.

If you do decide to buy in, a lot of practices finance at a zero or low interest rate loan. Ask your potential partners if they will consider this and use your savings for a downpayment. It seems to me that, if your income will jump so much after you are an owner, they should surely be willing to work with you, maybe offset your distribution checks with the debt service payments.

[cozmopak]

There is quite a bit of expensive equipment (radiology).

The buy-in happens next year and as far as I know, there is no ability to offset distributions.  The buy-in usually happens with a loan.  I agree that 200k is a large chunk of change.

 

[RDB]

cozmopak wrote:

There is quite a bit of expensive equipment (radiology).

The buy-in happens next year and as far as I know, there is no ability to offset distributions.  The buy-in usually happens with a loan.  I agree that 200k is a large chunk of change.

 

Click to expand...

Interesting, 200k does not seem like a large chunk of change if it allows you to increase your income 275-375k year one.

[q-school]

Look at the buy out. When it comes time to buy out partners you don't want to be holding the bag.

I'm not sure about 200k. Sounds like it is the depreciated value of assets plus accounts receivable, cash. Agreed that it sounds like a small amount. But radiology has been decimated by reimbursement changes from cms over the years.

Usually they are agreeable to withholding your pay for a year until the $ are collected. Surprising there is no option for either this or low rate loan.

[Hatton]

The amount of the buy in does not seem high.  I would understand what he is buying and what other radiology buyins go for.

[VagabondMD]

I am a radiologist, and here are some things I would want to know:

1. Are you buying into an imaging center(s), the professional practice or both?

2. What is the EBIDTA (last few years) of the imaging center(s), and how many partners are there?

3. Who are the other partners? Are they all rads in your group? Retired rads? Referring docs? Hospital? Business entity?

4. What have been the cash distributions to the partners for the last three years?

5. What is the five year plan for upgrades and or developing new centers?

6. What is the buy-in formula? Buy out formula?

 

[The White Coat Investor]

Obviously do your due diligence as others have noted.

As far as the personal finance issues are concerned, in the early career there are all kinds of great uses for money- paying off student loans, home downpayments, beefing up emergency funds, maxing out retirement accounts, college funds, practice buy-ins etc- and not nearly as much money. The cool part is that if you do it right, that problem goes away about mid career. The home is bought, maybe the mortgage is paid off, the student loans are gone, the college account is funded, the retirement accounts are funded, the buy-in is paid etc. The real key is making sure a big percentage of your income is going toward those good uses of money. The order in which you buy things (home versus practice versus college versus retirement) doesn't matter quite so much. So do the best you can, muddle through, and save a bunch of money.

[cozmopak]

That is excellent advice.  Thank you.

[DMFA]

I don't know anything about practice buy-ins, but I do know about simple amortizing loans (i.e. mortgages), and that the amount you'd have to earn in compound gains with an equal amount invested versus additional payments or less principal on top of minimum loan payments is roughly half.

Say you want to buy a $500,000 house (guessing if you can rent for $1,500/mo that's a p nice house in your area).  Say you can get a 15-year fixed at 3.25%.  Say you're in the top tax bracket (39.6%) and your mortgage interest is fully tax-deductible, which it is in most cases, thus rendering your effective interest rate 1.963%.

• Loan of $500,000 (zero down, like with a non-conforming "physician" loan: total $77,625.73 paid in interest over 15 years


• Loan of $400,000 (20% or $100k down): total $62,100.59 in interest (each $100,000 less saves you $15,525.15; this is linear)


• Loan of $300,000 (idk why you would put 40% down, but just to demonstrate your $200k figure): total $46,575.44 paid in interest

Annualizing those figures, that's (1+[15,525.15/100,000])^(1/15) = 0.97% compound, or 15,525.15/(100,000 * 15) = 1.04% simple.

So *if* you were, in essence, to leverage that $200,000 buy-in payment versus the principal the house you would buy, you'd basically just have to beat 1% on it as far as return goes.  If you will actually realize that return by literally 150% (prob more like 90% post-tax) in the first year, then it's an absolute 100% no-brainer.  I actually have a hard time believe that the buy-in to achieve that high a return could be that low, but remember, I don't know anything about buy-ins.

I am not encouraging you to have debt, nor am I encouraging you to spend $200,000 cash on something which you have not thoroughly analyzed.  But, assuming that money that would be used for mortgage is being invested or otherwise providing a return, it's hard to create a pure mathematical argument for paying off simple amortizing debt whose compound equivalent return on money paid over the minimum is less than a 1-year CD, especially versus a staggeringly absurd 83% after tax return, assuming your income goes up (600k-325k)*(1-39.6%) = $166,100 on the first year *alone*.

This of course assumes the returns on the $200,000 buy in will *actually* raise your pre-tax income by $275,000+ a year and pay for itself after 15 months, that the increased income you receive will happen quickly and won't leave you exposed for a significant period of time without cash on hand, and that you're appropriately insured against lost income.  But before splashing that amount, you'd better make absolutely darn sure you know what you're getting into.