Real estate is the number one long-term, wealth-building vehicle available to an established healthcare syndicate. Yet, more often than not, many organizations resort to paying into long-term variable rent models in new developments or improve existing buildings that offer small allowances for reconstruction.
As an example, one function of our comprehensive real estate service package includes that of development, in which we continue to field inquiries from well capitalized healthcare organizations that would rather turn over their keys to us and lease, than partner in the development of healthcare real estate. Yet, and as any lender will tell you, any associated risk in buying a medical building or performing a development is negated by the relative stability and/or strength of the organization. And in this environment, where capital is inexpensive and abundant, those organizations that utilize developers’ capital exclusively for building a medical project are simply not willing to accept the long term risk of their own business decisions. In other words, they should not be expanding.
As real estate advisors to health professionals, we believe in a partnership-oriented approach to further strategic financial objectives through real estate holdings. And, indeed, your organization should view itself as a source for wealth creation outside of the traditional models of revenue production. In certain respects, this requires a paradigm shift in the way a healthcare organization views growth in revenue. It is clear that the majority of independent physicians just want to work, treat patients and arrive home at a decent hour. However, in a loose monetary economic environment, even these physicians are realizing the potential for inflation diluting their work earnings.
Over several years, we have heard a variety of misconceptions from medical professionals about why they do not participate in real estate ventures. Accordingly, let us help to disprove some of these arguments.
Real estate is too expensive. This has to be the largest misconception. As an example, how many times have you said, “If I bought that building or property 10 years ago, I would have 3X, 4X, 5X, 10X my original cash investment?” The truth is that money is relative and determining an entry in real estate usually occurs upon purchase or development a piece of property. Trust real estate counsel that can provide thorough comparable sales information, by area and product type. All information should be used to benchmark an investment when locating a property to develop or purchase.
Real estate requires too much money . After several years, one of our clients came back to us regarding his 15,000-square-foot medical office building that we assisted in site selection and development. Their total cash investment on this project was approximately $325,000, split evenly, and the remaining was financed through bank debt of $2 million + $75,000 interest for a total cost of $2.4 million, mi. After 5 1/2 years, the building appraised at $3.4 million and our client was able to refinance this building and receive triple their original investment. And, to conclude, we are now responsible for the off-market disposition of the facility at a price that exceeds the refinanced amount with multiple bidders.
By no means, do organizations need excess capital to own real estate, especially within the medical arena. A good credit score, a successful care syndicate and a solid reputation in the community are the right ingredients for any institution to finance your investing activities in real estate.
Real estate is too risky. This may be more of a generational problem than anything and the risk averse tend not to be invested in real estate at all, rather recounting one person’s story.
For an example, if real estate is so risky, why are banks willing to give you 80 to 90 percent of a building’s value to buy or build your own medical office building or invest in healthcare real estate? Would they provide you with 80 percent of the value of a stock in the stock market? Likely not.
Banks inherently comprehend the value of real estate and are currently willing to lend to healthcare professionals. They know that as an industry care organizations work very hard to keep up with demand, rarely goes out of business and do not tend to transfer locations once established in a referral base and/or community.
Debt is too risky. There is good debt and there is bad debt. Good debt is used to accrue assets that generate income, appreciate in value and provide passive income. Bad debt is tied up in assets that do not generate income and depreciate in value over time.
Personal bad debt is another thing. It needs to be said that members of high stress, high reward work environments are notorious for spending their earned income on frivolous, short term items that depreciate upon purchase or soon thereafter. With inexpensive debt funding collateral (real estate), which will remain in place for decades, it is possible to create true wealth through real estate investment in a reasonable time period.
To conclude, contact MREA for all your healthcare real estate questions or concerns. Pair our knowledge of the real estate industry with your care organization’s spatial needs to start or further your personal wealth.
