17 Jun Debt is not always bad
In a perfect world we would all be completely debt free. There are a fortunate few who posses enough wealth money to go through life totally free of debt. And, then there are the rest of us who face debt as a fact of everyday life.
If debt is a fact of everyday life for you, then it’s important you keep certain things in mind when you are considering creating personal debt. There are basically two kinds of debt: Bad Debt and Good Debt.
What kind of debt could be good when we’ve always been told that debt is bad? Good Debt is incurred to acquire an appreciating asset and provides a new source of income; Bad Debt is debt incurred to acquire a depreciating asset and creates the responsibility of an added expense.
For example, educational debt would be viewed as an investment in your future. Typically, educational debt will provide you with an opportunity to increase your future income. This makes debt incurred for higher education a Good Debt.
Debt for a luxury automobile would be considered bad debt since it is an unnecessary expense that provides no income and depreciates in value. This makes this type of debt a Bad Debt.
Now, let’s take a look at good and bad debt as it relates to the average doctor who is ready to enter into private practice. Many new practitioners get caught up with opening brand new, shiny offices with all the latest, expensive gadgetry. Those who profit from the sale of such gadgetry promote this idea heavily.
Tens of thousands of dollars (in some cases hundreds of thousands) can be invested by a new practitioner for new equipment, new furniture and expensive leasehold improvements before the first patient ever walks through the door.
Interestingly enough, we have never heard of one single patient who was ever drawn to a dental practice because of the equipment. We have never had a doctor tell us that a patient was passing by and looked in his window, saw his brand new equipment, and decided to come in for a visit. The fact is patients don’t know if dental equipment is new or 20 years old as long as the old equipment is kept in good condition.
Now, if you think cars depreciate quickly, wait until you see the resale value of used dental equipment. The resale value of a car may depreciate up to thirty percent the first year, but dental equipment will depreciate up to ninety percent of its original cost the first year! So, since new, expensive replacement equipment does not produce any new patients and creates a non-income producing expense and is a rapidly depreciating investment, debt associated with this new equipment would be what kind of debt? Right, “Bad Debt.”
NOTE: New or used equipment that is required for a new procedure that will increase practice income would be considered “Good Debt.”
So, what can a doctor invest in that is an income-producing asset that appreciates in value?
An existing dental practice. Yes, you will incur debt to purchase the practice, but the current income stream of the practice far exceeds the expenses and the debt service (the money required to pay off the debt), thereby providing net income to the purchaser. This is known as income producing debt… Good Debt.
Good income producing practices do not depreciate in value; they appreciate in value. The debt does not fund an expense; it creates an investment. You will almost assuredly be able to sell this practice one day for far more than you paid for it and the investment will create an annual income for you throughout your entire career.
Buying a dental practice is similar to buying a Certificate of Deposit (C.D.) at the bank. Both are income-producing investments (the C.D. pays interest, the practice provides income). Both appreciate in value (the interest accumulates in the C.D., the practice increases in value over time). In addition, they both are considered a sure and safe investment.
But, the dental practice has a definite advantage over a C.D. The IRS allows you to take tax deductions for the cost of purchasing a dental practice even though the practice appreciates in value! This means that the dollars used to acquire a practice are pre-tax dollars (which is considered the most desirable by all astute investors). Of course, you cannot depreciate the C.D., so this represents an after-tax investment, which is far more costly, and the income from the C.D. pales when compared to the income produced through the dental practice investment.
If you are not blessed with wealth and have to incur debt to get ahead in life, then make your debt decisions wisely. Income producing debt is Good Debt… non-income producing debt is Bad Debt. It’s a simple rule based on logic. Think about it! Call PARAGON today for a complimentary consultation. You will be very glad you did… no obligation, just a very worthwhile education.