Why Investing in Medical Equipment Leasing is Great Income-Replacement
As you think about and plan for your retirement, you know a major key to success is a diversified financial portfolio. Because even with the most fiscally responsible planning and investing, the market of traditional stocks and bonds can’t be controlled or predicted. Additionally, to financially sustain your retirement, your investments will need to generate enough passive income to cover the rising costs of living. This requires investing in something outside of the stock market to ensure a stable monthly income.
The idea of investing in alternative assets is nothing new here and we’ve explored expanding your investments into equipment owning and leasing previously. But today we will explore investing in equipment leasing and why medical equipment leasing is a viable option for income-replacement investments in today’s economy.
How Has The Medical Equipment Leasing Industry Changed Recently?
The demand for new technologies to streamline medical care is at an all-time high. Not only are we facing an increased elderly population with a myriad of medical needs but there is also a terrible shortage of qualified medical staff to meet the increased needs of patients.
Instrumentation is in greater demand, prices are going up, supplies are going down, appointment scheduling time is going up and residual values of medical devices are at a recent, if not historical, all-time high. This makes investment companies like Geneva Capital Fund well positioned for growth, value, and opportunity.
The major player in the medical equipment leasing industry, GE Capital, is now only servicing leases and not currently initiating new ones. This opens the market for smaller lenders and increases their exposure to what has traditionally been a captured market that GE maintained for decades.
Xerxes K. Bhote, Principal at Geneva Capital Fund (genevacapitalfund.com), explains to us how his company generates income for their Limited Partners with equipment leasing.
How Is Income Derived From Equipment Leasing?
Once a unit goes out to a customer, a monthly revenue stream is filtered back to Geneva and those proceeds are reinvested into new products. This compounding effect allows for greater returns and typically grows more dynamically if left to compound versus “throwing off” monthly or annual income.
Geneva also derives income from the end-of-term asset sale. This could be a capital lease, whereby Geneva’s customer purchases the equipment at a predetermined price, it could be a Fair Market Value (FMV) lease, where the customer and Geneva negotiate a price based on comparables at term or it could be sold to third party asset purchasers where the rate of residual value fluctuates. In all of these cases, Geneva goes into each deal with a lot of data to provide an estimated market return profile.
Here is an example of a transaction:
Customer leases $1,000,000 worth of equipment on day 1.
Monthly payment = $30k or $360k after a year.Year 2 Geneva still collects the $30k per month on year 1 equipment plus the reinvested $360k, which is generating $11k per month or $129k per year.
Year 3 Geneva collects $30k + $11k + plus the reinvested $129k, which is generating $3.2k per month or $39k per year.
It’s imperative to understand that reinvestment is more attractive than a simple revenue return of lease streams. Geneva has Limited Partners (LPs), not shareholders; if a LP would like to create a dividend/income generating portfolio, it could be a possibility but it would cap any upside potential of the LP and may not be suited for a given client profile. However, funds can be redeemed after the “Ramp Up Period” (12 months) and would follow the ‘Distributions & Redemptions’ clause as stated in the investment documents.
What Other Products Are You Seeing Financed Through Leasing?
Geneva has provided funding for not only medical equipment but robotic lawn equipment, Internet of Things (IoT) technology, for both the ski and industrial cleaning industries, mass spectrometry equipment, and equipment for the oil and gas space.
We’re also working on entering into green spaces such as current power equipment, solar, and aerospace.
What Is The Potential For Residual After The Initial Lease Period Expires?
Residual values play a big role in the return profile for investors; therefore, equipment selection becomes an important factor. Let's run through some real-time examples of Geneva’s existing deals.
We have Internet of Things (IoT) equipment in the field that has residual values ranging from 20% for a 5-year term to 60% for a 3-year term.
We have contracts that have a guaranteed balloon payment of 20% residual value and we have FMV leases, specific to the medical space (think MRI machines) that historically have never fallen below 55% of their original value. These MRI deals Geneva has priced as if our residual would be only 30% and the annualized NET to investors is still above 14%. If we were to gain maximum value at term, returns could be above 17% annualized over the 5 years.
Invest in Medical Equipment With The Help of Chicago Trust Administration Services
At Chicago Trust Administration Services, we know the value of investing in income-producing assets to grow a strong and steady financial portfolio. Medical equipment investing has the potential for abundant opportunities.
We know that achieving a secure retirement using your self-directed IRA can be hard to navigate alone. If you chose to invest in medical equipment using your SD-IRA, we’d love to help ensure you adhere to all IRS regulations so you can reap the rewards of your investments.
To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
___________________________________________________________________________
*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.