You are the owner of your own medical practice, and you are ready to move your office.
Whether you are needing more space, adding a second location, or upgrading your facility—or you're simply ready for a change—finding a suitable building for your business is a big decision. Depending on your financial situation—which will be different for everyone and should certainly be considered when making your decision—you will be faced with whether you want to buy or lease your next location.
Here is a breakdown of things to consider when determining what makes sense for your medical practice, including some benefits and drawbacks for buying or leasing.
Purchase Commercial Real Estate
Of course, there will always be drawbacks to owning the real estate for your practice, but in general, we recommend committing to a hard asset and purchasing your facility when possible.
Purchase the property in a separate LLC as an individual and then lease it back to your business. You then have a retirement plan, and you will receive tax benefits for both your real estate LLC and your business.
Here are some additional benefits to investing in real estate so you can own the building of your medical practice.
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Benefits of Purchasing Your Medical Practice's Real Estate
Here are some additional benefits to owning your real estate.
When you buy your property, you own a hard asset with real value. As your business pays you rent on the building, you continue to pay down your loan and build equity in the building. Most commercial loans are based on a 20-year amortization, so if you operate for 20 years with the business paying down the loan (plus some extra each month for your own cash flow), you then own the property free and clear. If you’re ready to retire, you can refinance the building for a cash injection or sell the building and sail into the sunset.
On this same note, commercial real estate appreciates at an average of 3% per year. So, as you pay down the loan and build equity, the value of your asset increases simultaneously. If you bought a building for $2 million, it should be worth around $3.6 million 20 years later.
You should be set up to own the property individually or with a partner if necessary. Then, have your business sign a lease and pay rent each month. Further, you could purchase a 20,000-square-foot building and occupy 51% of the building to receive priority owner-occupant financing, and then you could rent out the remaining 49% of the building to another business. Then, if and when you’re ready to sell the practice, simply have the business sign a 20-year lease at your property as a condition of the sale, and you'll have guaranteed rental income for the next 20 years.
This is a big one, but we will keep it short. On the real estate side, you can deduct interest and depreciation on your building, and on the business side, the rent you pay (to yourself) is an expense.
This one is super important. As a tenant, you are tied to your landlord, who could always find a tenant they like better and kick you out of their building. Similarly, the landlord may skimp on making capital improvements and let the building degrade over time, which can affect your business. Owning your building gives you full control.
Disadvantages to Purchasing Commercial Real Estate
Buying the building that will house your medical practice (or any commercial real estate property, for that matter) isn't always a perfect solution, though. Here are some drawbacks.
The main downside to purchasing your facility is that most banks will require a 20%-25% down payment. This can eat into savings or cash that you would otherwise use to grow your business.
Being a Landlord
As the owner of the building, you now pay real estate taxes and insurance, take care of common area maintenance, collect rent from other tenants, find new tenants when others leave, and fix issues within the building. You’ll need to develop systems and processes to handle this.
Risk of Downturn
We talked about appreciation, but there is always the chance that your property loses value. In this case, you could be left with an asset that is worth less than when you bought it.
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Benefits of Leasing the Real Estate for Your Medical Practice
If you've decided not to buy the building that houses your medical practice, here are some positives that come from simply renting the space.
Without the upfront capital needed to purchase your real estate, those funds remain at your disposal to grow your business or to save for a rainy day.
Your Business Is Nimble
Commercial leases are generally as short as three years, so you can sign a short-term lease and then move to a new space if it isn’t working out or if you need more or less space.
Landlord Improvements or Tenant Improvement Allowance (TIA)
A good commercial agent will help you negotiate improvements, an allowance, and some free rent into your lease. These perks can really help you out if you’re somewhat short on cash.
With a lease, you generally know what your monthly rent is and know it will remain somewhat unchanged throughout the term of your lease. This makes financial planning and forecasting easier and limits any surprises, such as fixing a roof, replacing an HVAC system, etc.
Drawbacks to Leasing
Being a renter, though, isn't a perfect solution.
No Equity or Appreciation
A lease is a liability, not an asset. Therefore, your lease payments go to the landlord, and you will never see that money again. Also, there will be no growth or paydown of any loan to help build wealth.
No Passive Income
On the same note, you won’t build another passive income stream. Sure, your business may operate on its own, but if the business suffers, you won’t have your real estate to fall back on.
Rent Is Expensive
No one likes paying rent. It goes right down the drain, and it’s hard to watch it leave your bank account each month knowing it could be going toward paying down a loan.
Again, this is a big one. You are subject to the decisions and terms of your landlord. Sure, maybe you have a great landlord when you sign the lease, but what happens when they sell the building to someone else?
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When Should You Buy Commercial Real Estate for Your Medical Practice?
If you’re in a financial position to purchase and own your real estate, we strongly recommend it. With that said, if you love running your practice and you want to solely focus on that and are comfortable with the income you are already generating, do what makes you happy.
Another option in this scenario would be to partner with a real estate professional to purchase the building. That way you could run your practice and let your partner manage the real estate. Just make sure you choose a good partner.
Here are some reasons to own your commercial real estate:
- Build assets and create a real estate portfolio for retirement
- Increase equity and generate a second stream of income
- Take control of your business and its facilities
On the other hand, leasing might be the right answer if you want:
- The option to move or reconfigure your lease
- Keep the cash reserves you have to grow your business
- Freedom from handling all the responsibilities of a landlord
- A space in a large office building or one that is too expensive to purchase
The decision to lease vs. owning your real estate is a big one and should not be taken lightly. Make sure to consult a qualified commercial real estate agent so they can walk you through pricing and expenses and provide you with a full list of what is available in the market.
Don't forget to sign up for the free White Coat Investor Real Estate Newsletter that will alert you to opportunities to invest in private real estate syndications and funds, including most of those that Dr. Jim Dahle invests in.
Did you buy the building that houses your medical practice? Was it a good decision? Was there anything you'd do differently? If you lease out space, would you rather own the entire building? Comment below!
[Editor's Note: Michael Morris has worked in commercial real estate since 2014, completing over $100 million in transaction volume in that span. He also founded Pursuit of Passive Income to help aspiring entrepreneurs unlock financial freedom and create a life they love. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]