One of the most common questions we receive from our clients is whether they should own the building where their practice is located. The decision-making process is far more complex than a simple answer. In this post, we will delve into the various factors that should be considered when deciding whether to lease or purchase real estate for your dental or medical office. While ownership is often the preferred option, there are certain situations where leasing may be more advantageous. We will explore these scenarios in detail.
Where is Your Practice in Its Life Cycle?
First, it is important to assess where your practice stands in its life cycle before deciding between leasing or buying commercial real estate. The choice between the two options can vary greatly depending on your current business priorities and future goals. For those who are just starting out in the dental industry with limited capital, leasing may be the more practical option. On the other hand, those who are looking to strategically grow their practice in the mid-career phase may benefit more from buying commercial real estate. Meanwhile, those with mature practices who are nearing retirement may have different priorities altogether.
At our firm, we always encourage our clients to consider their immediate, mid-term, and long-term objectives in both their practice and personal lives. These objectives will ultimately shape their approach to the lease vs. buy question. When making this decision, there are several factors that we advise our clients to take into account. These include the current state of the real estate market, the financial implications of each option, the potential for future growth and expansion, and the overall flexibility and control that comes with owning versus leasing. By carefully considering these factors, our clients can make an informed decision that aligns with their unique business goals and priorities.
Capital Investment: A Smart Move for Those with the Funds to Spare
Investing in real estate is a wise decision for those who have the capital to spare. Owning property offers numerous advantages over leasing, including the potential for long-term capital appreciation. Investing in commercial real estate allows for equity growth, and with the cost of capital remaining near historic lows, borrowing funds to purchase property is a viable option for those with limited cash. However, it's important to note that purchasing a building ties up cash in an illiquid asset. If you already have a successful practice generating healthy cash flow, investing in real estate may not be a concern. But for those starting out or looking for short-term liquidity, such as building out space, investing in commercial real estate may not be the best option.
One of the biggest advantages of owning property is the predictability it offers. When you act as your own landlord, you have control over the building and never have to worry about unexpected rent increases, changes in management, or forced relocation. Long-term financing allows for accurate budgeting and financial planning, while also providing tax benefits through depreciation. This predictability is essential for the long-term growth of any business, including dentistry and medicine. However, being a landlord also comes with its downsides. When essential building features like HVAC or roofing fail, the burden of fixing them falls on the owner. This can be particularly challenging if the practice is not the only tenant in the building. Being a landlord to third-party tenants requires making business calculations and being prepared for unexpected expenses.
Ownership Promotes Long-Term Planning
Investing in real estate can be a smart move for those with the funds to spare. It offers numerous advantages, including long-term capital appreciation and predictability. However, it's important to weigh the pros and cons before making a decision, as owning property also comes with its own set of challenges.
Ownership of commercial real estate provides a multitude of benefits for practice owners. Not only does it offer a degree of control over the future of the practice, but it also allows for long-term planning and flexibility in determining growth and change. Choosing the right location and building with the appropriate size and configuration is crucial, but once that decision is made, ownership provides the opportunity to shape the future of the practice. Moreover, owning a commercial building gives practice owners a stake in the development of the surrounding community and commerce. As the owner, they have the power to choose tenants and make decisions about signage and exterior aesthetics that can influence public perception of the practice and the neighborhood. Additionally, they can have a voice in local zoning and planning decisions, which can significantly impact the growth and changes in the community.
Seek Legal Help in Making a Rent vs. Buy Decision
Whether buying or leasing, every situation is unique and requires careful consideration. At HFS, we provide legal counsel to dentists and medical professionals on the decision between leasing and purchasing real estate for their practices. We encourage our clients to use the above factors as a starting point for their analysis and seek legal help to make an informed decision. Ultimately, ownership promotes long-term planning and control over the future of the practice, making it a wise investment for dental practice owners.