Doctors often wonder whether it is better to own or rent their medical office space at one time or another. Owning a medical office building can range from an office condo to a multi-tenant medical office building. The decision to own or lease is strictly a business decision and depends on a number of factors that must be considered. Before making a decision for your medical practice consider the elements below.
- Upfront Cash Outlay – When leasing medical office space you typically don’t need to put as much money upfront as you do when buying. For example when renting all you typically need is to write a check for the first months rent, the security deposit, and possibly any tenant improvement dollars above the allowance given by the landlord. When you buy a medical office space you have to pay for building inspections, appraisals, loan fees, all improvement cots, and a down payment ranging from 10% to 25%.
- Room for Growth – When you lease medical office space and you need to grow later on you typically have options to move within the building or take adjacent space as it comes available. If you buy a building that is exactly the right size and your practice grows in a few years what do you do? It’s not ideal however you could lease out your space and relocate to a larger one, or you could open up another office. Growing out of a medical space that you own is more inconvenient than growing out of a medical space that you rent. It’s important that you think about not only your current needs but also your future medical office space needs.
- Fixed Vs Variable Costs – If you purchase a medical building you have more control of costs and have a pretty good idea of what your costs will be each year, especially if your loan is fixed rate. However depending on your loan term you need to be prepared for refinance charges. With a lease when it’s time to renew your subject to paying “market” lease rates which means they could significantly go up depending on the market you are in. You don’t have control over market conditions and tax increases. Also, most leases have annual increases of $0.50 to $1.00 or tied to whatever the Consumer Price Index (CPI) is at that time (typically 3% to 4%)
- Appreciation – Owning medical office space makes you a commercial real estate investor. If you are in an appreciating location you could sell your building at a profit later on. If you only occupy a portion of the building you own and lease out the remaining space you become a landlord. This can be a profitable endeavor or you end up losing money, however either way owning a building is a lot more work than you think.
- Taxes – When buying medical office space you have to consider all the taxes. Consult with your CPA about what you can and can’t deduct from taxes. When leasing you can deduct the total amount you pay in rent. When you own rental property you are able to write off repairs and maintenance immediately, however improvements and depreciation to your medical office are deducted over 39 years. For example let’s say you purchase a commercial medical property for $300,000 and the land is valued at $100,000. You can only write off about $5,100 of the purchase price annually regardless of how much money you put down. You are also able to deduct loan interest and property taxes. Additionally many practices purchase their medical space under an entity (e.g. LLC, S-Corp, etc) then that entity leases the space back to your practice. Doing this gives you more flexibility in writing off expenses, etc. Discuss this with your CPA and attorney.
- Location – It many cases the best locations have already been purchased which means if you want to be in a particular location your only option is to lease. On the flip side it could be that there is nothing to rent in the most desired location so your only option would be to buy an existing building or build a new one.
- Return on Investment – Before purchasing you need to determine the profitability of your practice. If you are getting a return of 20% you need to compare that to the potential ROI you might get from owning commercial real estate. Although some doctors have made wise choices and purchased a location with great returns and amassed a retirement fund, others haven’t been so lucky. If you overpay or over-leverage for the property, don’t maintain it, or market conditions dictate that it’s not as a desirable location as it once was you could be in for a disappointment. You make your money at the time of purchase so do your homework and run the numbers.
- Run the Numbers – I can’t stress this enough. Ask your CPA or accountant to create financial projections and tax benefits of leasing vs buying. Make sure to include all out of pocket costs for both (e.g. improvement costs, down payments, debt service, taxes, security deposits, etc.)
- Consult With Your Lender – Get them involved early on in the process as you want to get an idea of rates and terms for financing.
Overall renting makes sense if you don’t have the money for the large upfront investment needed to buy, you’re not sure how much space you will need now or in the future, or you don’t want to deal with the responsibility that comes with owning medical office space. If you are more established, want to be in one location for a long time, don’t have plans to grow later on, and you have the financials to take on a commercial real estate investment then buying might make more sense. Keep in mind that this is a business decision and it’s important to run the numbers to determine the best course.
Owning medical office space is not for everyone. Don’t listen to everyone that tells you that it’s better to own than rent as everyone’s situation is different. Do you own homework, gather info, and ask a lot of questions that will help you make a decision.
If you are still on the fence then consider asking other doctors who own or have previously owned their medical office space. You will benefit greatly from their experiences. If you have any questions about leasing or buying medical office space for sale in Austin feel free to give us a call.