January 28, 2021
Dental Practice Leasing vs Buying
To buy or lease dental space, that is the question. What is your long-term plan? Do you intend on doing a startup? Staying in your existing space? Or relocate in the future? Are you in the position to buy the dental practice, along with the real estate? Do you have an existing exit strategy or retirement plan? Deciding to own a dental practice rather than associate is a big decision. You’ve decided to take the leap and be an owner. Now the question remains: Do I buy the property, or do I lease the space? There are advantages to both, and we present both sides.
The experts at Healthcare Business Today offer this advice: “When making the decision to purchase or lease, don’t decide to purchase simply for the sake of owning real estate. Consider purchasing a space or property only if you would be prepared to lease that same location anyway – if you wouldn’t lease it, why buy it?” (1)
To help ensure you make the right decision, speak with a dental practice consultant who has seen it all. The team at Professional Transition Strategies (PTS) will not only guide you in determining the right path, but with an in-house real estate division, we can also assist with lease negotiations, renegotiations,or with the purchase of the real estate.
Advantages to buying dental office space
There are many “pros” when it comes to building your dental practice.
- When you own the real estate, you have a significant amount of flexibility in how you want to use your space. You can also manage and control it as you wish. You can control what happens inside and outside the building — not only the landscaping, but the signage, as well. By investing in effective signage, you can capture not only a passerby’s attention, but also make your office easier to find. This results in increasing your patient base.
- Another perk of buying the real estate is you can determine who your tenants are. Therefore, instead of being next door to the competition, you can lease to businesses that share a similar patient base. For instance, if you are a pediatric dentist, you can lease a space to a martial arts program for children, pediatrician or toy store.
- A primary benefit of owning the real estate is you are building equity. By acquiring such an asset, this equity tends to appreciate over time. It allows you the ability to borrow against the property if needed. You can also use other tenants’ income to help pay down debt on the property, as well as become another revenue stream. If you’re lucky enough to purchase the property in a flourishing area or during a down market, if would be worth more if or when you decide to sell the property.
- Can you say triple net leases? While there are variations to triple net leases, the general concept is that as a landlord for a commercial property, you do not have to pay any expenses on your property, as you would with residential real estate. Therefore, in many cases, the lessee will be the one to handle all property expenses, including real estate taxes.
- You can also expect tax breaks. By owning the real estate for your practice, you can deduct interest, depreciation and non-mortgage-related expenses from your property. Remember you can only deduct the interest portion of your mortgage payment and not expenses associated with your mortgage, such as closing costs or origination fees.
Disadvantages to buying dental office space
While there are many pros when it comes to buying the real estate of your office, there are also several cons, as well.
- If you own the real estate, it is significantly harder to pick up and move to a different location if needed. If the part of town you are in is declining and your tenants leave, or you need a larger or smaller space, it is easier to relocate if you lease and not the owner. It is also possible for the property to lose value due to market changes, tax increases, interest rate fluctuations and deteriorating location.
- When you buy both the real estate and dental practice, be prepared to make a larger upfront financial investment. Therefore, it is important to know if you are prequalified to make this sort of commitment. Because you will be tying up significant capital with the purchase of the space, you may not have the finances needed to put toward your practice, such as the purchase of new dental equipment, additional marketing efforts, hiring new staff or building out your practice.
- Another downfall of owning the real estate of your dental practice is the capital needed to make improvements to the property. While when you are leasing space, you can work it into your lease to have the landlord make the necessary improvements. However, as the landlord yourself, those dollars come out of your pocket.
- If you decide to buy a larger building and become a landlord to other tenants, be sure to familiarize yourself with your duties and responsibilities. While some may seem obvious, such as collecting rent, marketing available space and making repairs to the building, it is also important to remember a lot more goes in to becoming a landlord. One thing to understand is the time commitment you are making. To truly maximize your return on investment, you cannot be an absentee landlord. With commercial real estate, you are not only dealing with multiple leases, but also annual area maintenance costs that your tenants are typically responsible for. Other considerations are standard maintenance issues and public safety concerns.
Tips when buying office space
Before deciding whether to invest in the real estate for your dental office, make sure to weigh the benefits of owning the space, as well as the downside. One of the most important things when it comes to this large investment is to choose the right team. Most advisors will suggest you keep dental practice and real estate as independent entities. Make sure to consult your real estate professional and accountant to create a lease for yourself.
Advantages to leasing dental office space
Just like owning real estate, there are several pros and cons to leasing, as well.
- Leasing allows for more flexibility in being able to pick and choose an area you want to start or relocate your practice. You do give up a lot of the freedom of owning real estate, but leasing allows you to move to a property you might not be able to afford in a high-trafficked location. This allows you, the medical professional, to gain retail or office visibility you might not be able to afford otherwise. Leasing also gives you the flexibility to be able to move the location of your practice if the rental rate becomes too expensive or the location deteriorates over time.
- Depending on the term of your lease, landlords will grant “buy your tenancy” with what is called tenant improvement packages. These packages will give tenants an allowance to help build out their space. This, in effect, will allow you to put those monies toward marketing, equipment or hiring additional staff. Depending on vacancy in the space, the landlord can allow you grow your practice in adjacent space or you can give up space if you don’t need all the square footage.
- One of the biggest perks to leasing is you’re not responsible for managing the property. Landlords will either manage the property themselves or hire out the services to a third party. These services include, landscaping, snow removal, janitorial, constant maintenance of the building including HVAC, plumbing, roof, elevator, windows cleaning and parking lot repair. If something goes wrong within your space, it is the management companies’ job to fix the problem. This relieves you of the responsibility of repairing ceiling tiles, fixing water leaks or replacing lightbulbs.
- Another thing to remember is cash is king in the beginning stages of owning a practice. Not only is it significantly less expensive to lease a space than it is to purchase, but it also dramatically decreases your overall business risk. By freeing up this working capital, you can invest in additional marketing, equipment and, ultimately, a prime location for your practice. Compared to buying the real estate, the amount of upfront costs are one-sixth when leasing.
- While there are tax benefits to buying the property, there are also many advantages when leasing. You can deduct lease payments, property taxes, property insurance, utilities and maintenance. Similarly, unlike when you purchase the real estate, you may deduct the entire amount of your lease payment.
Disadvantages to leasing dental office space
- When you lease commercial space, you personally guarantee the terms within lease you signed. When you negotiate your lease, make sure the annual rent increases are at market rates. As time goes, the rent will continue to increase. This may bring additional pressure on you, the clinician, to produce more to afford the monthly rental payment.
- Ultimately, you may realize you cannot stay in the space forever and may eventually need to relocate. While the reason for your move may be an exciting one — your practice is thriving and expanding — it can also hurt your business. You not only risk a high attrition rate for patients and potentially staff members who may determine they won’t make the commute, but it is also possible equipment can break during the move.
- When you are in a space that is not truly yours, you don’t have the ability to make improvements and updates when desired. Depending on your lease and the landlord, changing your space to meet your needs is not always an option.
- If you decide to lease and give up being a decision-maker, you’re at the mercy of the landlord, property manager and commercial leasing agent. You hope the owner of the property is willing to work with you, but your needs may become the landlord’s second or third priority if there is a larger/national tenant in the property that gets preferred status. And if you don’t have exclusivity on the property, the landlord can put a competitor or unattractive use in the property without your input.
- The biggest disadvantage to leasing is that you are helping to pay down someone else’s mortgage and not building equity for yourself. Many retiring clinicians we work with at PTS complain they could have owned their property two to three times over again after paying rent in the same property for 30 years.
- You can’t take advantage of the tax benefits in owning commercial real estate. When owning commercial real estate, you’re can reduce your tax bill by depreciating the property over a set period. Commercial real estate owners can depreciate their properties over 39 years. Consult your financial advisor or tax consultant to learn more about the tax advantages.
Tips when leasing dental office space
As with most things in business, remember many leases are negotiable. It is advised to not only evaluate your business needs from the beginning, but to also understand your costs, lease options and termination conditions. Make sure to negotiate your leasehold improvements and check market rates before signing. More importantly, don’t be too quick to sign. Consult your attorney first.
As the leader in dental practice transitions, we not only serve as a dental practice consultant, but we also have an in-house real estate department. The experts at PTS will help you throughout the entire dental transitions process.
We recognize that every individual and every practice is different. We will provide an in-depth analysis and dental practice valuation of your current situation to see if it is in your best interest to lease or purchase a property. While we can provide facts and tips for each side of the coin, it is always advised to speak with your tax attorney for advice on which direction is right for you.
At PTS, we recognize every individual and every practice is different. We will provide an in-depth analysis of your current situation to see if it is in your best interest to lease or purchase a property. Contact us to get the process started.