Owning commercial real estate is always better than leasing it
Dispelling Commercial Real Estate Myths
Owning a home can create one of your largest assets and is typically seen as a relatively safe investment opportunity. Conventional wisdom says the same is true for commercial or medical real estate as there are legitimate benefits to owning, such as paying down the loan principal and building equity, receiving loan interest and property tax deductions and more. When running the numbers for owning, leasing is often labeled as “throwing money away” compared to building equity through ownership.
While these and other reasons are compelling aspects of ownership, there are many reasons why leasing your space might be a better decision than owning. This is especially true when considering the stage of your career, your ideal practice location and the quality of building you can afford.
Don’t misunderstand, owning commercial or medical real estate can be a great investment. If many items check the list, owning may be the obvious decision for your practice. However, there are many important factors often overlooked at first glance that should be evaluated prior to making a conclusion about the choice of your medical office space.
Here are a few questions to ask when considering if owning or leasing makes more sense:
- Can I qualify for the loan of owning or building my own space?
- Is this the location I want to be in for the next 15 to 20 years?
- Is it better to lease a smaller space for the next 5 to 10 years and then purchase or develop my ideal building when my practice is ready?
- Is the increased payment and debt warranted to own if it costs more than leasing?
- Would my practice be more profitable if I leased and received a large tenant improvement allowance, free rent and build out period?
- What is my exit strategy if I need to get out due to an emergency in 1 year or when I retire in 20 years?
- Are there any purchase opportunities available in the area where I ideally want to be?
- Will my practice suffer if I choose to own my space or build in an inferior area versus leasing in a more desirable location?
Those are several of many questions to consider. Now let’s dig into one of the questions further.
Will you need more space in the future?
Many healthcare practices have the desire to grow and wonder, “what can I afford and how much space will I actually use over the next few years vs. what will my practice’s needs be in 10 years?” Like many scenarios, there is a ditch on both sides of this question. If you are too conservative, you can end up in a space that you will outgrow which will choke your profitability. The lost income from reduced patient volume could end up costing you ten times what the expenses would have been to manage a larger space if you would have planned better. Also, the smaller your practice and revenue is, the lower the value of your practice.
Conversely, if you go too big, you can end up paying for a large portion of space that doesn’t get used for anything except storage; which isn’t desirable either.
Moving and build out costs are the main reasons why long-term leases typically present the best opportunity. For one, they eliminate the uncertainty of ‘deciding as you go’ in a short-term lease. To know which option is best for you, it is wise to surround yourself with market experts that can help you accurately project the amount of space needed. The main consideration for the ideal size of space is having the upside of growth but not obtaining too much that you can’t expand into it in a reasonable amount of time. This is another clear example of there not being a ‘one size fits all’ approach to commercial real estate; especially for healthcare practices. If your space needs will continue to increase in the near future, leasing could be the best option for you now while considering a purchase or new-build when you are more certain of the size you will be content with long-term.
Owning can be a great opportunity and decision for your practice. There are scenarios where the numbers prove that purchasing a building or space and paying for a brand-new build out could cost significantly less than leasing. Even if it costs more, it can be worth owning if the quality of the building, finishes, location or synergy of neighboring businesses make it the best opportunity.
Or, it can be a completely wrong decision for you practice, based on many factors.
There isn’t a ‘one size fits all’ approach to owning vs. leasing and what is right for one practice may not be right for yours. However, there is a ‘best approach’ to ensuring you make the right decision for your practice. This includes hiring professional representation from someone who fully understands healthcare real estate and won’t have any conflicts of interest, due to them representing landlords and sellers. Next, you need to fully understand all your options in the market, both leasing or purchasing. Don’t assume you have to pursue only one specific scenario. Allow your agent to fully educate you while running detailed analysis on the cost to enter and maintain each option, and ultimately what the pros and cons of your exit strategy would be in either decision. Lastly, make sure you have peace of mind in your final selection. As the second or third highest expense behind payroll, there is too much on the line with your commercial real estate decisions to not maximize every opportunity you have.
Carr Healthcare Realty is the nation’s leading provider of commercial real estate services for healthcare tenants and buyers. Every year, thousands of healthcare practices trust Carr to achieve the most favorable terms on their lease and purchase negotiations. Carr’s team of experts assist with start-ups, lease renewals, expansions, relocations, additional offices, purchases, and practice transitions. Healthcare practices choose Carr to save them a substantial amount of time and money; while ensuring their interests are always first.
To hear more about the impact we make in healthcare practices across the country, watch the video below.