February 19, 2020
Real Estate: Should I Buy or Lease My Office Space?
In the eCommerce era, many shoppers form their initial opinion of a business when they visit the company’s website. An outdated or poorly functioning website may be all it takes for a potential customer to look elsewhere.
Dental practices are putting more and more money into developing websites that will make an immediate impact on prospective patients. The goal of this outlay is to drive website visitors to the practice as new patients. But what happens when a new patient sees your office in person for the first time? Is the space warm and inviting or does it cause the patient to question whether your practice is really the right fit for them? Even in the digital age, your physical office space remains a vital part of the patient experience.
The practice building is uniquely identifiable to each dentist and how many people in the community will associate your business to other prospective patients. As the practice owner, do you have the ability and means to control the exterior look of your building? If you rent the space, does your landlord place the same value on exterior appeal as you do?
Many practice owners face the opportunity to purchase their building. Should they do so? Choosing the right path is complicated, and your decision could provide tremendous upside or become an unbearable strain on cash flow. Before buying your practice building and becoming a landlord, answer the following questions:
- What stage of life is your practice in? Growth? Stable? Contracting?
- Do you want a permanent location for long-term stability in the community?
- Do you lack control over the building aesthetics, maintenance, etc.?
- Have you experienced a lack of rent stability?
- Who should own the building? (A common approach is to establish an LLC to own the building and add an additional layer of limited liability.)
- Are current financing terms favorable to borrowers who qualify? (Today’s market generally is very favorable to borrowers due to near record low interest rates.)
- Do you want to be a landlord in retirement? (Some dentists prefer to sell their practice but hold the building as a landlord to provide supplemental income.)
- What are the tax planning opportunities as a building owner? (Work with your CPA to maximize tax planning strategies around depreciation.)
Dentists who choose to own their own practice building do so as another way to build personal wealth, but this step does not come without significant risk. Will the practice outgrow the office space in the near term? How does the space compare with similar commercial properties? Do you have the desire to become a landlord in addition to your practice ownership responsibilities?
Financing the purchase can be done in a variety of ways. U.S. Small Business Administration loans will typically cover up to 90% of the building’s value, requiring you to come up with the remaining 10%. Private commercial lenders will usually loan up to 85%, while conventional commercial lenders often will require a 25%-30% down payment.
Owning the practice building is not the correct decision for every dentist.
For instance, your cash flow and/or capital reserves may not support the purchase. When do you plan to retire? If the answer is sooner rather than later, then incurring new debt may not be worth the risk. Will the building purchase prevent you from making full contributions to your retirement plan? If the capital investment will cause large strains elsewhere, the overall costs will likely outweigh the benefits.
The decision to purchase your practice building must fit within your overall financial plan. Don’t consider it in isolation. Buildings are largely an illiquid asset and will require additional capital expenditures over time. Do you have the time and energy to take on such projects?
If an opportunity to purchase your practice building presents itself, then what is your next step? Consult your entire professional services team (financial advisors, CPA, attorney) before committing to a purchase that far too many doctors believe is always a safe investment.
If you have questions, the practice integration advisors at Buckingham can help. We’re happy to discuss this type of transaction in the context of your clinical career and long-term financial goals.
This commentary originally appeared February 19 on DentalTown.com
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About the Author
Brian is enthusiastic about his role in supporting a team that strives to deliver an exceptional client experience. He appreciates the importance of a well-rounded team working collaboratively to develop, implement and monitor a plan that helps clients achieve their distinct goals.