One of the most common questions about buying a dental practice is whether to buy or lease the space. And, as with many things in life, the answer is: it depends. It depends on the real estate market where you are looking to practice, whether the practice space is owned by the selling doctor or not, your plans for growing the practice, whether you foresee moving the practice, whether you want to deal with the additional responsibilities of real estate management, what kinds of risk you are comfortable with, just to name of few considerations.
Most advisors will say you should always buy. Some will say you never should. The fact is, that there is no consistent rule. Some doctors have bought their property and lost their shirts when the property devalued. Some doctors have built lucrative practices in leased space. So, ultimately, the question is really what will be best for you and your practice. Below we discuss some of the factors you should think about.
Return on Investment
When you lease, you are paying for someone else’s investment. When you buy, you are paying for your own. When you lease, your monthly payments will increase over time. If you are buying with a fixed-rate mortgage, your monthly payments will stay the same (unless you refinance or there are other loan terms that impact the payments). If you lease, you will pay rent every month until you someone else buys your dental practice. If you buy, depending on where you are at in your career, you may pay off the building and own it outright.
Conversely, when you lease, your landlord is responsible for maintenance and upkeep. When you buy, these are your expenses. When you lease, you have more flexibility to relocate if you need to expand beyond the available space or there are other reasons to move. When you buy, it’s much harder to relocate and cannot be done as quickly. When you lease, you are insulated from the factors that cause property values to drop. When you own, you take the brunt of any economic downturn.
If you choose to acquire real estate as part of buying a dental practice, you have the option of thinking beyond the needs of your practice. If your practice requires 2,500 square feet but are looking to expand, you can buy a 10,000 square foot building, divide it in half, and rent the other 5,000 square feet to another tenant or two or three. This creates an income stream separate from your practice. But it does mean increased costs in terms of managing the space, dealing with tenants, complaints, and repairs.
Also, when you decide, “it’s time to sell my dental practice,” you can choose to sell or keep the real estate, either getting the equity out of the building or an ongoing income stream as part of your retirement plan.
In the end, however, a lot of this comes down to whether you want the risk and responsibility of real estate ownership.
Control Over the Property
For an entrepreneurial doctor who is buying a dental practice, buying the building (or constructing a new building) can have some real advantages. First, it gives you much more control over your brand, which is a significant asset. You can make the property look how you want. You get to choose your signage. And you get to choose who you share the property with, if there is space for other tenants. These things can add significant value in unexpected ways.
If you lease space in a medical plaza, you might get your name on small sign along with all of the other tenants. You also might not get a sign at all. If you are in a retail space, you might get a sign over your entrance. Or you might not. And you have no control over who is in the spaces around you. If the property is not managed well, you could end up with questionable business as neighbors, or in a space that has high turnover and frequent vacancies. None of these are good for your brand.
By owning the building you can do something such as install a highly visible LED sign at the street. While this can be a significant outlay, you need to consider what you are buying. If you pay, for instance, $17,000 on a sign, assuming you get ten years out of it, that works out to $1,700 per year for 24-hour a day advertising visible to every person who walks or drives past. Some dentists have reported that these kinds of signs have, on their own, increased their business—simply by being there.
Additionally, if you have space to lease out, you get to choose which kinds of business you rent to. There are opportunities for cross-promotion and strategic partnerships. If, for instance, you have pediatric dental practice, you can look for business that also cater to families and children. If you present the opportunity for cross-promotion (having marketing materials in each other’s locations, splitting costs on advertising, etc.) and the exposure from foot traffic, you can end up with a tenant who feels more like a partner and may be willing to pay over market value for the benefits.
It May Pay to Lease when Buying a Dental Practice
If you are a young doctor at the beginning of your career, you may have ambitions beyond those that the selling doctor had realized. If you see room for growth in your new practice, it might make more sense to start out with a lease, with an eye toward buying or building your own space later on.
It wouldn’t make a lot of sense to buy a dental practice and immediately move its location. The move, along with the change in doctor, could have a negative impact on your patient retention (especially if the landlord ends up leasing to another dentist). Also, the perfect space that you envision might not yet be feasible for the practice. Under these circumstances, you may be better off leasing for the first few years as you establish yourself in the practice—and in the community—and put your effort into planning how to expand and and working toward that goal. Then, when you’re outgrowing your present space, you can begin looking at buying or building a new space.
Another reason to consider leasing is the real estate market in the area you are buying a dental practice. If you are in a dense urban area, property values may be so high that buying real estate is not feasible. Also, if you are in a market where real estate costs are peaking, that’s a bad time to buy, as the market will inevitably correct itself. And while real estate tends to appreciate over time, you don’t want to be the one who bought right before the crash.
Tax and Balance Sheet Implications of Leasing versus Buying
Whether you buy or lease space, either can have a positive impact on your tax liability, but in different ways. Lease payments are generally deductible as an ordinary business expense, however, deduction limits may apply. On a balance sheet, however, lease obligations will appear as liabilities (similar to equipment or other assets that you would finance with a traditional bank loan).
When you buy property, on the other had, Section 179 expensing (referring to the tax code section that allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes as an expense rather than requiring the cost of the property to be capitalized and depreciated) and first-year bonus depreciation can provide a significant tax savings for the first year the property is used by your dental practice. In fact, recent tax code changes have enhanced these tax breaks such that you may be better off buying things you would have previously leased (such as equipment).
Whether it will be better for your particular practice to buy or lease your practice space is a decision that needs to be made with the advice of a qualified tax professional.
Article courtesy of our DDSmatch Southwest professionals.