If you’re looking to start a new medical practice or move your existing practice elsewhere, you might be trying to decide whether to buy or lease medical office space. While this is an exciting place to find yourself, there are, of course, many factors to consider before making the leap.
Often when a physician starts a medical practice, their first step is to look for a space to lease. However, since many medical practices depend on one long-term location to attract and retain loyal customers in the community, buying office space can make more sense. There are many factors that should go into this important decision and, remember, it’s not a one-size-fits-all answer: leasing or buying medical office space will suit different physicians, in different practice areas, at different points of their career.
With that in mind, let’s take a look at some pros and cons of buying and leasing.
Pros of Buying Medical Office Space
Location, location, location
A great location is hard to find. If you’re lucky enough to find one that, say, helps to grow your patient base through foot traffic and easy access to public transit, a purchase to secure the space is one way to provide stability to your practice.
Freedom and control
If you value the freedom to run every aspect of your medical practice without potential limits, restrictions, and rent increases, consider buying an office space. This will allow you to change the building as you please (along with any needed government permits or approval) and control what you do with and what happens on your property.
Owning the property gives you the ability to control your medical practice and its future. If you’re leasing and your agreement expires without a renewal option, everything you’ve worked so hard to create could be drastically changed or taken away just by the absence of that physical office space – and all because the landlord sold the building and cashed in for a profit.
Financial gain: build your personal wealth
In recent years, commercial real estate has been a great investment for many entrepreneurs, including physicians. Of course nothing is guaranteed, but owning can build equity independently from your medical practice. This equity can be handy in so many ways, including as collateral for loans you might need later to, say, upgrade equipment, renovate the space, or hire additional staff. Plus, a well-financed property purchase can balance growth and cash flow to free up working capital by reducing your monthly rent. The amount you save can be used to build your medical practice.
A great reason to buy is you will no longer be paying rent to someone else. In fact, you can pay yourself rent, instead, and reap the benefits from it! If you set up ownership in such a way that your own corporation owns the building, you pay rent to that corporation, and, in turn, pay your practice expenses and mortgage out of that rent, then you get to keep the amount leftover as your income. In future, the property will likely appreciate in value and you can sell it for a nice profit – which can be helpful in increasing your retirement savings.
Other financial benefits of owning your medical practice include:
Fixed, instead of variable, costs.
Locking in your commercial mortgage long-term means you can remove ambiguity and depend on steady, fixed costs for your practice.
The associated costs of owning and running your medical practice can provide tax deductions from mortgage interest, property taxes, and other items. You can also claim building depreciation.
Owning your medical office can enable you to rent out any extra space you may not need, which offers an additional source of income. Even if down the road you choose to close your practice, you can still keep the property and rent it out to maintain that second income source.
Keep in mind that, often, your mortgage and its associated costs will work out to less than monthly rent. It’s a good idea to assess this regularly and see if it’s more financially viable to buy rather than lease. Also, even if your property’s appreciation doesn’t align with your financial projections, buying might still be more beneficial than leasing because low interest rates and/or tax benefits you only see from ownership could offset potential market downturns (this is based on your unique situation though, so it’s best to always check with your accountant).
Cons of Buying Medical Office Space
Rising interest rates and other market fluctuations
Low interest rates have encouraged many physicians to buy in recent years, and they have enjoyed considerable market appreciation. However, if and when interest rates rise, your costs will follow suit. As nice as it would be, nobody can predict the future. The market might slump, a recession could follow, and, suddenly, your building may not be worth quite what you paid for it, or at least not what you expected.
Lack of flexibility and cash flow
While you probably need some level of financial stability, being too stable can result in outgrowing your owned medical office space. This is especially true for new or growing practices, where unexpected future needs are commonly experienced. If you’ve outgrown and own your space, you’ll be faced with a lack of flexibility: the space may become inadequate, and if you can’t borrow necessary funds, or, say, if there is no extra space in which to renovate to increase capacity, you may be forced to sell the property and your cash flow may suffer as a result.
Buying your medical office space means you will also experience:
Consider the property, appraisal, real estate, closing, and maintenance costs, along with a large down payment and possible property improvement costs, that you will likely incur.
Ongoing additional costs.
On a regu
lar basis, expenses like property taxes, utilities, and maintenance costs will affect your bottom line.
Owning your medical office space – whether you buy an existing office or build something new – means asking yourself some key things and making some assumptions when considering the options:
How much do you need to invest in the office itself and any tenant improvements?
What will you need in the future? For instance, certain maintenance items, kitchen remodeling, and parking lot repairs might be foreseeable.
If you have empty space to lease, how long can you afford to leave it vacant, what are the leasing costs, and how much rental income can you reasonably expect?
How much will you sell the property for later on?
As the answers to these questions can’t be accurately predicted, there is risk involved. Although you can control some of it with things like insurance and warranties, many factors are external and out of your control, like the market, time delays, and price increases.
Protection and due diligence
Protection and due diligence is a must. You need to be protected from problems that can come with ownership, such as hidden building defects or environmental contamination. You may need a building condition inspection and an environmental assessment, or an environmental consulting firm who can assess the property before you purchase. Likewise, it’s just as important to have a lawyer conduct due diligence on issues like land title, zoning, outstanding taxes, liens, and easements.
Opportunity cost is higher from owning vs. leasing your medical office space. And that’s not only the cost of your hard-earned dollars but also of your valuable time. That is, the money you invest in a property could be used to grow your practice in other ways, such as hiring more physicians. Owning requires you to spend time managing the property instead of on other things, like seeing additional patients.
Above all else, before you buy, make sure your medical practice will have the resources to support that choice down the road, as this important investment is a commitment for the long haul.
Pros of Leasing Medical Office Space
With leasing, you are free from the additional responsibility and potential problems that come with owning a property. More of your time will be freed up to focus on your practice because the landlord handles repairs and maintenance.
Score a prime location
Leasing your medical office space gives you the chance to be in a desirable area with a good image, which can be important for some medical practices. Leasing medical office space in these high traffic areas is typically much more affordable than buying.
If your practice is growing rapidly or downsizing, or you’re unsure what will happen in the future, leasing may be the right option until you feel more stable. You get more short-term flexibility with leasing, as it’s easier to leave the space. As well, you can move in faster since a purchase deal can take a few months or longer to close and you may need even more time to remodel or renovate the office to suit your needs. This flexibility also comes up regularly when your lease is ending and you can choose to stay or leave – it’s a prime opportunity to evaluate options for your practice, your real estate needs, and the market.
Frees up your working capital
New medical practices can’t often commit a lot of capital to office space, so they will most likely lease. Even established practices need to be generating enough income to fund both their growth and property purchase. If you’ve opted to lease, thereby freeing up that capital, your practice is better able to respond to market opportunities and to qualify for larger loans, should you need them to, say, fund your practice’s growth.
Other financial benefits:
A low initial financial commitment with no down payment.
Tax-deductible lease payments.
Higher cash flow that helps your credit rating.
Some utilities and services possibly included in rent, such as water or cleaning.
Few unforeseeable costs since your lease dictates what the costs will be and most large capital items are the landlord’s responsibility.
Cons of Leasing Medical Office Space
Variable costs can be unreliable
Keep in mind, you may be faced with annual rent increases and higher costs when your lease expires, especially if the market has dramatically changed.
When leasing, you earn no equity and are funding someone else’s retirement with your payments.
Lack of stability
Although some physicians may not want the long-term commitment to a location, landlords may feel the same and can refuse to renew a lease once it expires. This may force you to move your practice and incur the associated costs when you’re not ready to do so.
While leasing is a great option to try a location out or get your feet on the ground when you start your practice, keep in mind you may not have the option to buy your space down the road if you choose to stay (at a time when owning could be a more financially viable option and make sense in other ways). Plus, moving, along with the risk of losing regular patients, is expensive.
Limited control over maintenance, renovations, and improvements
Though it’s nice having your landlord pay for maintenance and repairs, you have no control over the quality or timeliness of them. This may not be an issue today, but your landlord might change later on and things may not be as easy. Plus, it’s important to be aware if:
Restrictions limit your ability to change, expand, or use your space in different ways.
There are enough parking spaces for all tenants and visitors and if you’re guaranteed spaces.
hts regarding signage allow your practice to have the visibility it needs and the look and feel you’re trying to achieve.
Certain property must be returned to its original condition when you leave.
Equipment and fixtures remain your property or the landlord’s.
You are responsible for any portion of:
Cleaning, repairs, and other common area costs (like washrooms, entrances, reception area, parking lot, snow removal, or landscaping).
Property taxes, insurance, utilities, security, and repair or replacement of equipment (such as heating, ventilation, or air conditioning units).
Despite having the pros and cons laid out in front of you, choosing to buy or lease your medical office space can still be a difficult decision. Asking yourself these tough questions might help:
How long can you commit to a location or building? Financial studies have shown that, for the short term, leasing is more cost-effective than buying. However, if you are considering a property where you can set up your medical office for at least 10 years, then buying becomes more financially attractive.
How fast is your practice growing? If you anticipate your medical practice to rapidly grow in the next few years, then leasing gives you greater flexibility to move if your new space becomes too small. If you buy, you may outgrow the office or purchase more space than you need, which comes with associated expenses. This also applies if you think your practice may downsize in the next few years.
How are the local market and economy doing? The performance of real estate markets across Canada vary, so it’s important to learn about your local conditions. If your area has been in a slump but is coming out of it, then this could be a good time to invest. However, if property values are declining or are overinflated, leasing might offer a better location and protect you from losing the money it could cost you if you had bought and needed to sell.
Above all else, chances are a specific property might be your main consideration. If you can’t find what you need for lease, you may have to buy, and vice versa. Cost is also important, and if everything else is equal between, say, two properties, running a cost comparison over the short and long term is prudent.
Remember, both buying and leasing have perks and drawbacks that not only affect your bank account but also how you manage your practice. Keeping these things top of mind as you work and make plans for your future will help set you up for success.
This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.