Practice Strategies

A Question of Concrete: - Does It Make More Sense to Lease or Buy an Office?

Although most financial experts agree that it makes more sense to buy a home than rent an apartment, the pros and cons of office ownership aren’t quite so clear-cut. Dentists and physicians need to weigh a variety of factors when making that important decision, including:

• The availability of rental office space in the area. If office rent is reasonable in the area in which you practice, then it's probably best to rent. But if rents are high and you are planning to practice in that area for a long time, then it may make sense to buy, especially if you buy a building that can be expanded or remodeled as needed.
  
• How long you plan to practice in the area. Selling a commercial office building — especially office space designed for special purposes — is not as quick and simple as finding a buyer for the family home. In a medical group, that leads to the thorny issue of what to do when you or someone else wants to retire or move.
  
• Whether the capital earmarked for a building will be needed for other business expenses. No doubt, real estate ties up assets. You have to decide whether it makes more sense to use your capital to invest in facilities, or for growth and other aspects of practice operations.

A Concrete Investment?

There are plenty of medical office buildings available (you can thank hospitals looking to sell off their peripheral assets to raise capital for other projects). And lenders say physicians have shown more interest in owning real estate lately than in the past. Why?

You build equity in your building. Plain and simple, when you sell it, you get something. Over the long term, the property can be worth more than the actual practice itself.

• You lock in your cost of occupancy. Rents will always go up, but your mortgage payment won’t. This may result in higher profits in years to come when you’re likely paying less than market rental rates to occupy your facilities.
  
• You enjoy flexibility when selling your practice. When it comes time to retire, you can include the property as part of the practice’s assets or keep the property and lease it to the new owner. These rent payments can then provide a steady retirement income.
  
• You can replace some salary with rent payments and pay less payroll tax. Because rent is considered to be passive income, you can reduce your salary by the amount of rent you collect and save on payroll taxes.

Your Timeframe Is Everything

Once you buy the property, you’ve obviously lost some flexibility if you need to move later. For this reason, purchasing may not be the best option for fast-growth practices or practices that have a hard time forecasting their space needs.

But if yours is a mature practice and you’re confident that you can take a long-term perspective, then purchasing your business facilities could be a beneficial move. And with interest rates at lows not seen in over a generation, this could be a truly unique opportunity to lock in a low cost of occupancy for years to come.

Who better to discuss your long-term financial goals with than your accountant? Our experienced professionals can “run the numbers” and help you decide whether purchasing or leasing makes the most sense for your practice.

For more information about our services to the healthcare industry, Contact:
Maxine Lawyer, Director of Healthcare Services at 972.448.6905.

The articles in this newsletter are general in nature and are not a substitute for accounting, legal, or other professional services. We assume no liability for the reader's reliance on this information. Before implementing any of the ideas contained in this publication, consult a professional advisor to determine whether they apply to your unique circumstances.
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