This is part I on our series of leasing versus buying your dental office space. Part II will be published on Friday.
When establishing a practice, one of the decisions that looms over you is whether you should lease or buy. It might even be keeping you up at night. You try to get some shut eye. But when you do, thoughts of what you should do zip round and round in your head like a roller coaster careening out of control.
It's understandable why you might be struggling with this. Since the 1950s, home ownership has been a cherished part of the American dream. It’s been ingrained into our cultural DNA that buying a piece of property is a right.
But even more than that....almost a patriotic duty that every card-carrying member of society must take it upon himself to do.
Another thing drilled into our heads is that it’s always better to buy rather than to lease. After all, when you buy, your equity accumulates. But when you lease, you get zilch.
Besides, equity is great if you’re sucker-punched with such unexpected expenses as having to buy a new dental chair. Or, buying an older building and finding out there’s asbestos in the walls.
It's great having a nest egg to fall back on.
There are so many things to think about when making the decision to buy or to lease. For example, buying your own building means you’ll have greater flexibility over how to use the space. But the flipside is, you’ll be taking on a lot of debt in the form of a mortgage.
You go into the property management business when you buy space. This means more time managing the physical space, and less time running your busy practice. When you buy your practice, you wear two hats.
Are you ready for that?
In the end, there's no magical solution that's going to fit every owner and every set of circumstances.
Why Leasing May Be Better Than Buying
Leasing your dental office space may be better than buying it outright.
First, consider the power of location. This is something that’s important to the success of any business including your own. But often, no matter how much cash you wave around, the very best locations aren’t for sale.
This is usually because the owner can make far more money leasing his space instead of selling it. In most rental areas, there are way more leasing than buying opportunities. Unfortunately, buying may force you into a less-than-ideal location. This means fewer profits flowing into your coffers.
That’s why leasing may be the most profitable option for your business.
Leasing also gives you a tremendous amount of flexibility. You might peer into your personal crystal ball to see what your future holds. And instead of the blue skies of endless growth, everything is clouded in uncertainty.
What if you’re not sure how much you want to grow your practice?
What if business booms and the space you purchased 5 years ago isn’t big enough to handle all the extra business?
If you own the building, you’re out of luck. At least, until you sell it.
In this case, stick with leasing. Needs change all the time, and what works for you now might not work for you five years in the future. Crystal ball or not, sometimes you have no way of knowing.
Another way a lease gives you more flexibility is you get to renegotiate terms when the lease is up for renewal. You can also up and leave if the space is no longer satisfactory for you.
You can’t do that with a mortgage.
Purchasing a building can take three months or more. If you don’t have that much time, lease space until you know what your future looks like. With leasing, there aren't that many unforeseen costs because they’re all spelled out for you. Your landlord will also handle most of the more expensive things that come with being in an office.
Fewer headaches for you!
A reason to buy might be egoic satisfaction. This is something that nobody, no matter how evolved, is above.
You might want your name in gilded letters on the building for all to see, announcing you as owner. But with that distinction comes all the costs of ownership. Suddenly, your fantasy comes crashing down, destroyed by the intrusion of facts.
Those major repairs that your landlord always covered? They're your responsibility now. So, get out your wallet and fork out some cash. Owning is always risky.
To make it less so, you need to figure out some stuff.
Like, how much cash do you need to invest to get the building up to code. And, what your future expenses might be. This includes things like repaving a parking lot that has seen better days. Or refurbishing a lobby that hasn’t been updated since the Hoover administration.
Consider how much to charge too. You need to set a rent that’s low enough to be attractive to tenants, but not so low that it’s not profitable for you. If you have extra space to lease out, how long can you afford it to leave it vacant before it eats into your cash reserves?
There’re fewer upfront costs with leasing.
When you lease office space, your landlord will give you most or all the money to build out your space. This is money you don’t have to come up with. And, there aren’t any down payment or closing costs. There are some tax benefits to leasing as well. You’re allowed to write off most of your office space expenses which is always a good thing.
You also have to consider fluctuating market conditions.
There might be a recession. When it hits, your building will be worth much less than it was before. Recessions are a cyclic risk. To quote from a popular sci-fi series from the last decade:
“All this has happened before, and all this will happen again.”