Provided By Forrest Friedow, Regional Director at Larson Financial Group

Private practice physicians who are looking to open their own practice face the dilemma of whether to own or lease a medical office space. The decision to lease or buy will depend on your business objectives as a physician, as it will impact your practice finances and possibly affect your relationships with associates.

Buying a building can help physicians build their wealth, but the purchase of a medical space can be risky, and sometimes it’s just not a large enough advantage over renting.1 Three factors are of particular importance when determining whether to lease or buy:

Expenses

Monetary concerns are usually of primary importance when a physician decides to open their own practice. The amount of business expenses you are comfortable incurring will be a primary factor when considering whether to buy or lease.

Forrest Friedow

At an initial comparison, the math is simple – leasing is cheaper in the beginning. To lease, you do not need as much money upfront, as the first payment is typically the building’s first monthly rent check, a security deposit and any extra tenant-improvement dollars over your allowance. However, your monthly rent is a variable cost that could change when the lease expires depending on the climate of the market.

On the other hand, purchasing a practice upfront is a much bigger initial investment. A building purchase could include loan fees, building inspections, an appraisal and several other soft costs. On the upside, purchasing a building means your monthly payments will be fixed, giving you a better understanding of what you’ll pay year after year.2

Tax Advantages

As the owner of a building, you may have the benefit to deduct the depreciative value of real estate, as well as the purchase loan, property taxes and other qualifying expenses. For a lease, most rent and related occupancy costs are deductible currently against taxable income instead of deferred to future periods.3 By and large, the tax advantages of the transaction tend to be a secondary consideration and not a driving factor behind the decision.

Expansion & Location

Every physician wants to be successful in their private practice. What if your business is flourishing and your building is too small to keep up? As an owner, you would have the advantage of adding to your existing space to meet the growing needs of your practice. Unfortunately, if you’re leasing a building, you will likely have to get permission from your landlord for any substantial changes made to the property, depending on the cost of the additional space – if it’s even available at all.

Before deciding to lease or buy, you want to make sure you’re keeping your long-term plans in mind. If you are opening a practice in an area that is not your desired longstanding location, you should consider seeking a rental property and avoid purchasing a building.

The Big Picture

The verdict to lease or buy basically comes down to a financial decision, so it’s important to understand all of the potential costs of both scenarios. Being the owner of a building will require more expenses to maintain your practice, but it will allow you to build equity and spread out the costs of building improvements and operating expenses over a longer period of time. However, if you expect to outgrow your space within the next five to 10 years, leasing a building would probably be the more suitable option. This will allow you to spend more time focusing on building your patient base without having to worry about unexpected building costs and repairs.4

Ownership of a medical space can be a great investment, but it may not be an ideal arrangement for every physician. Do your research and don’t hesitate to get help from commercial brokers, building inspectors, accountants, financial lenders, contractors, etc. for further information. Establish and review your objectives, and run your numbers to guide you toward the most informed final decision.

References:

  1. Janet Kidd Stewart, “Should You Own Your Building?” (July 2009). http://www.physicianspractice.com/articles/should-you-own-your-building
  2. Leo Griffin, “Buy or Rent Medical Office Space – Consider These Points” (November 2014). https://www.linkedin.com/pulse/20141104123549-36311453-buy-or-rent-medical-office-space-consider-these-points
  3. James B. Calnan, CPA, “Decisions, Decisions Medical Office Space: Buy, Lease or Walkaway” (May 2008). http://healthcarenews.com/decisions-decisions-medical-office-space-buy-lease-or-walk-away/
  4. Marley McMillen, MBA and Jim Arend, MBA, “Before You Sign That Office Lease” (November-December 2010). http://www.aafp.org/fpm/2010/1100/p17.html

The preceding message is an advertisement of Larson Financial Group, LLC.

This article was written by Larson Financial Group, LLC and provided courtesy of Forrest Friedow, Regional Director. Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax planning needs.