Leasing vs. owning for your next healthcare practice
Review the pros and cons of leasing vs. buying a practice space.
For businesses that require specialized workspaces, the question of leasing or buying real estate may be complicated. Healthcare practice owners in particular may wrestle with this decision as they often need an attractive and viable location plus unique equipment specific to their field.
As you determine whether to lease or buy space for your next healthcare practice, you’ll need to know:
- What you are looking for in a location,
- The benefits of leasing or buying real estate,
- Some considerations unique to healthcare practices,
- And who should help in your search.
Let’s start from the beginning.
What makes a good location for a healthcare practice?
You may start by listing the physical requirements for a space, but there are additional aspects to consider during your real estate search.
“What’s most important for doctors to look at is the demographic factors of the location,” explains Gavin Shea, Director of Healthcare for Wells Fargo Practice Finance. You can access population, education, income, and other demographic information from the United States Census Bureau that may help pinpoint an attractive area for your practice.
Data may also help you assess the competition in a certain area. Is it an underserved or oversaturated market? Look for surveys and studies on buying habits and health care needs of the population. What kind of walk-in traffic might you see? Is it a largely commercial area that sees mostly day-to-day workers or a residential area that could have a more static population?
These insights may help predict what your patient base might look like, which could inform which unique amenities to offer or what kind of marketing tactics to use.
Perhaps the most obvious benefit of leasing is the flexibility it offers — especially for practice owners seeking a space for their second practice location. “You can start with one space that’s small and more cost-effective. Then, move out and move on as your business grows without worrying about being attached to an asset,” says Shea.
Leasing may be more viable for practices interested in retail centers which can be attractive and busy locations. Since you might not be able to buy those properties, you can start by leasing from the developer. “You might consider exchanging ownership for a high traffic and visible retail location if that’s part of your growth strategy. Leasing may be the most affordable way of achieving that,” Shea says.
Keep in mind after your lease term is up, your renewal option may be subject to rent increases, either built into the lease or negotiated. Those increases may place more pressure on your expenses and should be considered when deciding between leasing and buying.
Shea suggests that if a practice expects to outgrow a location in 10 years or less, leasing may be a more effective option. Beyond that, it might be time to consider purchasing real estate.
Many practice owners make the switch from leasing to owning after they’ve built a patient base and reached a sustainable, predictable level of revenue. In addition to locking in a set mortgage payment, buying real estate may eventually provide a valuable asset for your business.
The real estate could be a part of your own long-term plans, either as an asset you sell as you transition out of business or by generating rental income in your retirement, says Shea.
Generally, the main drawback of buying real estate is that it will likely involve more upfront costs which could pose a significant roadblock by tying up cash flow.
Similar to buying, building a location from the ground up typically involves more upfront costs. “It works in certain markets where the land cost is reasonable, and it’s not necessarily an over-developed market, where there’s actually some land available,” says Shea.
He adds that building is more common for veterinarians, as developers or landlords might not have interest in installing animal boarding spaces for a vet clinic.
Another option, for those with enough capital saved, is to construct a whole building where their practice occupies one office. By renting out the other offices to specialists or generalists (an oral surgeon leasing a connected office to a general practitioner, for instance) they can build a referral network to benefit their own practice while also acting as the landlord.
Who can help?
Shea strongly suggests practices seek:
- Tenant representation to help find real estate options and assist in the negotiation process. Fortunately, you won’t have to pay most representation you hire. Instead, they will likely receive commissions on the sale.
- A banker to help determine the level of lending your business may qualify for and to help model potential cash flows in a leasing or buying scenario.
Ultimately, in regard to buying or leasing, the most effective solution may be linked to the business stage of your practice. Learn about different financing options that could help your business grow.