Physician practices have a limited set of strategic options that will boost their bottom line over the long term. One is in real estate. As a recent article in the Baltimore Business Journal points out, managing your real estate is one tool for your long term practice and personal financial goals.
Whether you lease or own, the cost of your office space is one of your largest single expenses. It is also fixed – you can’t readily expand or contract your space as your patient volume varies. You also want to be consistent in your location – moving is expensive and may be perceived as unstable. Owning your space builds equity for your long term financial plan, and it controls your real estate costs. There will be increases in property taxes and maintenance, and repairs are part of your cost. Just as with your home, owning can be advantageous.
If you think you may need to exand significantly or move in the forseeable future (5-7 years), leasing offers more flexibility. A lease with options offers you a guarantee that the space will be available (the landlord won’t be kicking you out) and places limits on rent increases. For the landlord, they would prefer a stable tenant. Physicians are good tenants – they pay on time and have a low risk of failure.
To compare your lease vs. buy costs, build a spreadsheet that accounts for all direct costs on a cash basis. Included provisions for the deductions, such as property taxes and interest of the mortgage. In addition, in markets where commercial real estate prices are increasing, this adds to your return on investment.
The article also discusses the importance of space planning. Physician offices generally work best as a square in the patient care areas. Back office space and other non-patient areas can be off this “square”. Well-planned space also makes physician time more efficient, maximizing patient time.
As your annual financial statements and tax returns are completed, discuss with your advisors your real estate options and whether owning may make sense. While physician incomes are likely to be flat or decline in the next 5-7 years, real estate is one of the options to build wealth for the long term.