Every business owner with a physical office at some point confronts the question of whether to purchase or lease their office space. There are many factors to consider in making this important decision. For new dental practitioners who are uncertain of future space needs and want to ensure maximum cash flow as they grow their business, leasing may be a wise option. But for new or seasoned practice owners with a strong financial profile, a clear picture of future growth, and the ability to take advantage of the tax benefits of ownership, the commercial real estate market has never been more attractive.
Historically Low Prices for CRE
The 2008 recession and subsequent slump in the residential housing market extended to the commercial real estate (CRE) market as well, sending property values significantly lower and producing more available properties than has been seen in years. Today commercial properties for dental practices are far less expensive than they were three years ago.
Meanwhile, the rental market for commercial properties continues to be volatile and generally expensive. In some areas it may be ultimately less costly to purchase and outfit commercial real estate than to build-out and rent a leased space.
While property values will not likely rise at the aggressive rates seen from 1998 through 2005, it’s a safe bet that at today’s low prices, both residential and commercial real estate values are likely to appreciate over time. As the property owner, you receive the full benefit of that appreciation.
Favorable Financing Rates
The most significant cost to purchasing real estate is the mortgage interest rate. Today, rates for commercial real estate purchases are at an all-time low, ultimately saving you significant funds as you pay down your CRE mortgage. However, obtaining financing can be a challenge in the current economic climate, so it’s critical to maintain a spotless financial profile and be prepared with a comprehensive business plan that makes the case for the viability of your practice. Also consider working with a lender that specializes in dental practice financing and understands your particular needs.
Tax Advantages of Ownership
Leasing provides only limited tax relief to the lessee, but owning your property allows you to depreciate your asset while writing off all of your mortgage interest paid during the year. When combined with IRS Tax Code Section 179 deductions for equipment purchases, the practice owner can significantly offset the cost of purchasing the property.
In fact, analysis* has shown that while leasing provides greater cash flow initially – which may be important to the new practice owner – over the long term owning your property provides a far greater financial return in the form of tax benefits.
Practitioners who own their property have two ways they can earn income from their property ownership:
1) Tenants. If the purchased property has additional space for tenants, the property owner can use tenant income to help pay down the price of the property purchase, thus offsetting the cost of his or her investment. Of course, having tenants entails property management responsibilities that may detract from attending to your practice’s core business of treating patients.
2) Sale or Lease. Property owners can potentially help fund their retirements by selling their office property outright at the time of retirement, or selling the practice only and leasing the underlying property, producing an ongoing income stream.
Control of Practice Development
Property owners have greater control and freedom to operate their business and property according to their needs and desires. This includes controlling the appearance of the site, expanding or contracting office space, taking on tenants, incorporating green technologies, and controlling overall costs. Business owners in a leased setting may have difficulty getting approval to make property improvements on leased real estate, including the ongoing technology, cosmetic and functional changes required for an up-to-date dental practice.
While there are certainly benefits to leasing your practice space, including increased availability of cash, greater mobility as the practice grows, and ease of focus on your core business, owning the commercial real estate underlying your practice ultimately gives you greater control of your finances and growth. With properties now available at historically low purchase prices and financing rates, purchasing commercial real estate is an investment well worth considering.
*www.ginniemae.gov/rent_vs_buy, September 15, 2001.
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