There's a real opportunity to own a tangible asset that, from an investment standpoint, could increase and build wealth, says JP Blevins, healthcare lending general manager at Live Oak Bank.
If you’re leasing your current dental practice office space and thinking of expanding, it might be time to consider another option: purchasing real estate.
JP Blevins is healthcare lending general manager at Live Oak Bank, and a huge advocate for owning real estate.
“It’s pretty black and white when you put it on paper,” he says. “There are some tremendous financial benefits.”
Blevins says he hears a lot of myths: “Purchasing will cost too much.” “I can’t qualify because of the huge down payment.” “This whole process is too difficult.”
But when everything is drawn up on paper, Blevins says he’s never met anyone who doesn’t recognize that owning real estate makes all the financial sense in the world.
Weighing the Benefits
Blevins says he’ll often receive a phone call from a growing dental practice that has run out of space. The dentist will say, “I’ve been leasing since I started my business, so I assume when I look for a bigger building I’m also going to lease.” But Blevins replies, “Hold on. Let’s think about this.”
That’s because there are many benefits to owning your dental practice real estate. And it starts with the term of the loan. Some lenders will allow dentists to take the entire loan and amortize it over 25 years. In that case, your monthly mortgage payment to own the real estate could be equal or less to what you’d be paying to lease.
And there are other benefits.
“There’s a real opportunity to own a tangible asset that, from an investment standpoint, could increase and build wealth,” Blevins explains. “And your monthly payment now is going to build equity in an appreciating asset as opposed to paying someone else’s mortgage.”
There’s also the increased cash flow option. Consider that you’re expanding from a 2,000-square-foot building into one that’s 7,000- or 8,000-square-feet. But you only need about 4,000-square-feet. Now you have 3,000-square feet or so to lease to other tenants, generating rental income and improving cash flow.
Then, project forward. If you own that piece of real estate when it’s time to retire you will likely be able to sell it for a profit. Or, as an alternative, sell your practice but hold onto the real estate to generate what Blevins calls passive rental income.
“That’s what we call mailbox money,” he says. “Because you keep going to the mailbox, and money just pops in there no matter where you are — if you’re playing golf in Hawaii, or traveling with your family doing the things that you enjoy doing. But when you don’t own your real estate, you lose all of those benefits.”
Consider the Downside
It would be nice if there was no negative side to owning dental practice real estate, but even Blevins acknowledges that’s unrealistic. A key downside, he says, is market real estate fluctuation. For example, you could purchase real estate when the market is doing well. Several years later it could be 2008 all over again, in which case your real estate value is likely to decline.
If you’re a new dentist starting his or her first practice, buying real estate could add more risk to your already high overhead — such as student loans – when you don’t have a great deal of cash flow coming in. There are also property management responsibilities that come with ownership that you don’t have when you lease. And there could be unexpected changes in demographics in the town in which you buy.
But above all, Blevins says, don’t overpay just because you feel you have to own something.
“It still has to make business sense,” he says. “And if there’s not a lot of inventory or nothing that suits what you’re trying to buy, then maybe it’s time to pass.”
The Right Team
Venturing into a real estate project of any size can be stressful, but one of the ways to mitigate that stress is surrounding yourself with the right team. That starts with the bank. If you’re approved, you need to have a sense of how much of a loan your cash flow will support. That way when you begin looking at opportunities, you’ll know what range to limit yourself to.
“What I don’t want to do is go plan the Taj Mahal with my architect, and my cash flow does not support the Taj Mahal,” Blevins says. “So, connecting with a bank that works with dentists is helpful.”
It’s also a good idea to work closely with a respected CPA and financial advisor.
“That can certainly eliminate some of the stress of thinking this process is too difficult,” Blevins says. “Because really, it isn’t.”