Over the years, many NPs have asked us the question: “Should I lease or buy the space for my office? Which do you think is best?”
This is a tough question to answer because many variables go into the decision, including:
- Is it a new business?
- Is it an established, growing business?
- What are your long term plans?
- What are the long-term plans for your business?
There is no one correct answer to this question. The answer for each NP depends on individual goals, plans, and available resources.
But let’s take a look at the pros and cons for leasing vs. owning and shed some light on the subject.
Advantages of Leasing
No Down Payment: there is no down payment required to get into the office space. Except for the customary deposit and the cost for minor remodel, there is no major cash outlay. This allows you to use your cash to purchase equipment or hire employees.
Options: leasing allows you to keep your options open. When first getting started, you may not know 100% which direction to take for your business. This will get clearer as time goes by.
At some point, you may choose to expand, move, or diversify your business. If you’re leasing your space, this will be much easier to do than when you own space that may no longer fit your new direction.
Repairs: most repairs for your space will be handled by your landlord. While customary, this may not always be the case.
When negotiating your lease agreement, make sure it is specified that repairs will be handled by the landlord. At a minimum, your agreement should spell out what you will and will not be responsible for when it comes to repairs.
Disadvantages of Leasing
Can’t do what you want: if you don’t own, you may not be able to do what you want. You may not be able to create the environment you want to create (water fountains, colors, etc.) Or you may not be able to hire other providers, or bring in other specialties into your space. Make sure that your lease agreement is clear on this. At a minimum, it should not include any language that would limit your options in the future.
Ownership: the building housing your space may change ownership or may be sold. While this doesn’t have to affect your business, it certainly can.
Rents may increase and the nature of the surrounding businesses may change. Initially, your office may be located in an all medical business park. After the sale, the park may change from all medical to mixed business. This may affect how new patient perceive your office.
In the worst case scenario, you may have to move your office altogether. The new owner may have other plans for the building and everybody is forced to relocate.
Equity: there is no equity built up. Even though you have the expense of a monthly payment, you’re building equity for your landlord and not for yourself. Additionally, certain tax deductions are not available when leasing space.
Advantages of Owning
It’s up to you: you are in charge. Want to paint your office purple? No problem, it’s your call. You decide on the look and feel of your office, no one will say that you can’t!
Sublet the Space: as building owner you certainly can sub-let space. This will help reduce your overhead. You don’t need to ask for permission or go back to your lease to make sure you won’t be in violation of the contract.
Should you decide to stop practicing, you have the option of selling both space and practice, or you can rent out your space to another provider.
Equity: when you own your space, you’ll be building up equity. This equity can be utilized as collateral for a loan, fund another business, or fund your retirement.
Depending on how you set up your business, you may be able to expense the lease payments for you practice while receiving it as income for your other company, holding your real estate.
Note: Check with your legal and accounting advisors before setting this up!
Neighbor Control: when you own your building, you can control who is in your building. In other words, you have control as to the appropriateness of the other businesses in the building, keeping them complimentary and not competitive.
Long Term Payoff: Ownership is one way you can diversify your income and holdings. If you rent any additional spaces out to others, you’ll receive “passive” income and reduce your overhead.
Tax Deductions: there are many deductions available when owning your own space, including depreciation and interest on your mortgage. At the same time, you will also have to pay ongoing property taxes on your building.
Disadvantages of Owning
Initial Cost: when purchasing a building, your initial startup cost will be significantly higher. You will need funds for the down payment, closing costs, and insurance.
Time to Occupancy: this can vary greatly depending on the time required to close on the purchase.
Once the purchase is complete, remodeling may have to be done to suit your needs. This adds more time until you can move into your office and start your practice. Since you are the owner now, any remodeling costs are your responsibility.
Repairs and Maintenance: as the building owner, this is your responsibility now. Depending on the condition of the building you purchased this might be a substantial amount of money and time.
Real Estate Risks: owning real estate comes with its own set of risks. You may not be able to sell the building when you want to or the general value of real estate may decline, affecting resale of your property.
It’s a Trade-Off
Leasing vs. owning is a trade off. Leasing provides you with flexibility, whereas owning might limit you.
If you plan to stay in one place for a long time, have the resources to purchase your space, and can shoulder associated risks, then buying is definitely something to consider.
Otherwise, if you’re not sure how long you will stay in practice or if you want to stay in a certain location, then ownership may not be right for you at this time.
The bottom line is this: that there are advantages and disadvantages to both. Only after considering the “entire picture” is it possible to derive at the best decision for your specific situation.
Are you trying to decide if you should lease or buy?
Here is what to do next…
- Make a list of the long-term goals for yourself and your business.
- Take stock of your financial situation to determine if ownership is an option for you.
- Ask yourself if you’re prepared to deal with the potential headaches and risks of ownership?
- Make a list of how you and your business would benefit from ownership.
- Make a list of the pros and cons for both, leasing and owning.
- Make your decision.
As always, let us know what you think. Go ahead and leave us a comment… we’re looking forward to hearing from you.
By Johanna Hofmann, MBA, author of “Smart Business Planning for Clinicians” and regular contributor to the NPBusiness blog.