Real estate is a key component of your practice’s overall value. Here’s how to know when owning your property is the right option—and when it’s not.
I WAS AROUND 30 when I built my practice. The debt was cleared well before I turned 50, at which point I started paying myself rent (and generating extra income for the business). Investing in real estate means playing the long game, and it usually pays off—sometimes beyond all expectations. One doctor I recently consulted with ended up owning property that far exceeded the value of his practice if used as the location for something other than a dental office. This doctor had to decide whether to sell his practice to remain in his current location or sell the real estate alone for a lot more money.
Dental practices with great locations are valuable commodities—unless the practice cannot remain at its current location after a sale. If you’re leasing your practice and the lease is not assumable for subsequent owners, your practice will have little or no value. There may be no way around leasing if you’re in the middle of a major city. However, it is possible (though not easy) to write a long-term lease so that someone purchasing your practice will have the option to take it over. A long-term assumable lease in a major market can add significant value.
Still, you’ll realize the maximum value for your practice at sale time only if you own the real estate as well. It’s one of the safer bets you can make, as real estate can historically be counted on to appreciate. Owning your real estate also brings significant peace of mind. For example, what happens if your building is sold, and your new landlord is lax about upkeep, improvements and repairs? Your practice could quickly lose its luster while you’re still trapped by a lease. Or if your landlord sells the real estate and wants you out in order to change the property’s usage. Owning means you’re in control of your most valuable business asset.
In addition, owning gives you two separate bargaining chips when negotiating a sale agreement. Some prospective buyers might see more value in your land and building than the practice, or vice-versa. That allows for wiggle room to give more monetary heft to one than the other, assuming it makes the buyer happier. In addition, if your building has additional rental units that are occupied, its value could be even greater to a potential buyer because it offers built-in room for expansion later on, and reliable income in the meantime.
Things get more complicated the longer you wait to invest. If you’re in your fifties or are planning on fewer than 10 more years before retirement, that changes the game considerably. It’s a lot like buying a home: If you plan to stay, it’s a smart move, but if it’s only temporary, renting is the safer option. By the way, there’s nothing wrong with leasing commercial real estate as long as you negotiate a competitive long-term assumable lease and accept the fact that your focus should be on creating value by generating high income in a profitable practice.
Of course, there are no hard and fast rules when it comes to real estate. Every doctor has unique priorities, and each market comes with its own set of challenges and opportunities. If you never pictured yourself in the real estate business, join the club; entrepreneurs of all kinds face the reality that their business will be more stable and expandable—and more saleable—if they own their land and building. Heck, McDonald’s makes billions more from their property holdings than from burgers and fries.
The good news: Real estate doesn’t have to be a constant worry. It’s just one piece of your long-term business plan, albeit an important one.
If you’re struggling with whether it’s the right investment for your practice, reach out to me. Or if you’re thinking of selling but aren’t sure how to weigh the value of your practice and real estate, I’m here to help.
JAMES M. CLARK, DMD has filled many roles in clinical dentistry for more than 30 years. Now the head of Practice Transitions at Benco Dental, he can be reached at firstname.lastname@example.org.