Securing space for medical practice is a big decision. It’s essential to calculate all the risks and benefits before leasing or buying medical office property.
Experts say that leasing, particularly over shorter time horizons, is often a way cheaper and safer option.
It’s impossible to forecast future land returns precisely, and several individual factors influence whether a physician should lease or own. Local market conditions, personal risk tolerance, reasonable length of stay during a given location, and, therefore, the stability of practice all factor into the choice.
To help make the most straightforward decision, consider both the advantages and risks of both options.
Factors to Consider While Leasing Medical Property
Here are some factors that need to be considered for leasing medical office property:
Flexibility
Leasing offers greater flexibility than owning, so if you’re unsure about expanding your business or accepting the forthcoming years, this feature could also be your best bet. Leasing also is sensible if you encounter the subsequent prohibiting factors:
- A short time horizon—a purchase can take three months or longer to shut, then you would like time for any necessary improvements to form the office suitable for you.
- Costs are high for building or buying when you’re able to make a move—as purchase prices devour, interest rates rise, and construction costs increase; they will create a barrier to entry for ownership.
Costs
There aren’t many unforeseeable costs with leasing since your lease dictates what your values will be, and most high-ticket capital items fall to the owner. Typically, the sole variable is working expenses. Still, these are equivalent on each side of the lease-or-buy discussion; they aren’t too critical to the general decision as to whether to lease or buy. Also, carefully read the medical office lease agreement.
Market Fluctuations
When you’re leasing any property, you’re exposed to specific changes within the market at the top of every lease term. If the demand has risen considerably during your lease term, you’ll be faced with a significant rent increase. It’s also important to acknowledge that if the market declines during your period, you’ll likely be ready to negotiate a lower lease rate. In short, when leasing, you’re always riding the market.
Every market is different, but we’ve seen a tenant-friendly atmosphere within the Phoenix area over the last five years—with attractive lease rates, paid tenant improvements, free rent, and more. One of the vital elements of leasing is that you have optionality at regular intervals.
Related: Best Medical Properties For Lease In California
Factors to Consider While Buying Medical Property
Although leasing offers more flexibility in your short-term future, owning allows you to control your destiny and potentially build personal wealth. Want your name on the building and, therefore, the freedom to try to do whatever you would like within the space? Then you would possibly want to think about ownership. But thereupon control comes all the prices of ownership. Those high-ticket capital items covered by your landlord once you sign a lease become your responsibility when you’re the owner.
Risk
Owning—whether buying an existing building or constructing a replacement one—involves risk. When watching ownership options, you would like to form some assumptions (i.e., guesstimates):
What does one get to invest now for the bottom building and any necessary tenant improvements?
What will you like within the future—are there deferred maintenance items, parking zone repairs, etc.?
If you’ve got excess space to lease, how long are you able to carry the vacancy? What are the leasing costs, and what rent am I able to achieve?
With “assumptions” comes risk. You can control a number of the dangers with insurance and warranties, but many things are out of your control, just like the market generally, time delays, and price escalations.
Read More: Active Risk vs Passive Risk
Market Fluctuations
The market might hit a downturn, we’d have a recession, and suddenly you would possibly find that your building isn’t worth what you purchased or what you were expecting once you started. We’ve all seen it happen before, and it can happen again. That said, albeit appreciation doesn’t meet your projections, ownership might still be more financially advantageous than leasing because low interest rates and the tax benefits ownership provides could offset some market blips. Since an individual’s overall situation supports those, we always advise our clients to speak with their CPA.
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