By Aaron Neufeld, OD, FAAO
Sept. 22, 2021
Purchasing real estate to house your practice, and possibly rent out to other businesses, can deliver a tremendous return on investment. Here is how I made investing in practice real estate a financial winner.
Think About Long-Term ROI
I own a commercial office building that includes my practice and a small adjacent office, which we rent out.
I purchased my office building about two years ago. The purchase price was $1.6 million. The office building was recently appraised for $2.2 million. My practice is located in an affluent part of the San Francisco Bay Area–hence, the high price of real estate. However, real-estate appreciation has been rapid in the last couple years in many parts of the country despite the pandemic.
Why It’s Worth Owning Commercial Real Estate
2) Freedom from rent/landlord restrictions
3) Ability to further utilize property for profitability outside of housing practice
4) Post-practice/retirement benefits – Monthly cash flow (rent collection) or lump-sum collection (sale of building) upon exiting the practice
Tax Benefits of Owning Real Estate
○ Taken over 31-year time period
○ Only on building, not land
● Tax Deductible expenses
○ Mortgage interest
○ Property taxes
○ Maintenance + Capital Expenditures (CapEx)
Gain the Power to Transform Your Office Space
Before I purchased the property that my practice is located in, there were many improvements that needed to be made on the interior and exterior, however the previous owner did not have interest in making these improvements.
After purchasing the property I was able to make substantial improvements to the exterior, including a full scale re-landscaping and changes to the interior including new flooring. Our next upgrade will be a roof remodel in which we plan to install Tesla solar shingles to cut our energy bill and promote renewable energy.
How Do I Find the Right Property to Buy?
Finding the right property to buy for an office can be challenging. Here are a few tips for those looking to move into a building, and for those looking to buy the location they are in currently:
Moving into a New Building
● Consider future needs and growth when purchasing or building out a structure. Most practices will grow over time, so having an extra exam room is always useful.
● If financially feasible, owning sections or parcels that can be rented to other businesses allows for monthly cash flow and additional foot traffic.
● Location selection. Make sure the location is visible and geographically located where you can appeal to your target demographic.
Buying an Existing Building
● Consider the improvements/repairs that need to be made in the next five years. Determine if the cost of the real estate + these expenses is worth it over the long-term or whether a different building would better meet your needs.
● Learn all you can from the current owner regarding issues at the property level as well as at the city level.
Commercial Real Estate is Valued Differently from Residential Real Estate
Purchasing commercial real estate is different from purchasing residential real estate primarily due to how each is valued. While residential real estate is valued based on comparable units in a geographic vicinity, commercial real estate is valued based on how much revenue a business occupying the real estate can generate. Specifically, commercial real estate is valued using the following four techniques:
- Gross Rent Multiplier Approach (GRM)
- Sales Comparison Approach (SCA)
- Capital Asset Pricing Model (CAPM)
- The Cost Approach
How Do I Find Commercial Property for Sale?
There are many useful online tools for finding properties for sale. LoopNet and Crexi.com are great for shopping for commercial real estate since they not only list prices, but also calculate financing and cash flow for you.
For purchasing, enlisting the services of a real estate attorney can be substantially less expensive than using a real estate agent. Attorneys often charge a flat rate versus the percentage-based fee that real estate agents charge. Keep in mind that an attorney will also charge on a per hour (sometimes per minute) basis when communicating, so make sure you have all your ducks in a row regarding paperwork and research if you go this route.
How to Secure the Best Possible Deal
To obtain a “good deal” when purchasing real estate, a practice owner is looking for a property that allows the business to run efficiently and effectively without bogging down the owner with extraneous expenses and costly repairs.
It is important to do thorough due diligence when purchasing commercial property. Here are a few things to look out for whether buying existing or developing/purchasing new:
1) Liens and other liabilities
2) Pre-existing/underlying conditions
3) Environmental factors
4) Vulnerability to natural disasters/weather conditions
5) Understand easements associated
6) American Disabilities Act (ADA) compliant?
Developing Real Estate
7) Make sure land plot does not have zoning restrictions
8) Ensure construction lives up to long-term goals
9) Keep costs low – contractors, plumbing, electricians and getting permits
Key Calculations to Make Before Deciding to Finalize the Deal
1) Do you have the cash in either your business or personal cash reserves to make a down payment on the property?
2) Do you have adequate cash flow to cover the monthly mortgage + property tax + insurance + capital expenditures/maintenance costs of the property (assuming you will be financing a portion of the purchase price)?
Other Articles to Explore
Calculating ROI will involve looking at the following figures:
● Current rent/lease rate vs. future mortgage rate, then pitting these numbers as expenses (rent) vs equity (mortgage)
● Accounting for any other rents gathered besides owner occupied
● Determining forced appreciation from improvements made
The right commercial property can create a huge financial bonus for you while possibly also offering a better office space for patients.