When it comes to your practice, you need to consider the options clinically.
In the middle of a working session with a client recently, we were reminded of a timeless discussion that we’ve been having with doctors for nearly 20 years; a discussion that always begins with the question: “When it comes to my practice property, should I rent or buy the rooms?”
At the outset it’s important to note that there’s no “general” answer; it’s not a simple yes or no. As with many business oriented questions, the answer depends on each individual situation, regardless if you’re a vet, doctor, or dentist.
So how do we find the right answer? We need to look at 4 principal considerations – cashflow impact, commitment anxiety, capital outlay and tenancy risk.
There’s a saying in financial circles – “Turnover Is Vanity, Profit Is Sanity, Cash Is Reality”. Most businesses live or die according to their cash flow so it’s of great comfort to the @Credabl team when a doctor asks us “can I afford to buy my rooms?” It means they are really putting a lot of thought into the commitment they are about to make.
In reality the difference in cash flow between renting and buying may be quite narrow at the outset, but it changes over time. Generally speaking, premises are rented on a “yield” basis, which means the owner broadly requires a return of 6 to 8% per annum of the property value in rent from the tenant. An owner takes on a mortgage for the property value that, at the time of writing, carries a 4 to 6% per cent interest rate (depending on the circumstances).
At the outset, it may then seem that renting starts off more expensive than owning, but don’t forget, the owner also has to pay off the mortgage amount (the principal) plus the interest bill, so the monthly mortgage repayments are likely to come in a bit higher than the rent at the beginning. That said, it’s probably a variance of only 15 to 25% between the two amounts.
Additionally, rental agreements usually come with annual rent increases that can quickly eat into the difference. In fact, these increases can at times result in the rent and mortgage payments becoming almost the same within 3 years.
This situation amplifies over time – the rental will continue to be based on the value of the property but the owner has ‘locked in’ their purchase amount, and therefore the amount that they have to service in debt. Of course, the owner has an exposure to interest rates (going up) that may impact on their mortgage repayments.
At the end of the day, you need to keep all the above information in mind when making a decision of whether to rent or buy. Think hard about what’s best for you in the long term.
It’s a big decision, we get it. So a little anxiety always creeps in. What we’ve found over the years is that people look at the two options of renting and buying disparately. When it comes to buying we often hear “it’s a lot…. it’s $750,000” but when it comes to renting “it’s only $4,500 per month”. But don’t be fooled, both carry a relatively large commitment.
When renting, a landlord generally wants a 3 to 5 year lease agreement and you almost always want a renewal option to protect your tenancy options (not to mention any goodwill you’ve built up). So let’s get the calculator out. That rent of $4,500 per month is actually a commitment for up to $270,000 over 5 years and if you extend, it’s $540,000 over 10 years (and that’s not taking into consideration probable rent escalations). You should be considering it from the viewpoint of $750,000 vs [at least] $270,000 – both are still very significant commitments but now you can consider them on an even playing field.
There’s no getting around this one – buying usually involves a larger capital outlay than renting. The deposit (if needed), transfer stamp duty, legals and advice involved in buying will almost always cost more than the rental bond (usually 3 months rent but can be up to 6 months) you need to outlay to rent.
If you’re in the early stages of your career, coming up with a large amount of capital can possibly hinder your growth, however there are many ways to open up options around these costs.
We previously wrote about finding cash for a deposit on a home loan in Part Two of our “Tough decisions – ago toast or a new home” series. Similar options make sense here too. You can read more here.
You also can’t ignore your borrowing structure and future-proofing it to enable greater flexibility, such as setting up a unit trust for example, especially if you’re looking to bring in partners at a later stage.
Perhaps the most important consideration when deciding if you’re going to rent or buy is assessing the risk of simply being a tenant. So much is out of your hands. For example, the owner can sell the property, leaving you with a new landlord – someone unknown, who wants new terms, limitations on lease renewal etc.
On the other hand, if you’re the owner, you’re in control of what happens to the property.
The same applies to any fitout improvements or essential works. If you own the property, you can make changes when you want, and without needing the landlord’s permission. As a tenant, you’re reliant on the landlord to “fix” things in a timely manner, which doesn’t always happen. Even worse, the landlord may not necessarily grant permission to a particular “fix” or change in the property which could impact your practice and patient experience.
Before you go…
The final thing to consider, which we haven’t looked at above, is your growth or exit strategy. People often buy their rooms earlier in their career when they aren’t quite sure if their dreams are achievable, or when retirement seems a long way off. However, remember a few things:
- If you aspire to grow and run a practice that needs 200 square meters of space within 5 years, there’s no point starting out in a smaller space that cannot be extended. As a tenant, you may have less “sway” when it comes to extending (either via construction or leasing additional space in the same complex).
- Some practices have location-based goodwill – for example, you are the village vet, the neighbourhood dentist or the only GP in a medical precinct. If you move (perhaps not at your own choice), will your patient base follow? If you sell, will the goodwill purchasers be more attracted if there is the prospect of property ownership at some point in time.
- When it comes to exiting, the tenant usually leaves with nothing. After years of paying rent they simply walk away – often leaving an expensive fitout behind!
- As an owner, you may decide it’s time to move on, or retire. In this case, you always have the option to rent out the property and continue to accumulate wealth. Additionally, when an owner wants to sell their practice they have a more secure proposition to put to purchasers or maybe an income-generating asset to support their retirement.
With so much to consider as you set up practice it’s understandable that many practitioners feel overwhelmed and opt for what seems to be the “safest” or easiest choice .
But safe isn’t always smart. It’s important to step back, seek input from professionals and consider the options clinically – you may still decide to rent but you’ll feel comforted it’s the right pick having gone through a thorough decision making process.
The team at Credabl is always available to work with you to consider your options. Let’s talk!