Owning a home can create one of your largest assets and is typically seen as a relatively safe investment opportunity. Conventional wisdom would say the same is true for veterinary real estate as there are legitimate benefits to owning, including paying down the loan principal and building equity, receiving loan interest and property tax deductions, and more. When running the numbers for owning, leasing is often labeled as “throwing money away” compared to building equity through ownership.
While these and other reasons make ownership compelling, there are many reasons why leasing your space might be a better decision than owning. This is especially true when considering the stage of your career, your ideal practice location, and the quality of building you can afford.
Should you own or lease? The questions to ask
Before deciding whether to own or lease your veterinary real estate, ask these questions:
- Can I qualify for a loan to own or build my own space?
- Is this the location I want to be in for the next 15 to 20 years?
- Is it better to lease a smaller space for the next 5 to 10 years and then purchase or develop my ideal building when my practice is ready?
- Is the increased payment and debt worth it if owning costs more than leasing?
- Would my practice be more profitable if I leased and received a large tenant improvement allowance, free rent, and a build-out period?
- Whether I need to get out in 1 year because of an emergency or I want to retire in 20 years, what is my exit strategy?
- Are there any purchase opportunities available in the area where I ideally want to be?
- Will my practice suffer if I choose to own my space or build in an inferior area versus leasing in a more desirable location?
While all of those questions are important, let’s dig into one of them further: Will you need more space in the future?
Will you need more space in the future?
Many veterinary practices have the desire to grow, and practice owners often wonder, What can I afford, and how much space will I actually use over the next few years vs. what will my practice’s needs be in 10 years?
If you are too conservative, you can end up in a space that you will outgrow, which will choke your profitability. The lost income from reduced patient volume could end up costing you 10 times what the expenses would have been to manage a larger space if you would have better planned. Also, the smaller your practice and revenue is, the lower the value of your practice.
Conversely, if you go too big, you can end up paying for a large portion of space that doesn’t get used for anything except storage.
Moving and build-out costs are the main reasons long-term leases typically present the best opportunity. For one, they eliminate the uncertainty of “deciding as you go” in a short-term lease. To know which option is best for you, surround yourself with market experts that can help you accurately project the amount of space you’ll need. Ideally, you’ll have the upside of growth, but you won’t have so much space that you can’t expand into it in a reasonable amount of time.
If your space needs will continue to increase in the near future, leasing could be the best option for you now while considering a purchase or new-build when you are more certain of your long-term practice size.
That being said, there are scenarios where the numbers prove that purchasing a building or space and paying for a build-out could cost significantly less than leasing. Even if it costs more, it can be worth owning if the building and finishes are of high quality, the location is ideal, and/or the neighboring businesses are synergistic.
The best approach to choosing what’s right for you
Clearly, there isn’t a “one size fits all” approach to owning vs. leasing. What’s right for one practice may not be right for yours. But, there is a “best approach” to ensuring you make the right decision for your practice, and that involves:
- Hiring professional representation — Choose someone who fully understands veterinary real estate and won’t have any conflicts of interest (someone who doesn’t represent landlords and sellers).
- Becoming educated on all options — Don’t assume you have to pursue only one specific scenario. Your agent should fully educate on what buying or leasing would look like for you while running detailed analysis on the cost to enter and maintain each option. And, he or she should be able to tell you the pros and cons of your exit strategy in either scenario.
- Having peace of mind — Ensure you have peace of mind with your final selection. As the second or third highest expense behind payroll, there is too much on the line with your commercial real estate decisions to not maximize every opportunity you have.
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