That is the question!
By Margaret M. Boyle, CPA, CVA
AT SOME POINT, you will need to decide whether to continue to rent space or buy your own space.
For most, the decision is difficult and many factors must be considered. While there is no recipe for making this decision, you must be aware of the myriad of factors to consider at least.
There are many reasons to consider buying a building instead of renting:
- Maintain control of the facility, including its maintenance and costs.
- Find better or more space (image, size, or location) that is not available through the rental market.
- Diversify your investment portfolio.
- Pay lower monthly mortgage payments than rent.
- Provide a project for an otherwise bored dentist.
- Or - the most common we hear - “My sister-in-law who’s in real estate said I’m foolish not to own.”
If you have the bug to own your space instead of rent it, consider the overall financial impact of your decision. The purchase of a building may be the single largest investment many dentists will make except for a personal residence and a dental practice. Give considerable attention to your overall financial plan and long-term objectives. We recommend the dentist have a solid financial structure that includes:
- an overall personal financial plan and an understanding of how ownership will impact it;
- established retirement and after-tax investment accounts that will not be hindered by the purchase;
- healthy cash flow personally and at the practice;
- manageable practice and personal debt;
- an expectation for continued growth in the practice; and
- available time and energy for your new role as “landlord.”
After you have jumped those hurdles and decided to purchase, assemble a team of professionals: your dental CPA, dental attorney, real estate professional, lender, equipment dealer, and designer at a minimum. While many dentists think they are better doing the project on their own and saving money, the added cost for an experienced and knowledgeable team are far outweighed by the benefits of avoiding major pitfalls. Your team will help you evaluate the options, more accurately estimate the total costs, obtain competitive financing, and manage the project (which will allow you to focus on patient care, production, and managing your practice).
If the purchase of the building turns into an even bigger project of buying land and constructing a building from the ground up (or even a major remodel), there are significant financial, tax, and legal considerations: performing a cost segregation study to maximize your income tax deductions and minimize taxes; qualifying and applying for tax credits related to rehabilitating old or historic buildings; or breaking out costs or being in compliance with the Americans with Disabilities Act Credit.
Your dental CPA and team of professionals will help you decide how to properly structure the purchase and ownership of the building, including the following considerations:
- Should you own the building outside the practice to better segregate your assets and protect them from lawsuits?
- Are you planning for a partner to buy in down the road?
- Do you want to sell a portion of the building down the road?
- Do you plan on keeping the building long term to extend the income stream after you sell the practice and retire?
- Which entity should pay for building maintenance?
The forgoing represents a summary of some of the key issues you should consider. There are a myriad of other issues beyond the scope of this article. For example, each state has different tax rules and laws that need to be considered in addition to federal tax law.
In the end, whether to continue as a renter or buy your own space will likely be decided by the numbers and tax benefits, your emotions, and other intangible items. In either case, assemble a team of professionals that will help you achieve your goals and avoid the money pit.