The Benefits of Owning your Dental Office
Owning your dental practice real estate offers exceptional investment benefits, allowing you, as a practice owner, to strategically boost your long-term net worth in several ways:
1. Appreciation
2. Equity Creation through Loan Paydown
3. Tax Benefits via Depreciation and Passive Income Conversion
While the advantages of appreciation and equity creation are commonly understood, the substantial tax benefits often go unnoticed.
When you own your dental practice real estate, paying yourself rent becomes possible. This transforms your "active income" as a dentist into "passive income" in the form of rent. Why is this advantageous? Because "passive income" enjoys more favorable tax treatment. Converting more "active income" into "passive income" enables the use of "passive losses" to offset that income. For instance, if you pay yourself $100,000 in rent yearly from your real estate ownership, that translates to $100,000 in passive income. Any "passive losses" from depreciation on your practice real estate or other investment real estate (like rental properties or syndications) can be employed to counterbalance this $100,000 of passive income. Essentially, you can shelter $100,000 of income for as long as your practice pays you rent. This continues even after selling your practice and can serve as a valuable retirement income source, potentially enabling early retirement.
In my case, I have two practice locations, each leased from my real estate holding company at approximately $20/square foot NNN for 5000 square feet, with annual 2% rent increases. This equates to about $100,000 of rent per location annually or a total of $200,000 per year (rates may vary based on your location). Currently, I incur no income tax on this rent due to sufficient "passive losses" offsetting it via a cost segregation study.
Imagine being able to shelter $100-200,000 of income annually! What could you accomplish with those tax savings? Personally, I prefer reinvesting it in other passive income sources, establishing a snowball effect.
I acknowledge that purchasing real estate might not always seem viable. High price points or perceived capital inadequacies might pose challenges. However, overlooked solutions to these problems often exist, necessitating some contemplation and resourcefulness.
Should you seek guidance on owning your practice real estate, I'm here to assist. Whether it's sharing experiences, providing resources, or offering insights, I'm more than willing to help! Owning your practice real estate can present an exceptional, low-risk entry into the realm of real estate investment.
— Dr. Reed Faldet
Buying Your Dental Office Over Leasing
Why don't more dentists doing a startup consider buying a property for their start up, rather than leasing from someone else?
In a leasing scenario, you're often committing to 10-15 years of rent payments alongside prorated property expenses typical in a NNN lease. Understandably, a lease is as much a financial liability as a loan, each commonly supported by personal guarantees—both place obligations on you.
Moreover, the monthly payment on a 25-year mortgage for a property may not substantially differ from potential lease payments. So, could it be the down payment or liquidity requirements from the lender that deter many?
Some banks might extend loans covering 100% of the real estate purchase price, although it's not a prevailing practice. Traditional owner-occupied financing, conversely, typically demands a 15-20% down payment. If you lack such capital, exploring partnerships solely for the real estate might be worth considering. However, I'd advise against partnering on the dental practice startup itself, given its operational intricacies and potential upside.
Could the challenge lie in finding a viable property, seeming like an insurmountable task?
Certainly, it can be daunting, yet it needn't be overwhelming. This is where a proficient real estate broker comes in. Their job revolves around sourcing properties that suit your needs. By providing them with specific criteria, they can present potential properties aligning with your qualitative and quantitative guidelines. Engaging multiple realtors or brokers could be beneficial, as local realtors might offer valuable options. Always start with healthcare specific brokers as they are going to understand your needs the best.
–Dr. Reed Faldet
Networth and Owning
This podcast episode discusses how purchasing your real estate can significantly boost your net worth by $1 million or more and save hundreds of thousands in taxes. It's an excellent resource for anyone considering a startup or acquisition in the dental field. The interview features the founder of CARR Healthcare Realty, who provides a comprehensive breakdown of crucial factors regarding leasing and acquiring dental practice real estate.
Around the 17-minute mark, the speaker explains why opting to buy your real estate can easily add $1 million to your net worth and save over $100,000 in taxes. Using an example where purchasing practice real estate for $1 million on a 20-year loan, he illustrates how monthly payments reduce the loan principal, steadily building equity, resulting in a $40,000/year net worth increase. Additionally, with commercial real estate appreciating historically at around 3% per year, there's an added $30,000+/year increment to your net worth. The combination of loan repayment and appreciation can significantly boost your net worth by seven figures.
At the end of the 20-year period, the property purchased at $1 million is likely valued close to $2 million and is debt-free. If one chooses to sell the practice, they could potentially receive $2 million for the practice real estate, separate from the proceeds of the practice sale. Alternatively, considering a cash-out refinance could result in a tax-free withdrawal of over $1 million, while still collecting rent from a successor. A $2 million property can generate $100,000-150,000 cash flow annually, supporting an early and comfortable retirement.
I strongly advocate for practice ownership and owning practice real estate. In my view, there's no better method to increase net worth and achieve financial freedom earlier in life. If you're eager to explore practice ownership or real estate, I'm available to connect. Achieving ownership of your practice and real estate is feasible; sometimes, it requires creative use of available financial tools! I'm also happy to assist in evaluating larger deals, particularly multi-tenant retail or medical office complexes, provided the numbers align. Leveraging your operational business (dental practice) to invest in more passive ventures (commercial real estate) can be a strategic move!"
— Dr. Reed Faldet
Overcoming Obstacles to Owning Your Dental Practice Real Estate
What are the primary reasons dentists undertaking start-ups opt to LEASE their space rather than OWN it? The two most common reasons I hear are:
1. Availability of Suitable Property: Prices don't align, and there's limited supply.
2. Difficulty Financing: Affording the downpayment (10-20%) or concerns about taking on more debt.
So, how do you tackle these obstacles? Firstly, you need to determine if owning your real estate is worth the effort. If the numbers make sense, I wholeheartedly believe that every practice owner benefits from property ownership. Long-term financial benefits and the control that comes with ownership outweigh the drawbacks of leasing. Negotiating leases can feel restricting, especially when you're faced with conceding to landlords or relocating.
Commercial leases differ from residential leases; tenants often shoulder property maintenance and repair costs. If you're investing significant amounts into building out a space and subsequently maintaining it, why not benefit from tax advantages, appreciation, and equity growth as a property owner?
Here's a brief guide to overcoming these common hurdles:
Availability: Expand your options. Consider vacant commercial properties like former bank branches. These spaces, ranging from 2000-4000 square feet, can be converted into dental offices within your build-out budget. Additionally, look at expanding your budget; new medical condos, office spaces, or retail units sitting on the market for a while might be priced lower, yet hold value relative to their cost. Buying below market value instantly creates equity, making financing easier.
Difficulty Financing: Owner-occupied real estate reduces down payment requirements. Some lenders ask for 10-15%, while others may loan the full purchase amount. Alternatively, consider a capital partner solely for the real estate. This collaborative approach allows ownership and control from the start, benefiting both parties.
Debt can be daunting, but if your income from assets exceeds debt payments, it's very manageable. The perspective on debt varies, but if you trust your success as a practice owner, extend that trust to owning your real estate!
—Dr. Reed Faldet