A Question of Concrete: Does It Make More Sense to Lease or Buy an Office?

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Lenders say that physicians have shown more interest in owning real estate lately than in the past. Why?

You build equity. Plain and simple, when you sell your building, you get something. Over the long term, the property can be worth more than the actual practice itself.

You lock in your cost of occupancy. Rents will always go up, but your mortgage payment won’t. This may result in higher profits in years to come when you’re likely paying less than market rental rates to occupy your facilities.

You enjoy flexibility when selling your practice. When it comes time to retire, you can include the property as part of the practice’s assets or keep the property and lease it to the new owner. These rent payments can then provide a steady retirement income.

You can replace some salary with rent payments and pay less payroll tax. Because rent is considered to be non-earned income, you can reduce your salary by the amount of rent you collect and save on payroll taxes. 

A Concrete Investment?

Although most financial experts agree that it makes more sense to buy a home than rent an apartment, the pros and cons of office ownership aren’t quite so clear-cut. Physicians and dentists need to weigh a variety of factors when making this important decision, including: 

  • The availability of rental office space in the area. If office rent is reasonable in the area in which you practice, then it's probably best to rent. But if rents are high and you are planning to practice in that area for a long time, then it may make sense to buy, especially if you purchase a building that can be expanded or remodeled as needed.
  • How long you plan to practice in the area. Selling a commercial office building — especially office space designed for special purposes — can be an involved process. In a medical group, that can lead to the thorny issue of what to do when you or someone else wants to retire or move. 
  • Whether the capital earmarked for a building will be needed for other business expenses. No doubt, real estate ties up assets. You have to decide whether it makes more sense to use your capital to invest in facilities, or for growth and other aspects of practice operations.

Your Timeframe Is Everything

Once you buy the property, you’ve obviously lost some flexibility if you need to move later. For this reason, purchasing may not be the best option for fast-growth practices or practices that have a hard time forecasting their space needs.

But if yours is a mature practice and you’re confident that you can take a long-term perspective, then purchasing your business facilities could be a beneficial move. And with interest rates still at lows not seen in over a generation, this could be a truly unique opportunity to lock in a low cost of occupancy for years to come.

Who better to discuss your long-term financial goals with than your accountant? Our experienced professionals can “run the numbers” and help you decide whether purchasing or leasing makes the most sense for your practice. 

SKR+CO Expert
Danielle Gaffney, CPA, Senior Tax Manager
Danielle has been in public accounting since 2013. She works primarily with small businesses and partnerships and particularly enjoys serving real estate and medical/dental practice clients.