Does Real Estate Ownership Affect the Value of Your Practice?

Does Real Estate Ownership Affect the Value of Your Practice?

Every doctor, dentist, and veterinarian practice needs physical space that it can occupy. However, different practitioners arrive at different conclusions about how to obtain that space. For some, leasing space, perhaps in an established medical plaza or office park, is the most sensible option. For others, it might be more logical to purchase a piece of real estate, owning the place outright rather than paying rent to someone else.

As you consider the real estate options for one practice, you might wonder whether the ownership of your building would ever affect the valuation of the practice itself. In other words, will buying your own space now prove advantageous when it comes time to sell? The answer is a little bit complicated.

What Determines the Value of Your Practice?

There are any number of factors that can affect the value of your practice, though there are two factors that loom larger than all the rest. Those factors are revenue generation and cash flow.

Would owning your own piece of real estate ever affect your revenue generation? Probably not. That’s going to have a lot more to do with things like your marketing efforts and patient experience.

So what about cash flow? That’s where ownership of your building might actually have a tangible effect on the resale value of your practice.

Rent, Real Estate, and Valuing Your Practice

When you sell your practice, appraisers will look for something called the “adjusted cash flow.” That’s the number that’s really going to matter to potential buyers. Basically, the appraiser will look at whatever number you’re currently paying in rent, then adjust it to reflect the current market value. In other words, the assumption is that a potential buyer will pay market-based rent.

If you own your own building, you may be in the habit of paying yourself “rent.” Some practice owners actually pay themselves a lot of rent, potentially more than the actual market value. But other practice owners don’t pay themselves rent at all. The decision about how much rent to pay yourself is usually based on tax planning.

When an appraiser adjusts your rent to the current market value, then, the actual rent you’re paying yourself is more or less irrelevant. The appraisal process and its adjustment to market values levels the playing field, meaning that the practice that owns its own space and the one that doesn’t will be on equal footing.

Other Factors to Consider

Does that mean that the building you occupy has no impact on your practice valuation? Not at all. Beyond questions of owning versus renting, there are a number of ways in which your physical space can impact your practice resale value. For example:

  • Is your practice well-positioned to meet the target demographic?
  • Does the interior layout promote patient experience and clinical efficiency?
  • Do you have operating rooms going unused, or are you making full use of the available resources?
To come at all of these questions from another angle, simply ask whether your physical space is contributing to the overall success of your practice. If the answer is yes, that’s likely going to make it more attractive to potential buyers.

Reasons to Own Your Own Building

It should also be noted that, even beyond the question of practice valuation, there are definitely some good reasons to consider purchasing your own building. For example:

  • Most of the time, physical office spaces appreciate over time, which means they are a financially advantageous investment.
  • If your space has room for multiple practices in it, you can generate substantial rental income.
  • You can also build equity, which may be useful for securing different types of practice financing down the road.

Consider Your Options

There are a number of factors that might affect your thinking with regard to purchasing practice
space. If you have any additional questions or simply want to speak with an expert, we invite
you to contact us. Reach out to the team at LenDRgroup Consulting to inquire about our practice
consultation services.