There is an age-old question I’ve come across in discussions with many health-care professionals.
There is an age-old question I’ve come across in discussions with many health-care professionals. This question is not limited to professionals in the health-care industry, such as medical doctors, chiropractors and pharmacists, but is raised also by other professionals such as engineers – I have even heard the question from the occasional accountant with whom I’ve worked over the past 20 years. The question: “Is it better to have an investment real estate portfolio or to own the commercial property my business or practice it is in?” Both options have merit but, as with most things in life, this isn’t simple to answer, as there are many items that are unique to each individual and their practice’s operations to consider.
Rent and Opportunity
I recently had an interesting conversation with a chiropractor’s accountant on this topic, which led me to write this article. This particular accountant’s perspective was: “The answer to the question of whether a chiropractor should have an investment real state portfolio, separate from his/her practice, or own the commercial property his/her practice is in depends on whether, in the long run, they want to be a doctor or a landlord.” Further demonstrating that this is not a clear-cut decision with a cookie-cutter answer for all professionals, he added: “It’s simple if your rent is far more expensive than the mortgage payment to own and the renovation costs are reasonable for a place you can see your practice in for a long time. The primary item to factor in is the opportunity cost of the capital and time required.” The interpretation of this is that you must decide whether or not you could get a better return by investing the available capital in something else compared to tying it up in a down payment, renovations and ongoing building maintenance. Also, you must consider the time you’d spend as a landlord compared to time spent being a practitioner.
What type of practice do you have?
In answering our question, there are various scenarios for owning your own commercial property as a health-care practitioner that should be taken into consideration.
Our accountant friend, on page 39, described the typical situation of a doctor owning the commercial property, either personally or through a holding company, and the practice operating as simply as moving money from your left pocket to your right. What this means is that the revenue from owning the property comes directly from patient care, or other clinic operations, and is not, in any way, independent from it. This is particularly the case for many chiropractors whose practice in the commercial property is the only source of revenue. This – again, depending on other co-factors – may or may not be a best-case scenario for owning your commercial property.
If there are other tenants, however, then there can be a legitimate claim that there is an additional revenue stream available to you as a building owner that is separate from your own operations. But this, too, can sometimes be blurred, as in the situation for chiropractors who offer additional services, aside from their own, by having other health-care professionals available in their clinic. These other practitioners form part of the business model and the additional revenues the chiropractor receives are either from renting their space or a small margin on their services. The consideration to weigh here – and one that is often overlooked – is which of these practices is the “flagship” operation, or the primary draw, for the clinic, without which the others likely would not exist or would fail. Here is where the blurring of lines can occur, thus leading to inaccurate assessment of the situation. In other words, as the accountant put it for more clarity, ask yourself the question: “If you chose to wind up your services, realistically would the operations continue to generate a sustainable income or would those practitioners fail and have to eventually move on?, Another significant consideration is, “Could these additional revenue streams be attained without having to own the commercial property?”
Benefits to owning your building
Some obvious benefits of owning the facilities you practise in include the fact that there is no one more reliable in paying rent than you, and you are building the equity – through property value increase and mortgage paydown – in your own commercial property as opposed to someone else’s. I’ve always liked the idea of investing in yourself, and this is as close as it gets. This shares some of the same principles as owning your own home. But of course, unless you are working out of your own home, you are not generating any income from your home. From an investment perspective, this is viewed more as a “saving” versus a “making” money plan because most would prefer not to have to downsize or sell their home in the future for income. Also, as your own landlord, you don’t have to put up with the landlord’s restrictions or slow responses in dealing with any issues with the facilities – for example, parking, leaking roof, HVAC, plumbing, electrical problems, etc. You now run the show, and so, you just quickly deal with things on your own terms, and carry on.
On the other hand…
The reason many choose to keep their real estate investments separate from their practice operations is to be able to have a revenue stream that is independent of their business, and to keep their personal holdings clear from the business and its operations. This can be simpler to manage over the long run and the ability to liquidate for estate planning is cleaner, unless there are plans for children to take over the practice.
Diversification is also another consideration and there are a couple of ways to view this. Aside from not wanting to have all their capital invested in one place – that is, the business – health-care professionals often prefer to live not too far from work. What this translates to is that both properties, home and commercial property, are in the same market. This works well when times are good, but the reverse is true also: when times are rough, the value of both will be reduced. Therefore, having an investment property portfolio that is separate from your business and your home also allows you to have a true passive income; that is, it produces income without a lot of time involvement and independently from the performance of your business and/or home equity.
Here’s another thought: when you own the commercial property as a part of the practice, debt payments and other expenses associated with owning cannot be made unless they are generating income from your work because everything is directly linked. A common opinion of many business owners is that the focus of their time and energy should be devoted to their professional practice and not have the distractions of being a landlord take away from this. As one doctor said, “The return on an hour spent with my patients is greater, in my practice, than on being a landlord.” And so, for some, the preference becomes to have a real estate portfolio that is separate from the business operations and to put into place a system for administering that portfolio without a the practitioner’s day-to-day involvement, thus relieving them of the role and challenges of simultaneously being a landlord.
Points to consider
In summary, the question we are trying to address does not have one answer that is best for every chiropractor – or, for that matter, for all professionals in general – but, instead, depends on your individual preferences, your income and investment goals, and the type of clinic that you run.
To help you decide which option may be worth exploring for your own individual situation, here are a few things to think about:
- Do you want an income or assets independent from your practice or operations, and why? (That is, what are the diversification options and benefits for you?)
- What does your clinic’s operating cash flow look like with both options and what are the immediate capital requirements? (That is, down-payment, improvement costs, etc.)
- Can the money you’re using (for down payment, renovations, building maintenance, etc.) or time required provide a better return from somewhere else? (That is, what is the opportunity cost?)
- Exit strategy. When, or if, you are looking to sell your practice, is it likely that the property will form part of the sale and will it make it easier or more difficult to sell?
- How easy is it to sell or lease the commercial property should you sell or wind up your practice?
- How much do you want to be involved in the business of being a landlord and do you have the expertise to manage this? Experienced commercial property owners know that when commercial properties are vacated – that is, if you decide to wind up your practice – they can remain vacant for extended periods as commercial tenants have very particular needs, which can also lead to costly tenant or leasehold improvements.
Whether you consider having real estate as a part of your operations or separating your real estate investment portfolio as an option to create or preserve wealth, building equity and creating a long-term passive income is something worth exploring. How you wish to go about it – and I’ve seen success on both fronts – should be based on your defined objectives and priorities. You will discover there are unique strategies that align better for you and options to help you achieve what you want.
Will Wong is the director at CORE Investment Solutions Inc., a real estate investment firm based in Vancouver that specializes in helping individuals and companies build hassle-free real estate portfolios. He has written a report called The Strategic Real Estate Investing Report, and if you would like a copy or have any suggestions on topics for future articles, he can be reached at will@investresmart.com.
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