By Chad Fleming, OD, FAAO
Feb. 9, 2022
Practice real estate can provide an OD with additional financial security and greater freedom in how office space is used and transformed. Here is how to make real estate an investment that delivers a substantial return.
Real Estate Can Be a Long-Term Financial Growth Strategy
The owners of my practice, including myself, have an additional LLC that owns real estate. We do not own all five of our practice’s locations yet, but the goal is to continue to acquire the real estate. Real estate is a great investment strategy, and allows for a doctor to sell out profitably, whether to private equity or other partners, and retain income into retirement.
Even if you only own small pieces of a large real estate entity, there are many advantages. In addition to owning the real estate where you practice, you can invest in commercial real estate for retail or other businesses. If you own commercial real estate, you also have the benefits of a business taking care of the property and not dealing with residents who trash or degrade the property value. Commercial real estate usually has a minimum of five-year contracts for tenets, so your risk is minimized compared to residential real estate investments.
The real estate investment which my practice partners and I made has a net return on investment that is approximately 10-15 percent depending on the given year. Last year was not as profitable due to having to replace HVAC systems at many of the locations, as they seemed to all go at once.
Make Your Office Be Any Way You Like
When you are renter, you are limited by what the landlord will permit you to do. When you are an owner of your office space, nearly any option is yours. We don’t have to worry about taking the time to submit a formal request or application to the landlord to make desired changes. We also can do it ourselves, or have an inexpensive contractor do it. In one of the practice locations we don’t own, there are guidelines of approval and certain requirements that must be met before changes can be made to the structure. I don’t like to have to wait to change things, and don’t like spending more money than necessary.
How Do I Find a Good Commercial Property Realtor?
Ask the realtor questions about how they get paid, what type of relationship you will have with them–whether it will be a transactional or broker/negotiator relationship. There are different types of relationships you can have with a commercial realtor, so it’s important to have that information.
The realtor should work for you in finding property to invest in. If they know you are relatively serious they will help you find the type of property you are looking for and will know about property that is available pre-market. You don’t have to stick with one realtor; you can move around until you find the right one.
Red Flags to Watch Out for When Buying Property
Red flags to watch out for when buying commercial real estate are similar to what you would watch out for when buying a house. For example, you want to check the build date, replacement of HVAC and taxes, among other factors.
Your realtor should be able to get all of the information you request about the property you are thinking of buying, along with information from the previous owner.
Don’t assume the flashy areas of town are where the best real estate investments are. Sometimes the best deals are well-maintained buildings that are not necessarily located in the trendiest part of town, and, therefore, are not priced as high.
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Do Due Diligence & Expect Unexpected Expenses
Take the time to carefully consider the contract for the sale before you make the investment, and expect unexpected needed repairs or updates. It’s best to keep money in reserve for the express purpose of addressing these expenses, which are usually inevitable.
Calculate the Money You Will Have Left After Paying Mortgage for the Property
How much money will I have left over after I pay the bank? Can I afford to pay the mortgage every month without bankrupting myself? Will my ROI be greater than 7 percent, 10 percent or 12 percent? Those are a few key questions to ask yourself before finalizing the sale.
If you calculate that the ROI will be under 10 percent, you want to keep shopping. Less than 10 percent ROI is not bad, but it’s not a home run either. Calculate your payoff and how much interest you will pay for the loan to purchase the property. You may want to eventually use the rent for the space as income to live off of. If you invest in commercial real estate wisely, and accurately calculate your ROI, you will have added to your long-term financial security.