By Lisa Shin, OD
Feb. 10, 2016
Purchasing real estate for your business can be more than a good investment. If you’re a parent, it can give you the space you need to better balance your family responsibilities and work. This is my story of how a real estate purchase enabled me to build my practice, while being there for my daughter’s every milestone.
I was able to integrate daycare within her practice. Business condominiums are an attractive real estate option, as it allows the purchase of space within a larger building. Be aware that there can be restrictive by-laws, as well as condominium association dues.
I had been in solo private practice for a decade when I became a mom for the first time. I bought my practice six months after graduating, and had worked hard to become an established, respected member of my small-town, mountain community in New Mexico. I had finally paid off student loans and my practice. But I had no intention of cutting back or slowing down.
I had heard about an OD who owned a large building for his practice, and used one of the floors as a personal daycare for his children. This situation appealed to me: a nursery/playroom in my practice where I could be close to my daughter while working. I had paid years of rent with nothing to show for it. In fact, my total rent paid was near the value of the space itself. I decided that it was time to buy!
My first opportunity was a work/live condominium. It was contemporary and modern, specifically designed for a business on the main floor, with spacious living quarters on the two upper floors. The garage could be used as storage. However, the lower floor was actually less square footage (960 square feet) than what I had been renting.Also, the county restricted what percentage of the condo (less than 50 percent) could be used for work, which meant I would not be able to expand my practice onto the upper floors. The most serious concern was parking, which would be restricted to 2 patients at a time. Although this was specifically designed for work/life balance, there would be too many constraints on the practice.
Next, I found prime commercial space in a downtown location that included multiple offices, a large conference room, and a nice break room. It was a higher price than I expected and the purchase would require a commercial bank loan. Even with my strong relationship with the local bank, I was only able to secure a 9.25 percent fixed rate. An alternative was a variable rate loan, which would start at 6.25 percent, but would adjust every three years, to a maximum of 15 percent. A variable rate is usually tied to fluctuations in the market, and it is always riskier.
I found a bank that was located further away, which offered a 6.25 percent fixed loan. However, I would be required to bank exclusively with them, pay their high credit card processing fees, and make CD investments. With a tax deduction on interest payments and property taxes factored in, I would have paid only a few hundred dollars more than my previous monthly rent. But I would have been a proud owner of considerably more attractive real estate in the end.
The nursery Dr. Shin created in her office for her daughter. As her daughter has grown older, the doctor has converted this room from a personal nursery to a playroom for all children visiting her office, full of games, toys, books and movies. Dr. Shin says purchasing her office space gave her greater control over how the space was used, including the ability to better manage her work and family responsibilities.
Advantages of Buying over Renting
Real estate is an excellent way to build equity as a long-term investment. There are many advantages of buying practice space. In the future sale of one’s practice, ownership of real estate is an essential part of total value. Establishing asset ownership is also a great way to secure retirement.
Remember, mortgage interest, property taxes and maintenance fees are all deductible on your federal income tax return. There is more control over your own property, with no landlord dictating terms and raising rent. On the other hand, you must take care of your own repairs and maintenance. You must consider the costs such as appraisal, inspection, loan fees and down payment.Further, most banks require at least a 20-25 percent down payment.
Additionally, you should look at trends for the commercial real estate in your area. If long-term property generally appreciates, even more reason to buy. Calculate the total costs over 20 years of buying versus renting. In my area, I noted that residential real estate was much more volatile than commercial real estate, which held its value over time.
For example, $2,000/month in rent over 20 years = $480,000. Also factor in gross income, rent, expenses and net profit in space A. How does this compare to the gross income earned, loan payments, expenses and net profit in space B? If space A generates essentially the same net profits as space B, it is better to purchase space B because you will own a valuable asset after 20 years.
Advantages of Paying Cash
It was one week away from closing when I felt uneasy and anxious about the sale. At the same time, I found out that the seller of another business space had just lowered her price. It was inside a professional building, with high traffic and visibility. The only supermarket in town was right across the street. It was also “sale by owner,” and I had enough cash on hand to purchase this space, without a bank loan. Even though it had approximately 200 less square footage than the second space at 1,360 square feet, it had everything I needed: my nursery, a kitchenette and enough space for my exam room and optical. This property offered by far the most parking for my patients.
Making a cash offer gave me the upper hand, and I was able to negotiate the price down even further, as well as close within 10 days. Even with the penalties incurred with breach of contract on the prior space (including my $2,000 earnest money, $500 property inspection fee, $2,800 penalties and the fees incurred with the fixed rate bank loan), I saved this amount many times over, by eliminating the costs associated with a loan. Making this cash purchase, I was only responsible for deed recording and mortgage release recording fees. The most considerable savings was interest. Consider that a $285,000 mortgage amount at a 6.5 percent interest rate over 15 years calculates to $446,878 in total payments. A cash sale gives roughly $161,878 in savings.
Loan interest payments are tax deductible, but remember that you are only saving about 30 cents in taxes to every dollar spent (assuming a 27 percent federal tax bracket). So the $161,878 in savings could amount to a $113,315 savings, without this tax deduction. However, this is a significant savings over time. Without a monthly rent or loan payment, I have been able to increase my tax deductible contributions to a Simple IRA plan, as well as to charitable organizations. I have also taken advantage of the yearly Section 179 deduction to upgrade my equipment and purchase new optical displays.
It was a purchase I felt very comfortable with. Without a loan to worry about, I had peace of mind and security in case of unexpected disaster, injury or medical problems. There are advantages to a bank loan, such as the ability to put cash into stocks and tax-advantaged bonds that earn a higher interest rate. Even if you are unable to make a cash purchase, it is always wise to put as much cash down as possible to minimize your monthly payments and total interest paid.
Two weeks after my daughter was born, I was back to full-time work.
Patients, employees, vendors and friends took a keen interest in her. She brought much joy and many smiles to the practice. Many patients have asked me, “So how’s that baby?” It’s opened up many fruitful conversations, and it’s another way to connect with my patients.
They enjoy the report as much as I enjoy sharing it. Talking about kids and grand-kids is a great way to start an eye exam!
Great Rewards of Having Your Child in the Office
Many mothers in private practice feel guilt over not spending enough time with their families. Having my daughter in my practice allowed me to have the best of both worlds. I avoided daycare and loved checking in on her throughout the day. Private practice means more control over the schedule. I was able to see patients around her feeding times and naps. I handpicked babysitters to come to the practice, under my direct supervision.
Thankfully, one of my employees was a grandmother and a tremendous help. I have greater empathy and understanding for parents and their kids. It’s opened up doors of new friendships and opportunities. As she’s grown older, I’ve converted this room from a personal nursery to a playroom for all the kids, full of games, toys, books and movies. Emphasizing our pediatric care and services, has been a great practice builder.
It is no doubt a challenge to build a practice as a mom, but it also brings great joy, fulfillment and rewards. Owning my own office space gave me the flexibility I needed to be the kind of mother and practice owner I wanted to be.
How have you managed being a parent, while building your practice? Should you consider purchasing real estate as a long-term investment? Why?