By Roger Mummert
ROB Content Director
Sept. 4, 2019
In optometry, wealth-building rests on a three-legged stool, says Mark Wright, OD, FCOVD, our ROB Professional Editor and mentor in all things optometric.
The value of your practice is one leg. Outside investments are a second. And your real-estate assets are a third.
Let’s examine that third leg, real estate.
The choices you make in real estate are increasingly important to your overall success in optometry. Get it right, and you build a rock-solid asset that pays long-term dividends, well into retirement. Get it wrong, and your whole retirement stool could topple over.
In matters of real estate, vigilant observation and adjustments are essential. The ups and downs can be brutal, and often you’ve got to ride them out.
One current trend to be ridden out is the “retail Armageddon.”
Retail is being roiled by the internet. Consumers purchase more and more with their phones and fingers and shop less and less with their feet. And retail real estate is suffering collateral damage. Witness shopping malls that are declining or dying, department stores being sold for scrap value, downtowns that are bereft of shoppers, and strip malls that are pock-marked with empty storefronts. The retail Armageddon also threatens many optometry practices and optical shops located in once-prime shopping areas.
So the question for ODs: How to counter or mitigate this trend?
Should you purchase your real estate as a long-term hedge against downward retail forces? Or rent space and stay as liquid and flexible as possible? After all, occupancy costs for optometric practices run 7-8 percent of gross revenue, translating to roughly $50,00-$75,000 per year, according to MBA Key Metrics of Optometric Practice. No small potatoes over a 30-40 year career.
I posed the question “Rent or buy?” to a number thought-leading contributors to ROB. The overwhelming consensus is that buying real estate is generally a win-win, provided terms are right and it makes sense financially to your individual situation. More often than not, real estate escalates in value and returns an investment handsomely.
Renting Pros and Cons
ODs who rent commonly encounter the following scenarios and face critical decisions.
Renting provides an out. Life is uncertain, and you may want to stay flexible. A lease is only temporary, and the end of a lease can extricate you from a bad partnership or poor location.
Landlords dictate terms. Say you have a long-term lease in a mall that requires you be open (and providing eye exams) whenever the mall is open. You’d like to ease off your doctoring hours, but OD-associate applicants respond to your job posts on their own terms: “Want to do full-scope optometry…no weekends!” You may be working (and working Saturdays) till you your lease expires or you drop, whichever comes first.
Malls are dying, downtowns, too. You may be secure in a long-term lease, but your mall declines and foot traffic is reduced to a trickle. Breaking your lease and moving may be your survival strategy. You’ll need to explore legal strategies to extricate yourself. Best scenario, you review and negotiate terms of an early exit before you sign a lease. The same holds true for struggling downtown locations, where promotions like “First Fridays” and “Buy Local Weekends” try to stem the tide of the bricks’n’mortar slide.
Management companies don’t give a hoot about you. There are plenty of “hot retail locations” in growing and high-income areas, but retail management companies want to attract top national brands (Starbucks, Target, Chipotle, Apple) and you’re just “Jody Local, OD.” Take a look at the ROB interview with Greg Groenemann of Vision Source. As a Vision Source practice, you can present yourself as a national brand while remaining independent, and “we can help your negotiate a lease on that basis,” he says.
Buying Pros and Cons
Now let’s look at ODs who purchase their real estate.
You have security and you can increase value. When you own, you have long-term security, but need to ensure it. Jason Ortman, OD, of Castle Pines, Colo., teamed up with a half-dozen other non-OD doctors to build a multi-specialty medical building and it’s been a success. Numerous OD-owners have gone this way, and they form co-op boards and manage their real-estate investment. It takes time and effort, but done right it builds value. Laurie Sorrenson, OD, FAAO, of Austin, Texas, took a big leap in moving a highly successful practice up the road where she designed and constructed a new free-standing building to deliver her “WOW!” office culture. She took a big chance and it’s paid off way bigger.
You have another revenue stream. Often, your building’s space exceeds your needs, which creates other opportunities. Michael Kling, OD, bought and gut-renovated a building in a prime San Diego neighborhood. The building was larger than he needed for his practice, and he rents several suites to non-OD providers. He also holds business-building seminars and peer-group meetings in a spacious conference room that he created from the extra space.
You can sell your practice and rent to the buyer. When you sell OD to OD, the practice real estate is a key asset of the sale. However, if you sell to a PE-backed company, they usually want just the practice, not the real estate. Here you have an opportunity: Right-size your lease (so you lease from yourself for fair-market value), sell the practice and lease it to the acquiring company. The rent you collect provides a post-sale income stream.
Consensus: Buy if it’s Right
Now for the thought-leader consensus. Most favor buying your real estate–with certain caveats.
“I think real estate investment is one of the ‘safest’ investments you can have,” says Mike Rothschild, OD, of Carrollton, Ga. “But, of course, it depends on a lot of things. I don’t know of a single example of an OD who purchased property (that they could afford) who ended up losing money on that investment.”
But in some areas, purchase prices are prohibitive. “When we were looking to move our office, we did look at everything available with the possibility to buy,” says Jennifer Stewart, OD, of Norwalk, Conn. “But we didn’t find anything that checked all the boxes, so we rent.”
Many ODs face the same barrier. “If I knew I wanted to put down roots and I could afford to, I would certainly buy land and put up a building, probably a multi-use building.” says Justin Bazan, OD, of Brooklyn, N.Y. “Being an on-the-go guy in a crazy real-estate market, it won’t happen any time soon. Paying all that money in rent doesn’t feel like a solid financial move, but it suits me for right now.”
“Ownership of real estate is always better than renting for the long term,” says Ken Daniels, OD, of Hopewell, N.J. He advises that ODs should put themselves in a position to buy while renting by negotiating a “first refusal” to purchase, should the opportunity arise. Presently, in the volatile retail environment, many retailers are looking to rent rather than buy real estate, creating diminished competition with ODs. “A service-oriented business is in a better position to buy,” he says, warning, though, that many ODs are “fearful of the cost and the potential future sale.”
“Regardless of e-commerce trends, private practice optometry will continue to thrive and has a strong financial future, with supply and demand factors and practice-specialty opportunities,” says Richard Edlow, OD, of Catonsville, Md. “Owning the real estate is a solid component of wealth building, if the practice is the sole tenant and the practitioner doesn’t have to worry about being a landlord for others.”
There are happy endings for people who take chances on real estate, even if they become “Joe Landlord, OD.”
My late uncle was a small-town dentist in Kentucky. In the 1960s, he bought the retail building where he’d been renting space. Over the last half-century, there were years when space in the building went vacant, but today his two sons have the building fully rented. Long after his passing, my uncle’s building provides ongoing income for his widow, my 96-year-old aunt, at an age when life savings generally have given out. Who knew? My uncle apparently did.
Roger Mummert is Content Director of Review of Optometric Business. Contact: firstname.lastname@example.org