The Best or Worst Decision?
Recently, we had a question on DSN about whether or not a dentist should buy their own building or move and build a new building. Thinking of spending a few million on real estate, this person said, “I feel like it could be the best or worst decision I could make.”
I totally understand the hesitation; debt loads like this are pretty huge, and it’s a tough pill to swallow. But, let’s do the math to figure out the best scenario:
A Theoretical Exercise
Let’s pretend that you occupy ⅓ of a building, and you’re thinking about purchasing the entire building plus parking lot/land. You currently have about 2,500 square feet, and if you took over the entire building you’d have closer to 7,000 square feet.
Purchase Price on a building: $2 million
Current Rent + Triple Net Costs (Taxes, Insurance, Utilities) = $8,000/month
If you were to pay the $2M, spread it out over 20 years at 4.5% interest rate….your monthly payment on the loan would be $12,600, and then triple net costs might be another $3,000. In this scenario, you get 3X the space for only 2X the rent.
What can you do on 3X the space?
If your clinic is collecting about $2 million annually with your first 2,500 square feet, the assumption is that you could possibly hire more associates, hygienists, and get to near $6 million on 7,000 square feet. At this level, your percentage spent on Facility in your budget would drop by about 33% once you achieve this level.
When doing the math, it’s obviously good to look at the times when it works, but what about when it doesn’t work? In my mind, there’s three scenarios when it doesn’t work:
- You’re cash-strapped and struggling right now. If you don’t have the money or success to warrant expansion, then do not buy your real estate. Even though it looks sexy, you might be putting yourself in a position that you cannot afford to be in. If this is you, work on your operations first, get to a good profitability level, and then find real estate.
- Your time horizon is less than 10 years. If you were to try to buy the building, build out the space, and sell out in the next 5-7 years….then this is a bad idea. You might not get the return you’re looking for. It might work out ok, but the risk profile for that time horizon is significantly different. If you are in your early 30s and you think this will be your dental home for 10 to 20 years, then this is perfect. Anything over 10 years pretty much guarantees that this will be a good financial decision for you.
- You don’t want to have a larger clinic. This is totally person-dependant. Some of us like to have small profitable clinics where we work 2-3 days a week and take lots of vacations. Sometimes we don’t want to have to manage a large team. That’s OK! If that’s you, then don’t chase someone else’s dream. If you hate managing people, don’t hire 25 of them and build a mega-clinic.
Overall, there’s lots of reasons to buy your real estate, and lots of reasons not to buy it.
Hopefully the information here helps you if you’re ever in this scenario!