“If you take good care of a commercial property for 15 years, it will take care of you for the rest of your life.”
Back in 1999, a wealthy mentor who owned a few commercial properties told me this, and thankfully, I listened to him. The building I bought in 2003 has increased in value by over $1 million and will be paid off slightly ahead of the 15-year projection.
I am a believer in the power of owning real estate for your practice. I have talked to several practice owners over the years who have been told by accountants, business consultants, and other sources not to own real estate. Their advice has been to focus mainly on the practice and not get involved in the headaches of commercial property ownership. But I disagree.
Why own instead of rent?
First of all, you have more control over your business. No landlord can raise your rent at will. You can’t be unexpectedly kicked out at the end of a lease or if a building is sold. If you buy a larger building with space for tenants, you get to decide who your neighbors are. Instead of dealing with undesirable neighbors whose clientele doesn’t benefit your business, you can “stack the deck” and create a win-win situation of traffic and referrals.
You build equity in your commercial property with every mortgage payment you make. A typical practice owner can easily pay over one million dollars in rent over the lifespan of the operation. By making the payments to yourself, you build wealth automatically just by making a payment you’d have to make anyway.
Another benefit of commercial property is taking advantage of two types of appreciation. The first is the normal inflation and escalation of property prices. Generally speaking, property prices increase over time. Yes, there can be occasional downturns but over a 10-to-20 year period most land and building values increase.
The other type of appreciation happens when you do things to make a building more valuable and force up the value of the property. There are countless TV shows that do this with residential properties. The fixer-upper approach is even more effective on commercial property.
If you find a vacant or neglected building, reface it, and increase its curb appeal, you can easily get a multiple return on your investment. First, the building will appraise out for more money.
Second, if you renovated the building specifically to attract a certain type of tenant like a higher-end hair salon, medical, or dental practice, the higher rent that the tenant will pay will also increase the investment value of the building. This one strategy can easily add hundreds of thousands of dollars in value to a property.
There are always risks with any investment, but owning commercial real estate is actually less risky than renting.
When you rent a space for your practice, you sign a lease—usually for a five-year period. If you are spending $3,000 per month, you have a total liability of $180,000. If you spend $40,000 on improvements, you now have a committed outlay of $220,000 (which you could lose if you need to close your practice and cannot sell it).
But say you bought a property for your practice. Your monthly payments may be slightly higher, but in many areas buying is actually cheaper than renting. You will own all the improvements you put into the space. The $40,000 you spend on build-out makes the property more valuable and is now an asset you own.
If you need to close your practice and can’t sell, you still have multiple options. You can sell the building. You can rent your space out in a long-term lease or month-to-month short-term agreement. There are cases where doctors rent out single office spaces in their commercial buildings that more than cover the entire mortgage and other expenses. You don’t have to get the landlord’s approval to do these things because you are the landlord.
Owning real estate also gives you multiple options at retirement. You can sell your practice with the real estate. You can sell the practice to one buyer with a longer term lease and sell the building separately to an investor. You can sell your practice and collect rent from your chosen successor and tenant. Or you can sell your building, take out your equity, and lease back the space to keep operating.
Commercial real estate is flexible.
You can creatively buy, finance, improve, and sell properties. Next time you drive down the street and see a vacant building, look closely. Instead of an old building, you may just be looking at a million-dollar life-changing opportunity in disguise.
Sam Beckford is the founder of Successful Property Strategies. He has personally helped hundreds of business owners buy and build their own commercial real estate since 2003. He hosts the “2 Day Intensive Property Workshop” at his waterfront coaching center in Vancouver. He can be contacted through chiropracticrealestate.com.