E612 | Should You Rent or Buy An Office?

In this episode, Doc Danny answers the frequently asked question of whether to rent or buy a standalone space for a physical therapy practice. He suggests that renting is less risky and provides more flexibility, especially if there is no established business history or good personal credit. Buying a building should be considered only when there is a lot of funding available.

Doc Danny also talks about the long-term prospects and potential for other tenants to pay the mortgage of the building when buying a space. He explains that owning a building has unique tax advantages and there are local lending programs that can be utilized.

Danny provides information about different options for acquiring a building for a business, including local programs and the Small Business Association (SBA). He suggests having a commercial realtor and a banking relationship in place before acquiring the building.

The value of the building is based on the strength and quality of the tenants and leases in the building. Doc Danny advises considering the area and tenant mix before making the decision to buy a building. He concludes by highlighting the importance of thinking about the long term and making a thoughtful decision.

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Podcast Transcript

Danny: Hey, real quick before we get started, head over to Facebook and join the PT Entrepreneur's Facebook group. If you haven't done so yet, we have monthly live trainings going on there. There's an opportunity for you to join in the conversation instead of just listening to what I have to say on this podcast, as well as the people that I bring on, and it's a really cool place to join about 6,000 other clinicians that are.

Honestly trying to change the landscape of our profession through these cash and hybrid practices. One other thing that's really cool is we have a guide in there that's a quick start guide. When you join, you can go and check this out. There's about seven videos that we've curated that are the most common questions we get, and the best case studies that we've found to really help you start, grow, and scale your practice up to seven figures.

So if you haven't done so yet, head to Facebook request to join the PT Entrepreneurs Facebook group. You have to be a clinician. We're gonna check you out. We don't just let anybody in. But if you are head there, go ahead and get signed up. We'd love to have the conversation with you in that group.

So here's the question. How do physical therapists like us who don't wanna see 30 patients a day, who don't wanna work home health and have real student loans create a career and life for ourselves that we've always dreamed about? This is the question and this podcast is the answer. My name's Danny Matte and welcome to the PT Entrepreneur Podcast.

What's going on guys? Doc Danny here with the PT Entrepreneur Podcast, and today I'm answering a question that I get quite a bit actually in our mastermind group. And it has to do with whether you should rent or you should buy a standalone space for your practice. And I think this is actually a really Important thing to look at for your business long term to decide if, if you want to buy a space, if you want to rent a space to run your business out of, because for many of you, you'll have that option.

And I'll tell you, our background with this, we never actually bought a facility for athletes potential when we owned it. But we looked for years. The challenge that we ran into was we were in a very residential space. The part of the city we were in was very residential, very little commercial.

And the rent that we had we'd been there for a while. So the rent raises it had happened. Kept us under what was considered market rates for the duration of time that we were there. And what I mean by that is, by the time that we sold that practice, we were paying like $2,800 a month for a space that if we were to buy an equivalent space in that area, it probably would cost us closer to $4,000 a month to buy the space versus to rent the space for $2,800 a month.

So it didn't make any sense. Financially for us to do that, aside from the fact that maybe we could have created some cash flow by having other tenants in place, but for the amount of work it was gonna take and the potential risk it just didn't make any sense for us. Now, let's say we were paying $4,000 a month and we could buy a space and we could pay $4,000 a month to own it then it would've been a very different decision.

So as you look at this, you have to really understand your numbers, and I'm gonna walk you through some of the things that, that you're gonna wanna look at. I want you to give you some context. It's not something that we did, although I don't think it's a bad idea. I think it's actually a pretty good idea depending on the environment, the rent and the actual like mortgage environment that you are in your area.

Lemme start by saying this. If you're a newer business, I do not recommend that you buy. A space. Don't buy a building for your space right outta the gates. In most cases, the only time that I would say that maybe you wanna look at that is if you have a lot of funding. Let's say you have a financial backer that's, investing a bunch of money into that and it's a really good opportunity for you to scale fast, then maybe that's the case.

The only times that I've seen new businesses buy. Facilities and build out bigger facilities. That is the case. The only times I've seen people do that, that don't have a lot of financial backing, they've gone on a business. Be warned, it's not something that you want to take on really early, unless you really have a lot of capital to throw at that, which many of us do not.

We're boot, we're bootstrapping these businesses. We're not taking on private money. We don't have. Whatever some deep pocket investor that is going to, give us half a million dollars for an interest rate and maybe part of a part of the business or something.

So it's really not the best idea early on. And the reason that I say it's better to rent, in particular as a new business is, are a few things, right? So when I was a. Intern at the Baylor program. I spent a year at a outer network clinic that was in just outside San Antonio. And the people that owned this facility, they had at the time, I think 20 or 20, 20 or 22 facilities clinics between San Antonio and Austin.

And they didn't own any of the real estate that you know that they had their clinics within. They were all in rented spaces. And I asked the, one of the partners one time, I was like, why don't you guys buy a building? And he goes we could. But for them it was, there was a few things that they really liked about renting.

First it was less risky. So when you buy a space, you are. Committing to that space for better or worse, for a long period of time. It's very hard to sell. It's very hard to buy as well. It takes a long time and it's far less risky. You can. Get in, get out, shut down, sublease to somebody else. Like you have a lot of options to remove yourself from there if you pick the wrong demographic area.

And for them, like they wanted speed, they wanted to grow quickly. So for them, renting made a ton of sense. Also, he told me, Something that I thought was interesting, but I didn't, I don't think I actually quite understood what he was talking about at the time, but one of the things he said was that they were not playing a real estate game.

They were playing a business game, and the value of their business was based off of. The revenue, the profit, and the growth that they were showing, in a short period of time. So basically business stars, businesses are valued off of the profit that they have and the speed at which they're growing.

So it's, you're showing that there's a lot more. Meat on the bone in the business if it's growing quickly and somebody can capitalize on that and it can be a good return on investment for them. There's a lot of profits, so they're gonna have, money that's coming back to them predictably each month.

And they were playing the business game, the business growth game, not the real estate game. To their credit, they did sell all those practices and quite a few more that they had and were very financially successful with that without owning any of the real estate directly. It was just the businesses within that.

So the other thing for new business owners to think about is that you're probably gonna outgrow the space. You're not moving into that. With a new business, knowing exactly. What you want it to look like, maybe where exactly you want to be. Maybe you're, you need to move to a slightly different part of town.

We saw that with our space when we set up our standalone space, it was on actually the opposite side of Atlanta from where we had started. Partially because we didn't really know the city and it was cheaper on the other side of town. And we had just started our practice. It was like, man, we're gonna find the cheapest rent that we possibly can and we're just gonna start there.

And many of you do the same thing. So you're probably gonna outgrow the space. You might need to be in a slightly different area. And, you really just don't know what you want the layout to look like, what services maybe you're gonna provide. That you need to build space for.

For instance, let's say you realize, Hey, I really like doing, semi-private training. So I'm training six people at a time. It's like this transitionary bridge program. Maybe it's a great opportunity to develop some recurring revenue within the business, but I need a bigger gym space because I don't have enough space to actually treat or to to train all these people at the same time.

So you need to move and find a bigger space, right? So if you bought a place that was small and you're stuck in that, there's not a whole lot that can do versus when your lease is up, you can move, you can break it, you have a lot more flexibility. Now, let's say you are a more established business, this is where I think you can really look to buy a building and for it potentially to be a really good long-term.

Investment for your business and have a lot of positives to to you personally as well, even if you decide to, autopilot or sell that business. So I'm not saying that you have to buy a building and we didn't and successfully were able to, sell our our practice. But again, it depends on your environment.

Our rent was so low, didn't make any sense. If your rent is higher and you can get something similar, I see a lot of benefits in owning, and I'm gonna talk about a few of those. First of all, a couple reasons why you might wanna wait. Like I said, you're probably gonna outgrow space.

You don't know what it's gonna look like. You also don't have any established business history. So for you to buy a space with no established business history, you better have some immaculate personal credit and some amazing personal credit history. Even still, you're probably not going to have most financial institutions.

Want any there won't have really want anything to do with you until you have established. Typically for three years that you know you have started and are running a successful business. They view you very, as a very risky potential client. When you have a business that is under three years old, and even if it's three years old, they still kinda look at that might take a chance on you.

And the more established, the more successful, you know you are, the more profitable you are and that you can show you have this history of growing and being profitable the more. Businesses, banks in particular are gonna look at you and say, This person is a worthy person to, land money to, because they don't feel like you're gonna default on that.

And then they're stuck with the building that they have to take through, a process to try to sell. It's very expensive for them to do that. And they're basically, Collateralizing the actual building. Sometimes personal guarantees. In fact, most cases, personal guarantees, where if you if you have to sell the building and they sell it for less than what owe on it, then you have to pay the remainder back to them.

So there is quite a bit more risk associated with this versus, versus renting. So if you wait a bit longer, the pros for that are, what you want it to look like, and you're probably gonna get a lot better rate on your loan than if you're a newer business owner. And I'll give you a real life example of this.

One of the things that. That I do outside of the business world as far as investing goes is investing in real estate. So one thing that I've really I've really enjoyed is being able to build successful businesses and then be able to take the cash flow from that and. Buy, solid real estate that I want to have for a long time that is cash flow positive, right?

So it is a pretty straightforward investing process in the real estate side. And one of the things that we're looking at now is just, is actually buying a medical office here in Atlanta. And as I ran the numbers on it, I got my commercial realtor in, or a commercial loan officer involved and got an idea of what we're looking at interest wise.

The person that we're working with to find and acquire the building did the same thing and the difference between what I was quoted and then what this person was quoted was a difference of 2% on an interest rate. 2% on an interest rate. And if you're buying a bigger building you're looking at probably somewhere between, $500,000 and maybe $2 million for a building.

Could go even up from there, depending on the size of it, depending on how many tenants you have, all kinds of stuff. But let's just say it's a million dollars. The difference of 2% on your interest rate. So if you're at 6% for a million dollar loan, it's $6,000 per month. If you're at. 8%. 2% more.

For a million dollar building, million dollar loan, you're at $7,700 per month for that loan. So by you having an established history in which I have and this other person doesn't, You get a big discount in terms of what the bank is willing to lend money to you for because you are less risky. They feel more comfortable with you.

In fact, once you have established business history, they'll actually negotiate to lend you money because they want to be able to work with people like yourself who have run a business and grown a business and have a track record of that. So not only will you know what you're looking for, but you also will have a better rate, meaning you're gonna be able to Typically be more financially sound within that building.

And probably cash flow. It better if you have other tenants, which is really the way to go. I don't know if I would buy a building just for my own business. You probably could if it was similar to what the rent you'd be paying would be. But the real benefit to a building like that is if you can buy the building let's say you can buy the building and there's three different tenants in there.

If those other two can basically pay your mortgage for that building for you, then all of a sudden you're basically rent free. Also, there's some unique tax advantages to owning a building as well, which I'm not gonna really get into too much cuz it's somewhat confusing. And I would definitely recommend if you go to buy a building, make sure you're working with a CPA that understands real estate because there's things that you can do such as depreciation, which is basically, think of it like wear and tear.

On a building and everything has wear and tear on it, right? Like your car has wear and tear on it, the house that you live in but you don't get to actually deduct that. Against your income. The way that a building that you is, an investment, a building that you have your business in, you can deduct that against income that you get from the building, which is a really unique advantage that you don't have whenever you're renting.

You don't get to deduct anything and you still have costs associated with it, right? So if you can find a building in an area that you like, that you can have tenants in that are paying your. Basically your cost for that building each month. That's a pretty great way to go, especially if you can find a building that has preexisting tenants in it.

Then it's, you're saving yourself quite a bit of work with even finding anybody. Now, even managing that is still probably gonna be, to some degree, a decent amount of time and energy on your part. So you have to make sure that it's worth it versus just focusing on your business. Which again, if I go back to my reference from the clinic that I was at as an intern, I see why they did it.

They were trying to grow really quickly, trying to scale to as many clinics as they could, and they didn't want to be, hampered with. Being a landlord to anybody, even though that might be a pretty good long-term decision. The other thing that's really cool about buying buildings, especially depending on where you're at and the counties and the cities that you're in, is oftentimes they'll have local specific lending programs for businesses in the counties and the cities that, that you live in.

And you may not even know these exist. But for instance, there's a group here in Atlanta called Atlanta Invests, and it is a nonprofit that specifically works with local businesses that are in the city of Atlanta, and I believe it's Fulton County or maybe DeKalb County, one of the two counties here.

You have to have a business. That is buying a building for your business and using at least 51% of that building, I believe is what the percentage is for your business. Meaning, so ha half that building or a little more than half that building is for your business. The rest of it you can rent out. And the reason they do this is because they want to incentivize.

Local businesses to own local real estate and not necessarily just have big, private equity firms that own all the real estate. And what they do is they actually let you get a loan through them at a lower down payment than. Even like pri definitely lower than private institutions like a bank would do.

For as little as I, I think that it's five or 10% down. Most commercial buildings is gonna be closer to 20 to 30% if you're going with a private loan, meaning, If it's a million dollar building, you gotta come up with 200 or $300,000 down versus if it's 5%, that million dollar building, you gotta come up with $50,000.

Huge difference for people in terms of how long it would take for them to just, to save the amount of money to do that. Look in your area for any of these local programs. You can talk to local bankers about it. People that are in, little networking groups locally would know about this.

I actually didn't know this. This group even existed until my barber told me about it. Who owns a barbershop and he had used Atlanta Invest. To actually I think he got a loan to outfit his facility. I don't think he owns the building, but he took a loan for construction purposes and they do those as well.

So look in your local area for some of these business nonprofits that are looking to help improve the local businesses within your area. They, there's probably some that exist. The other option you have is the small business association. So the SBA has loans specifically for. Buildings and for businesses to move into those, again, they have requirements where, you typically need a certain amount of time with a business to show that they're gonna dig into everything.

It's a very lengthy process when you're looking at the sba. It's a government program there's a lot of red tape associated with that, but they tend to have better lending terms as well. Sometimes they're a bit more forgivable a little less strict than. Private institutions are, but even still, these are your different options to look at to acquire a building.

So if you're looking at doing this, the last thing that I would say is really keep in mind that the value of your building is based off the strength of the leases that you have within it. Let me say that one more time because this actually took me a really long time to understand this, cuz for me, my main understanding was in residential real estate, just my own home and some rental, single family homes that we had owned and those are based off of.

The comparables of what sells around you, right? So they call 'em comps. So when you look at what your house could sell for you look at the comps of the other houses that are three bedroom, two bathroom, if that's what your house is in your neighborhood, your area, similar school district, all that have sold, and that's what they typically base pricing off of.

So if you're looking at commercial real estate, it's different because the building is not valued. In some ways it is valued based on like comps in the area, but more than anything, it's based off of the strength and the quality of the tenants and the leases that are in place. So if I have a building, let's say this is a 4,000 square foot building that is, in Atlanta and it has nobody in it.

And I take that same 4,000 square foot building and I fill it with medical tenants, like physical therapists and dentists and optometrists and whatever, doctors or whatever it might be. But people that are gonna be in person kind of medical staff, which would probably be complimentary to whatever clinic you have.

If you were to do that, and all of a sudden you have a fully leased building that's exactly the same, it would be worth significantly more multiples, more of what an empty building is because. Commercial buildings, they're really more like small businesses. You look at a business based off of its cash flow, okay?

This business is MA is generating a hundred thousand dollars in net profit cash flow per year. Then you multiply that by whatever the multiple is to give you the value of the business. The same thing is said in commercial real estate. So if you were to actually put your own business in there, You are increasing the value of that building.

So you're actually increasing the equity of the building by putting your business in there and your business committing to being there long term as well as other businesses. So something to think about, it's not the same, it's not as speculative as commercial or as residential. Real estate. Commercial real estate for you as a business owner can actually be a really solid really solid decision long term.

And if you sell the practice. What's interesting to look at is like I have friends that have sold. Practices that they have, but they still own the real estate and now they have a strong tenant they know that is, gonna do well. They understand the business that's in there. They keep the real estate and that's their, it's almost like a big part of their retirement plan, honestly.

They might be cash flowing on their building. It can be quite a bit, depending on the building. It could be, a thousand dollars a month to. $12,000 a month depending on the size of the building and how much they owe on it. So something to think about as you're looking at this sort of long-term perspective.

I think if you're trying to scale to a bunch of clinics, you're probably best to look at the rental strategy. Like the group that I was an intern for. If you're thinking, Hey, I wanna have one facility and I really want This to look a certain way. I want to be in this part of the area of the city.

I think the area is gonna do better over a long period of time, over the next 20, 30 years. That might be worth it for you to look at buying a building. And if you're gonna do that there's a couple key people that you need to have in place. Number one is a commercial realtor. Someone that buys and sells commercial real estate.

You don't wanna work with a residential realtor if you're gonna do that. So commercial real realtor is what you're looking for. You also need to have a banking relationship, and that commercial realtor probably will have that if people that you bank with on the business side. Most likely they do commercial loans as well.

They can be vastly different as well. I, so I would definitely reach out to a few different groups and see, hey, what what rates are you at right now? Basically for this type of a building, we move our business into it, and give them example of what you're looking at. They can give you an idea of, what you're probably qualified for in terms of a loan, but also what rate you can look at.

But those are the two key people that you're really gonna need. So I hope this helps. I think this is something that is a bit more advanced if you're newer. Then I wouldn't worry too much about buying a building if you have an established practice. I do think this is a good thing to think about. Especially if you like your area, I think, there's nothing in the short term that's gonna be a massive difference maker for you, 10 years from now, Are you gonna look back and say, man, I'm glad I did that, or I'm glad I didn't do that.

I think again, it's also, it's very regional. Very much depends on where you're at and if it's something you believe in your area that's gonna be better over a long period of time. And you can infill, the building that you have with the right tenant mix, it can be a really massive increase in.

Your return and your net worth because that building can really grow in value over a long period of time. So anyway, hope this helps you guys decide whether you want to buy a building or you wanna rent big decisions to make hopefully good problems to solve. And as always, thank you so much for listening, and I'll catch you next week.

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