Rent vs Buy: A Private Practitioner’s Perspective
By Thomas Barba, PT, MPT
Back in 2002, I began my search for the “perfect” location for my first private physical therapy clinic.
My accountant at the time gave me two pieces of advice for opening a business. The first, location-location-location. Second, renting is the safer option in case things didn’t work out as planned, you wouldn’t be tied to a building.
I took that advice to heart and in 2003, decided on a location in Auburn, Michigan, a farming community. With money scarce, especially with buying equipment and providing for my young family, I had to get this location right. Circumstances did work out, and over the next 12 years I proceeded to rent not only the original space but all five units within the same building. I also opened two additional clinics within 15 miles of each other, renting these locations as well.
I was seriously outgrowing all three locations and needed to upgrade to larger buildings. I was tired of writing monthly checks to three different landlords for several years and not having enough space or the ability to expand. Adding up the amount of payments I made since to landlords over 15 years, I quickly realized that I could have had these buildings paid off, but on the other hand there was something safe about not having to worry about owning a building. In this area, there were no larger buildings that I could rent, I didn’t have the option of adding on, and I did not want to venture off too far from these original locations.
I really had no choice. My practices were viable and growing. I went in search of buildings to purchase, but how should I go about doing that?
After several meetings with a banker, a lawyer, and an accountant trying to find the best solution to purchase commercial real estate, the question became should my S Corp buy the buildings, or should I buy the buildings through a new and separate LLC? With their counsel and extensive research, there were two reasons why I chose to purchase the commercial buildings through a separate LLC.
REASON #1: CAPITAL GAINS TAXES WILL BE HIGHER WHEN SELLING
For tax reasons, do not hold real estate in the name of a C or S corporation. Your corporation will pay considerably more in capital gains when you try to sell that property then you would a flow-through entity, such as an LLC.
REASON #2: ASSET PROTECTION
If you own real estate inside a corporation and the corporation is sued, you are at risk of losing more than your buildings. If you held your buildings in an LLC outside your practice, this will protect your business assets. As the owner of the buildings in a separate LLC, you will need to make sure that you have ample insurance for any situations that arise. Your buildings would be your only concern as you have protected the actual practice from being liable. The business assets remain out of the reach of the creditor, allowing it to continue operating without disruption and with its assets in tact.
In 2015, I began writing my monthly rent checks to a real estate company that I have a stake in, which is better than writing a check to a landlord who was getting rich off of me, and in the five years of ownership the only thing that I regret is that I did not do this sooner.
These three buildings are in prime locations and will be either part of a succession plan over and above the value of the practice as either a landlord for my successor, or a one-time sale.
As of the time of this writing, I had to add a third reason on why renting to myself worked out well: the COVID-19 pandemic. When cash flow was of the utmost importance, it was very easy to get a reprieve on the rent of all three locations compared to if I had a different landlord who may or may not have been willing to work with my practice.
- Buy your building through a separate LLC to protect your practice.
- If your practice does not make it, then you will have commercial real estate to sell instead of it imploding with your business.
- You can keep your real estate separate during an exit strategy where you can either have a long term lease with the successor or sell the buildings separate from the practice.
- Your corporation will pay rent for an office building which is owned by a separate LLC that you own. The rent paid by the corporation is a tax deduction for the business and the income from the rent is offset by operating expenses as well as the expense of depreciation.
- Once your buildings in the LLC are paid off, you will then be creating a strong residual income for years to come while also building strong equity.
- Tax savings if you were to sell the real estate in a separate LLC compared to a corporation.
- Location, location, location!
As in anything that we do in our practice, there are no “sure things” and not every opportunity will work out favorably. Please do your due diligence for your situation by talking to your own professionals.
Thomas Barba, PT, MPT, is the founder and sole owner of Prohealth Rehabilitation PLLC, dba Auburn Physical Therapy since 2003. He can be reached at email@example.com.