I’ve been hearing more and more cases of Dentists signing up for exorbitant rental rates. There are some places in Melbourne and Sydney charging $1000+/SQM!!!
For a practice to be profitable from a business sense, rent including outgoings needs to be under 10% of total turnover. Further, in terms of benchmarking and in comparison to other profitable dental surgeries, annual rent costs should fall between 5% and 10% of total turnover. That is, if a practice is billing 500K/year, rent needs to be less than 50K/year. One exception to this is for start-up practices in growth areas with practice turnover increasing year on year. The other is when purchasing an underworked or under marketed practice. Initially, the rental percentage will be high but as turnover increases it will become more in line with benchmarks.
So what should one look for when assessing a good rental rate?
I’ll start by explaining how many SQM is required. For a 2 chair practice with OPG room and adequate staff and waiting room the total SQM required is around 75 SQM. For a 3 chair practice it is roughly 95 SQM and 4 chair it is 120SQM. These are with the dental rooms being approximately 3.3M by 3M. I find these smaller rooms to be more ergonomic and user friendly as well as efficient in terms of reducing square meterage. These SQM to dental room ratios are of an approximate nature and is also highly dependent on the shape of the tenancy but it does provide a rough guide.
I aim to have rental rates around $600/SQM. Obviously the lower the better. This is also dependent on landlord incentives and if they’re providing a rent free period or fit-out contribution. If they’re providing either of those then the rental rate is adjusted by taking that into account. For example, if the landlord is providing a 100K fit out incentive for a 5-year lease then the rental rate is usually inflated to reflect this. They are offering the inducement to get you to accept a higher rental rate which increases the yield on their property, allowing them a much higher valuation.
So after the adjustment the rental rate should ideally be around that $600/SQM. From the perspective of a landlord, us dentists are desirable, stable and long-term tenants and as such considerable negotiation can be done to achieve this rate. A small caveat to this is the fact that more and more, I’m finding multiple dentists competing for the same available tenancy in some locations.
Tenancies in large shopping outlets such as Westfield’s may appear quite attractive. However, the landlords may not be open to negotiation and leasing costs may be too high for a dental practice to ever be profitable. Often exclusivity clauses are not granted either. Be aware of this.
The most common factor I see in practices that have gone bust is that they have setup in a highly competitive area. However, another common factor is the majority have exorbitant rental rates or have taken a very large tenancy when half or a quarter of the size would have been enough.
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Our next practice ownership seminar is coming up in Sydney in March next year. It is now open for registration. We cover this topic and go into further depth as well as provide much more information on everything to do with buying or starting-up a dental practice, these seminars have sold out in previous years so please register ASAP.
We also offer a practice purchase assessment which will do this analysis for you as well as other expert guidance in various areas of practice ownership. Please see the below link for more information.