**Puchasing the Premises of your Practice**
Part 1: Start-ups
I get asked this question quite often. I will answer this in regards to both a start-up and buying an established practice. In part 1 I will talk about a start-up and in part 2 I will talk about an established practice.
For a start-up, I more often than not advocate against buying the building as well. The reason for this is that a start-up is a risk in today’s competitive environment and purchasing the building multiplies that risk. If the practice doesn’t do well you’re also left with trying to offload a building with a niche fit out. Commercial property can be much more problematic to sell or re-lease compared to residential property.
One recent example that comes to mind was of a start-up dental practice located 30 minutes north of Brisbane’s CBD. They had spent over 2 million dollars buying the land and building the shell of the practice (this did not include the fitout). When the practice went downhill and they had to wind the business up, the owner not only lost money on the failing business but also lost a much larger amount on the building. The niche building was repossessed by the bank and sold at a significantly lower price than the build cost. If the owner didn’t overcapitalise they could have worn the loss of 100 to 200 thousand dollars but instead the loss was well into the 7 figures. There are many other similar examples in Sydney and Melbourne.
However, there are times that I may advocate buying the building for start-ups. In situations such as setting up in areas where there is massive demand for dental services and no existing dental practices. These areas are now non-existent within a 1-hour drive of Sydney, Melbourne or Brisbane and are generally very rare to find in metropolitan areas. In regional or rural areas, it is much easier to purchase cheap commercial property and combined with an environment of minimal competition, purchase of the building may become an attractive proposition.
The other situation where I advocate buying a building for a start-up is that if the building can be bought cheaply and can easily be re-leased or sold if necessary. Generally, these buildings will be strata titled units in small strip shops. You can sometimes grab a bargain and create significant value almost immediately by signing a lease to yourself. This won’t always be the case, but I thought I would share a little story of mine.
I found a suburb in a low economic area to start a practice that had a population of 12,000 people but no dentist. There was a 97sqm tenancy available to purchase in the small shopping center that had 6 or 7 other tenanted shops. I was able to purchase the shop for $260,000 including stamp duty and lawyers’ fees. I decided to sign a lease to myself for $330 per square metre per year including outgoings with 4% rental increase, which was on par for the area. Body corp and council rates combined were approximately $6,000 per year.
After three months, I sold the Dental Business which had turned over approximately $90,000 in the first 10 weeks with good growth trajectory. I kept the building. A year after that, I decided to put the building on the market. The total rent at that point was now $33,300 with $6,000 of costs. So net rent was approximately $27,000 for the strata shop. I ended up selling the shop for $360,000 to an interstate investor and after commission and lawyers fees, this came to $350,000.
I had capital losses carried forward so paid no tax on the profit. I also earned about 15 months of rent which was equal to approximately $40,000.
There was also interest payment on the loan of approximate $10,000
The total income was thus:
$90,000 (net proceeds from sale)
$30,000 (from rent minus interest payments).
This represented “profit” of $120,000 or approx 48% over approx 15 months.
As mentioned, I don’t normally recommend buying the building for a startup but there are times where it can be good. Especially if you get a great location with minimal competition AND if your outlay is minimal. Just by signing a lease to a dentist, the value of the property can increase significantly. You can create equity from day one. It’s extremely attractive to an investor. Many people choose to keep the property but even the value increase from this helps your equity growth. Also, it’s almost always positively geared from day one. That is, your market rent payments will more than cover the interest payments on the property.
However, it is important to assess risk and the worst case scenario. Particularly, in today’s competitive environment where the reality is that some start-ups just won’t make it.
Stay tuned for part 2 where I will discuss buying a building for an established practice.
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Our next lot of practice Ownership seminars are in Melbourne and Brisbane later in the year. We cover all these topics and more, they sell out quick so please register ASAP:
We also offer services for people looking to set-up or buy practices where we assess things such as leasing vs buying. Please see the below link for more information.