Should I Sell My Real Estate?
A high percentage of veterinary practice owners own the building their practice is located. The longer the doctor has owned the practice, the more equity they may have in the building. They also are paying themselves a high rent for tax planning purposes. One of the questions we get asked when a veterinarian is considering selling their practice is, “Should I also sell my building?”
One thing to consider when selling your practice regarding the real estate is, do you want to be a landlord? We have years of experience being a landlord and there are pros and cons. The pros are that you retain the building and get a monthly rental payment. Hopefully, that rental payment covers the mortgage, taxes, maintenance, insurance, and any replacement of major capital items. That includes when the HVAC system or roof fails and they need replacing. The other pro may be an appreciation of the real estate. Currently, we are in a high real estate market. Real estate markets are cyclical. They go up and they go down. There is timing involved in a sale. You time it right and you can reap your rewards of all the years you have owned the building. Time it wrong, and you feel a little pain from not selling at the height of the market.
The cons are like the pros. Being a landlord requires you to be on call 24 hours per day and 7 days per week. If a heavy storm occurs and the snow collapses the roof, the wind blows a tree onto the building, or the parking lot floods into the building, guess who gets the phone call? That’s correct, you! We have been on the receiving end on calls that happen at 2:00 in the morning when the building started to flood.
Another con is when the lease is up and the tenant decides they want to own their own building. They didn’t tell you that they purchased the building next door and you now no longer have a tenant! The odds of getting another veterinarian to start up a practice in your building is very low. It will also be difficult to get another tenant quickly. Potential tenants are scared away because the building was formerly occupied by a veterinarian. They think there will be odors, or the general public has known that location as a veterinary practice location and it may be hard to change the general public’s view of that location. There are three veterinary buildings within five miles of our office that have been vacant for several years due to this exact thing happening.
The third con is timing the market. We’re currently in an up-cycle market. With interest rates and building inventory low and demand high, building values and prices are on the high end. Holding onto the building so you can get some cash flow and then sell the building later could cause you to lose hundreds of thousands of dollars. Also, a building has more value to an owner/user than it does to an investor. That means when you sell your practice, a buyer may be willing to pay 100% of market value, or slightly higher than market value in order to acquire the building. Whereas, an investor will try to negotiate and get the best possible price they can get.
In summary, owning your own building while you are in practice is the smart thing to do. You build equity, pay yourself rent, and can do anything you want to the building. But after you sell your practice, it may be a different story. Consult with your transition broker, who should also have commercial real estate experience, and get sound advice to help you make the right decision.