Should I buy my own office building or condo for my solo medical practice?

The doc on the other side of town just bought their own office which is huge and fancy. It has granite countertops, fancy flooring, and all the upgrades. Do I need to buy my own office to get rich?

What I don’t want is for folks to think that just because someone else owns their building, that I have to get one too to get rich.  We all know by going solo rather than working for someone else you can make a truckload more money by controlling your overhead and making smart decisions. I would argue the same is NOT true for real estate. Don’t expect that you can manage your property more efficiently than a professional management company, or that somehow your returns will magically be higher.

I want to reiterate that I don’t think a building is terrible investment, and that I never said no one should get one. But what I am trying to say is that buying or constructing your building isn’t a slam dunk, sure fire way to get rich, or to even beat the stock market.

I do think that it’s very reasonable for someone who has a $5 million portfolio to have $500,000-1,000,000 in real estate investments (REITs, direct ownership, syndication). What concerns me is if most of your net worth is in a few places. Especially since most of us have spent a lot to start our practices. But if find a good deal, and are disciplined and have a plan to save money in the stock market too, go for it.

I have a friend who was a millionaire in 30s and rented a $1000/ month apartment- zero home equity, zero business equity, side gigs or passive income.  My message is renting rather than building equity isn’t always bad (it took me years to figure this out), and diligent saving and investing works (I figured this out fast).

I agree that if you were to pay rent and spend all your leftover money, you’re better off buying because it forces you to build equity.   But if you’re the type of equities investor who invests broadly and doesn’t panic sell when the market dips 5-10% and buys a ton when it crashes more than that, you’ll do well even without any real estate equity.

There are many tax advantages of buying as outlined in my cost segregation analysis post. But the deductions are eventually recaptured (at 25% as a section 1250 gain) unless you reset the basis by investing in another property (1031 exchange?). Of course there’s the time value of money as you state, I agree if the government gave me a tax break to pay back later I’d sure as hell take it.

But when the building is paid off the owner will be taxed at ordinary rates on all income from cash flow. That’s tax inefficient, I’ll give a specific example below. Don’t forget you also pay a 6% broker fee when selling your property which eats into your gains.

I will admit that one big advantage of buying a place is that you’re your own tenant (guaranteed to make payments) as well as your own landlord (who will be fair to the tenant and keep the place looking nice). You’re guaranteed to have 100% occupancy!

The reason why there’s a increase in inequality between the middle class and rich is simple:  the middle class have most of their net worth tied up in residential own use (admittedly not commercial or residential investment) real estate. The wealthy are heavily invested in stocks. And you can guess which one grows faster.

The whole reason why I know a ton about maximizing taxed advantage accounts and stocks is because that’s where the money is.  See my post on what to do with your first $50,000. If the path to getting rich for a typical soloeyedoc was predominantly with real estate, don’t you all think I’d be laser focused on how to buy the best real estate and get the best real estate tax breaks?

Click on this link for examples of portfolios for folks with $5-25 million. Only 7% of it is In real estate investments. Yet 40% of it is in stocks.

This linked Forbes article summarizes what I’m saying: the $200 million net worth individual only has 7% in their portfolio in real estate.

Read the second part of the article. It’s hilarious. They basically say if you use a two fund domestic/ international portfolio you’ll beat the returns of the $200 million portfolio- due to the bloodsucking financial advisor fees.

Let me share with you something:  I’m paying just under $4000 all in (full service equivalent) per month for my space. My biggest primary care referral source is moving into new construction and I was told ownership was a possibility.

So I contacted their broker. It was actually lease with option to buy shares of the building. The new place is at $5100 per month all in, with a $60/sq ft tenant allowance. So I’d probably pay $40,000 to 50,000 out of my own pocket for TIs and then pay $12,000 more in rent per year. Over 10 years, that’s $160,000 or so. Even if I bought $200,000 in shares, it would have to return 6% over the stock market average of 8% to “make up” for the increased rent and amortization over 10 years of TIs. The place is nicer and newer, but my current office is just fine. Thanks but no thanks, I’d rather not be an owner.

Same for my residential real estate. I bought my first place for $253,000 and after upgrades and fixing the broken AC my cost basis was about $275,000. I could’ve rented out for $1700/ month, after real estate taxes and HOA fees of $430, $1270/month or $15,240 a year. That’s a 5.6% return- but taxed at ordinary rates, it turns into 3.5% post tax.  Add about 2% appreciation every year or 1.5% post tax (in reality, in my market the price hasn’t changed) to get 5%. In contrast, the stock market at a assumed return of 8% (it’s been higher lately) even with 23.8% capital gains is a 6.1% return which beats 5%.

And this was buying at a short sale price- the numbers in my current place are actually way worse. To make a long story short, I’d get a 4.4% return, about 2.7% post tax if I leased it out. I really wish I had simply rented instead of buying and having equity. In both instances my home “investment” has gotten clobbered by the average 8% (6.1% post tax) return. But we’ve been in a huge bull market so had I rented and built zero equity I would’ve made out like a thief with equities, which have returned 14% over the last five years.

Someone in our google group shared with me they paid $430,000 for building, $260,000 for tenant improvements. That’s $700,000 total. With 20% down and a 4.1% rate, the payment is $2706 per month. The rent would be about $4100 so since the mortgage is less than rent this is a good deal right?  Assuming CAMs are $8/sq ft at 3100 sq ft, this is another $2066 per month for a total of $4772. You could argue that in 10 years, rent would be higher but if you purchased, the mortgage would be the same (CAM might go up higher but not as quick as rent).

It’s a myth that building equity is “better” than renting. It took me years to realize this. Which is why I’m taking the time to write this email. You need to look at the numbers. For your own office, you need to look at the mortgage vs rent, consider the size of your office as you’ll be “locked in” and harder to grow into more space, and consider how long you’ll practice, although you could sell the building along with your practice if you found a willing buyer.

And as I said, a residential home is consumption, not an investment, although if you buy it forces you to save. I’ve said buying a nice pad is a good way to spend your hard earned money. If you buy your own office, you need to be careful to no go overboard with office size or decor, or it’s consumption and not an investment. Of course I’m going to have a nice looking clean office, but you don’t need designer lighting and every fancy upgrade. If you’re currently seeing 20 patients a day and plan to grow to 30, 2500 to 2800 sq ft is reasonable, but 4500 sq feet means you’re paying a ton in extra mortgage, tenant improvements, and CAMs (common area maintenance).

I agree it is possible to make a ton of money in real estate.  I know a real estate broker makes out very well (more than what I earned working for the government as a doc). That’s because builders for projects solicit his advice and ask him for help in return for shares in the property. He can then sell them at a markup later to a REIT.

But the problem is scaling and raising capital.  An individual investor doesn’t have enough capital to buy multiple office buildings in different cities to diversify. There are folks who do (raise capital and pick buildings to buy) this for a living and the good ones make a lot no doubt. If you’re smart enough and have the desire to become a full time real estate king, then why did you go to medical school?  I would argue that if you’re really that great at picking stocks (or if someone is willing to pay you a lot to do so) or pick real estate, and you don’t like your day job as a soloeyedoc, then go for it.

Some people may look at real estate as passive income, but I am the contrarian here. That’s because there’s no such thing as free money. Stocks are the closest thing; very hands off. If you own real estate, you better be prepared to actively manage the property, deal with service issues and maintenance, or pay someone to do so. Read the comments on this post especially 4 and 10:  running real estate is a business, not passive income.

Even in the main part of the post when he talks about forced appreciation by improving the property- this may or may not appreciate the property more than what you spent to improve it.  Real estate agents actually calculate the percent you can recover at time of sale from home improvements- and it’s usually less than what you spent. And for your mentioning that someone has $400,000 in passive income per year, if you have a $5 million dollar portfolio in equities with a 8% return this is what you will achieve.

Buying and supervising an office buildout is a arduous task. Even the folks who have done it say to be prepared for lots of headaches and stress and antacids. Then again, even if you are moving from one rental to another and there’s a buildout involved, it will be arduous and stressful although perhaps not to the same degree.

If you want truly passive real estate income buy a REIT from Vanguard.

There is no right or wrong answer about whether to buy your office building or rent. To many people it sounds more “sophisticated” to say you own a $500,000 building than $500,000 in stocks.

Buying a house forces you to save, and gives you a nice place to live, but isn’t a great investment compared to stocks. Buying commercial real estate or residential as an investment can certainly increase your wealth, but it’s more work than you think, and may or may not beat the stock market, which is less work (just remember to diversify in low cost funds and not panic sell low). And it’s entirely possible to get rich with zero home equity and zero commercial real estate equity.

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