Leasing vs Buying: Side-by-Side Comparison
The lease versus buy decision affects your capital allocation, operational flexibility, tax position, and eventual practice exit. Understanding the tradeoffs helps you make an informed choice aligned with your professional and financial goals.
| Factor | Leasing | Buying |
|---|---|---|
| Upfront Capital | Security deposit, first/last month rent, buildout costs | Down payment (typically 10-25%), closing costs, buildout costs |
| Monthly Cost | Rent (may escalate), CAM charges, some maintenance | Mortgage payment, property taxes, insurance, all maintenance |
| Control | Limited by lease terms; landlord approval for changes | Full control over property use and modifications |
| Flexibility | Can relocate at lease end; limited by lease term | Must sell property to relocate; more commitment |
| Wealth Building | No equity accumulation in real estate | Build equity; potential appreciation; retirement asset |
| Tax Treatment | Rent fully deductible as business expense | Interest, taxes, depreciation deductible; complexity increases |
| Exit Options | Buyer must qualify with landlord or find new space | Sell practice and building together or separately; lease back option |
Advantages of Leasing
Leasing Benefits
- Preserve capital for practice investment and growth
- Maintain flexibility to relocate or expand
- Landlord handles major repairs and property management
- Simpler financial structure and administration
- Easier to exit if practice needs change
- No exposure to real estate market risk
Leasing Drawbacks
- No equity accumulation or appreciation benefit
- Rent escalations increase costs over time
- Limited control over property decisions
- Lease renewal uncertainty and negotiation leverage
- Landlord approval needed for modifications
- May need to relocate if lease not renewed
Advantages of Buying
Ownership Benefits
- Build equity and wealth outside practice value
- Fixed mortgage payment provides cost predictability
- Full control over property use and modifications
- Potential rental income if space exceeds needs
- Retirement asset or passive income source
- More exit flexibility when selling practice
Ownership Drawbacks
- Significant capital required for down payment
- Responsible for all maintenance and repairs
- Less flexibility to relocate or downsize
- Real estate market risk and illiquidity
- More complex tax and legal structure
- Property management demands time and attention
Financial Analysis
The financial comparison between leasing and buying depends on your cost of capital, the local real estate market, your tax situation, and your investment horizon. A proper analysis requires modeling both scenarios with realistic assumptions.
Key Financial Considerations
Opportunity Cost of Capital
Capital used for real estate cannot be invested in practice growth, equipment, marketing, or other investments. Compare expected returns on real estate versus alternative uses of the same capital.
Total Cost of Occupancy
Compare all-in costs: rent plus CAM versus mortgage, taxes, insurance, maintenance, and management. Include both cash flows and non-cash items like depreciation benefits.
Appreciation Assumptions
Real estate appreciation is not guaranteed. Medical office buildings in some markets appreciate steadily while others remain flat or decline. Be conservative in projections.
Tax Efficiency
Ownership offers depreciation deductions and potential 1031 exchange benefits. But rent is fully deductible with simpler administration. Net tax impact varies by situation.
Example: Simplified Financial Comparison
Scenario: 2,000 sq ft dental office space
Lease Option:
Rent: $28/sq ft NNN = $56,000/year
CAM and taxes: $8/sq ft = $16,000/year
Total annual cost: $72,000
Buy Option:
Purchase price: $600,000 (8% cap rate on $48,000 NOI)
Down payment (20%): $120,000
Mortgage payment (7%, 25 years): $40,800/year
Taxes, insurance, maintenance: $18,000/year
Total annual cost: $58,800 (but building equity of ~$15,000/year)
"In our dental practice M&A work, we consistently see that real estate decisions made early in a dentist's career have outsized impact at exit. Dentists who purchased their buildings 15-20 years ago often find that their real estate appreciated more reliably than their practice value, providing meaningful retirement flexibility. But dentists who over-leveraged into real estate early sometimes struggled with cash flow that constrained practice growth. The right answer depends entirely on individual circumstances and risk tolerance."
Practice Lifecycle Considerations
The optimal real estate strategy changes as your practice matures. What makes sense for a new graduate differs from what makes sense for a dentist approaching retirement.
Early Career (Years 1-5)
Early-career dentists typically benefit from leasing. Capital is scarce and better deployed in practice acquisition, equipment, marketing, and staff development. Practice needs may change as you establish your patient base and clinical focus. Location flexibility allows you to respond to market opportunities or correct initial location decisions.
If purchasing a practice that includes real estate, consider whether to acquire both assets or lease the real estate from the seller. Buying both increases capital requirements but may provide better terms than third-party leasing. The seller becoming your landlord creates a continuing relationship that should be structured carefully.
Mid-Career (Years 5-15)
Established dentists with stable practices and accumulated capital have more ownership options. If your practice location is proven, ownership provides long-term cost control and wealth building. This is often the optimal window for real estate acquisition because you have time to benefit from appreciation before retirement and income to support the investment.
Key questions at this stage include whether you expect to practice in the same location for 10+ more years, whether you have capital available without constraining practice operations, and whether you want to build wealth outside your practice equity.
Late Career (Years 15+)
Approaching retirement, real estate strategy intersects with exit planning. Owning your building provides options: sell practice and building together to maximize buyer pool, sell practice and retain building as passive income, or sell practice and lease back to buyer while you gradually divest.
If you do not own real estate, focus shifts to lease management. Ensure your lease term aligns with practice sale timeline. Negotiate assignment provisions that facilitate buyer transition. Consider whether lease uncertainty affects practice marketability.
Lease term alignment: If you plan to sell your practice in 5 years, you need a lease that extends at least 5-10 years to give buyers adequate security. Selling a practice with only 2 years remaining on the lease significantly reduces buyer interest and practice value. Plan lease renewals with your exit timeline in mind.
Real Estate In Practice Sales
Real estate adds complexity to practice sales. Whether you own or lease affects buyer pool, transaction structure, and deal timeline.
Selling Practice With Owned Real Estate
When you own your building, you have options. You can sell both practice and real estate to the same buyer, expanding your buyer pool to include those who want to own rather than lease. You can sell the practice and become your buyer's landlord, creating ongoing rental income. Or you can sell the practice and sell the building separately, though this requires finding two buyers with compatible timelines.
DSOs and larger buyers often prefer acquiring both assets. Private buyers may prefer to lease initially to reduce acquisition capital requirements. Your flexibility to accommodate either approach improves your negotiating position.
Selling Practice With Leased Space
Lease assignment is critical when selling a leased practice. Most commercial leases require landlord consent for assignment. Landlords may use the sale as leverage to extract concessions, raise rent, or impose additional requirements on the buyer.
- Review assignment provisions: Understand what your lease permits and requires for assignment.
- Engage landlord early: Do not surprise your landlord with a sale. Early communication typically produces better outcomes.
- Negotiate buyer protections: Your purchase agreement should address what happens if landlord consent is delayed or conditioned.
- Consider lease extension: Buyers want lease security. Negotiating a fresh long-term lease as part of the sale may be more attractive than assigning a lease with limited remaining term.
Landlord Leverage At Sale
Landlords understand that practice sellers need lease cooperation to close deals. Some landlords use this leverage aggressively, demanding rent increases, personal guarantees, or other concessions as a condition of consent. Review your lease assignment provisions before listing your practice, and consider negotiating better assignment terms at your next renewal if your current lease is restrictive.
Planning A Practice Sale Involving Real Estate?
Get guidance on structuring real estate components, lease assignment, and transaction coordination from a dental practice transaction attorney.
Schedule ConsultationOwnership Structures
Dentists who purchase real estate typically hold it in a separate entity rather than in their practice entity or personal name. Proper structuring provides liability protection, tax flexibility, and cleaner separation of assets.
Common Ownership Structures
Separate LLC
Most common structure. Real estate held in LLC that leases to your practice entity. Provides liability separation and allows different ownership (such as including spouse or family members).
Self-Directed IRA/401(k)
Allows tax-advantaged real estate investment. Complex rules apply, and you cannot personally guarantee debt. Requires specialized custodian and careful compliance.
Lease Between Related Entities
When your real estate LLC leases to your practice, the lease must reflect fair market terms. The IRS scrutinizes related-party transactions. Rent should be comparable to what you would pay an unrelated landlord. Document fair market rent with comparable lease data or appraisal.
"We frequently encounter dentists who purchased their building personally years ago without establishing a separate entity. At sale time, this creates unnecessary complexity and potential tax inefficiency. If you are considering real estate purchase, invest in proper structuring upfront. The cost is modest compared to the complications of restructuring later, and proper structure from day one provides clean separation when you eventually sell either the practice, the building, or both."
When To Speak With A Dental Practice M&A Attorney
Real estate decisions often intersect with practice transactions in ways that benefit from experienced legal guidance. Dentists should consider consulting with a dental practice transaction attorney when:
When To Consult A Dental M&A Attorney About Real Estate
- Acquiring a practice that includes real estate — to understand how real estate affects purchase price allocation, financing structure, and transaction documentation
- Negotiating a commercial lease — especially assignment provisions, renewal options, and tenant improvement allowances that affect future practice value
- Planning a practice sale with owned real estate — to evaluate whether selling both assets, retaining the building, or other structures optimize your outcome
- Structuring real estate ownership — to ensure proper entity formation, operating agreements, and related-party lease documentation
- Facing lease assignment issues in a practice sale — to negotiate with landlords and protect transaction completion
- Evaluating DSO offers that involve real estate — to understand how DSOs typically structure real estate components and negotiate appropriate terms
Jaffe Law PLLC represents dentists in practice acquisitions, sales, DSO transactions, and related real estate matters. Schedule a consultation to discuss your specific situation.
