Leasing v buying a commercial property for your medical practice

In some ways, commercial property works differently from residential real estate.

The cost of a commercial property will depend on a variety of factors including location, size, and condition. The common thread is that GST is normally payable on commercial properties.

As a plus, however, stamp duty does not always apply to commercial property.

Commercial properties in the ACT with a dutiable value of $1.8 million or less do not attract stamp duty [1]. 

Similarly, commercial property in NSW [2] and South Australia [3] is exempt from purchaser duty.

While there can be a perception that it’s cheaper for doctors to lease rather than own their rooms, Jeremy Stagg, Head of Avant Finance, South Australia, says buying your medical suites could be surprisingly cash flow-friendly.

“Doctors who lease their premises may find that over periods of 10, 15 or 20 years, it works out cheaper to buy the property,” he explains.

Unlike residential properties, in a commercial lease arrangement, it is typically the lessee who pays many of the property’s ongoing costs, such as maintenance. So, from this perspective, there is no advantage to leasing.

What may come as a surprise, is that buying doesn’t have to be a significant drain on a doctor’s cash flow.

As Jeremy points out, “Commercial lease payments tend to be very comparable to the principal plus interest payments on a commercial property loan.”

A proven investment

Importantly, commercial property enjoys favourable tax treatment.

It is always important to speak to your tax adviser for tailored advice, but in many cases, doctors may be able to claim a variety of costs associated with owning their premises including non-cash expenses such as building depreciation.

“We often see doctors hold their medical premises through their self-managed super fund (SMSF),” notes Jeremy. “As SMSFs are taxed at a maximum of 15% in the accumulation phase – well below the personal tax rate of many doctors – this could further enhance the tax appeal of owning commercial property.”

At the same time, commercial property brings diversification to a doctor’s portfolio of investments.

Jeremy observes, “It’s not uncommon for doctors to hold onto their premises long after they have retired as a means of generating passive income.”

That said, doctors don’t have to wait until they have hung up their stethoscope to maximise the benefits of owning their rooms.

“Doctors who own their consulting rooms may be able to sub-let space. This could mean bringing in a consultant who complements the doctor’s own business, such as an orthopaedic surgeon subletting to a physiotherapist,” notes Jeremy. “This not only enhances the doctor’s service offering to their patients, it also provides an additional source of passive income.”

Commercial property loans have evolved

 Like much of the mortgage market, commercial property loans have come a long way in recent years.

“Once upon a time commercial property loans often had tight repayment terms of around 15 years, and required a minimum deposit of 30%,” says Jeremy. “That’s not the case anymore.

“Today we are seeing loans offered for 100% of the value of properties used for medical occupation, often with no additional security required, coupled with 30-year terms,” he adds.

It is this evolution in commercial lending that is narrowing the gap between lease and mortgage repayments on equivalent properties.

Ultimately though, it’s not just about saving money.

Jeremy notes, “Owning your medical suites gives you, your staff and your patients certainty of tenure – and this can underpin the long term success of a practice.

“It really can be a case of own your rooms, own your future.”

For more details on buying your medical premises talk to the experienced team of mortgage specialists at Avant.