Buy and Build

[FireBall]

I am looking to buy a piece of land and build a building for my office. I have been eyeing a lot for few years that is in great spot. Its 1.1m. I am debt free and own my house and practice and saved 1.5m for this. Building will cost about 4m more and I plan to rent remaining space. I have about 750k spread between Taxable, 401k, HSA, Roth, 529. Pre COVID I made about 1.1m per year over the last 2 years and was on pace this year as well. Now who knows what will happen. If I go ahead with the above plan in the next 3-6 moths, it will take 18-24 months for it to complete. New location can improve my practice significantly and I have 15-20yrs left to retire. HCOL area with avg SFH at 600k+. Atleast at this point nothing else available here for me to buy that is suitable. It is probably better to wait to see how things play out but as a plan what do you think? Thoughts?

[EntrepreneurMD]

I am almost exactly in your position, mid-career and I did precisely what you are describing, moving into the 16K sq ft building 2 1/2 years ago and renting out the other suites to health care providers. Three acres cost me just around 7 figures as well, my household income was also just over 7 figures at the time. My down payment was $1.4M, but my building cost only $2.7M total (I'm in LCOL area). I took about a year in the planning phase and 1 year for the actual construction, for perspective. Since moving in, our business revenues grew annually to a new record in 2019. I have maintained through the years a 7 figure global emergency funds, given about $2M in annual expenditures (not necessarily all expenses, but exiting primary accounts). Also for reference, I did a 10 year 0 points fixed (no balloon) construction to perm loan of 3.5% with $27K closing costs on a $2.3M loan. You'll get very healthy tax breaks on closing costs, mortgage interest and especially depreciation.

I have a separate LLC for my commercial real estate that receives the rent from myself as a tenant as well as the other tenants. Annual lease income of 10-12% (including your portion) of total project cost is pretty typical. Expenses there run around 25% of lease collections. I include mortgage interest but not principal as an expense as the principal builds equity. I set up a NNN lease plus rental taxes. Keep in mind property taxes on commercial property is generally at a higher millage than residential, but I actually found the property insurance more forgiving.

One thing I did that you may want to consider. I had all spaces leased out before I even signed the contract for the building construction and loan. Then there were allowances for the tenants that I worked out with the builder and tenants paid for extras. This helps to maintain minimal quality standards. They were responsible to design their own spaces. The more the tenants want you to pay upfront, the higher the lease rate will be to cover costs and interest, and vice versa. I did minimum 5-10 year leases with annual inflation adjustments, but it may depend on your market. Over the next two decades as tenants move out, rather than replace them I can in theory triple to quadruple current business revenues by expanding into the suites over time, and the property has enough space to build another 5K square feet if needed.

Keep in mind on the business side (assuming you'll use more space), there will be the additional costs of chairs, computers, desks, printers, exam tables, oto-ophthalmoscopes, wall decor, whatever your business needs may be.

The main concern now is what does the future hold? Will we maintain business revenues and income? I certainly expect some level of drop in business and take home income for 2020, possibly under 7 figures take home. Problems can spill into 2021. Make sure you can weather that possibility. I'm actually 3 months from paying off the building loan, that gives me an extra $22K in monthly cash flow. Fortunately back to debt free.

Given the uncertainty, you could buy the lot and hold on until COVID works it's risk out of the system. Make sure the lot can accommodate the building size you intend. There are minimum requirements for parking spaces in healthcare due to the daily volume of vehicles. I personally put in 25% more spaces than required because healthcare facilities run into parking issues all the time.

PM me if you need any more specifics. Hope this helped.

[Lordosis]

How much do you think the expansion would grow your business. How long would it take to make up the costs under optimal circumstances? Under average circumstances? Under less then average circumstances? Do not forget to factor in interest. Low in this environment but significant non the less. And opportunity cost. Possibly very significant.

[Cubicle]

If you can grab the lot for a good price, & it's easily sellable if needed, take it now, & watch the market/pandemic. When things ease up, build. If things look iffy, put up for sale. You'd lost money by holding it, but if you get a good enough price now, it might not be a lot.

[FireBall]

The plan is to acquire the lot and wait on the construction portion until things settle down. I need more space as we outgrew already but how much the practice will grow in the new environment is unknown. Acquiring tenants in the new economy may be easier said than done as well.