Senior care business owners have been known to struggle with the owning vs. leasing question,
but the answer to the "are you better off" question is always the same... it all depends.
From an operational standpoint, there's not a world of difference between owning and leasing the real estate.
Either way, the business owner has the right to occupy the property and keep the profits earned.
The license is in the business owner's name and the business owner is responsible for property maintenance. Also,
the physical appearance of the building will essentially look the same.
isn't a right or wrong way to go, but there are advantages and disadvantages with either option. The essential differences
between the options are economical.
Those leasing the buildings must pay the property
owner a security deposit, while those buying the property must come up with a much larger down payment. When leasing
the property, the money saved by not purchasing the real estate can be put to work in other ways.
For example, the money saved by not investing in real estate might be used as working and operating capital
or to finance growth. Capital improvements are another possibility, or the money may be better spent investing in people
and home office expenses.
The obvious disadvantages for lessees is they cannot
obtain 100 percent appreciation on the property. Lease costs may be higher, but not always, and the lessee must pay
for capital improvements that enhance the building's value.
of ownership does count for something. And capital used for improving buildings can enhance the value of the property
and the value of the owner's investment as well.
With mortgage rates at
current lows, real estate can be a great place to invest if the owner has capital to invest. However, on the flip
side, pruchasing requires 25 percent to 30 percent equity when borrowing from a bank or institutional lender, which is
a huge barrier for many.
Among the disadvantages to purchasing is the fact
that buyers need a good credit score and solid bank or other types of financial relationships. And there is always the
possibility that capital used for buying buildings may be better purposed in other ways.
It's important that the business not be undercapitalized.
Lessees may be confused about various control issues, such as who owns the license, property
modifications or expansion, and the length of the lease. Sometimes they worry about whether they'll be in the building
for a long period of time.
Among owners who purchase
senior care real estate, misconceptions related to passive investments and the terms and conditions of loan options are not
uncommon. Also, borrowers should not delude themselves into believing credit ratings are not important or that HUD financing
The idea that if the market changes there will always be somebody
around to buy the buildings may not be applicable in some markets.