Buy or lease your dental office?

How this comparison works

This is a pre-tax, nominal-dollar, discounted comparison of the cash each option requires. It is not a mortgage-payment-versus-rent shortcut, and it does not produce a recommendation.

At time zero:

own_initial   = down_payment + buyer_closing_costs + buyer_initial_improvements
lease_initial = initial_nonrefundable_lease_costs

Then for each year t = 1..H, with loan payments taken from the monthly schedule:

own_cash[t]   = loan_payments_in_year[t]
  + owner_operating_cost_year1*(1+owner_cost_growth)^(t-1)
lease_cash[t] = rent_year1*(1+rent_growth)^(t-1)
  + tenant_other_cost_year1*(1+tenant_cost_growth)^(t-1)

terminal_property_value = property_price*(1+appreciation)^H
net_terminal_proceeds   = terminal_property_value*(1-sale_cost_share)
  - loan_balance_after_12H_payments

PV_own   = own_initial   + SUM(own_cash[t]/(1+discount)^t)
  - net_terminal_proceeds/(1+discount)^H
PV_lease = lease_initial + SUM(lease_cash[t]/(1+discount)^t)

modeled_buy_cost_advantage = PV_lease - PV_own

Reading the result

A positive buy cost advantage means ownership has the lower modeled present cost under these assumptions. A negative figure means leasing has the lower modeled present cost under these assumptions. Neither is advice, and the sign can flip on a single assumption, try changing the horizon, the rent escalation and the discount rate and watch what happens.

Discounting already charges for the down payment

The discount rate is the opportunity cost of money in this model. Cash committed at time zero is not discounted at all, which is exactly how it is penalised relative to money spent later. Adding a separate charge for what the down payment "could have earned" would count the same cost twice.

The loan and the exit

• Fixed rate, fully amortizing only. No balloon is modeled, and no refinancing is assumed.
• If the loan pays off before the horizon ends, scheduled payments stop and the balance stays at zero for the remaining years.
• The balance subtracted at exit is the balance after the last scheduled payment inside the horizon. It is subtracted once.
• Negative net sale proceeds stay negative. Negative equity is not floored at zero.

What is excluded

• All income taxes. No depreciation, no cost segregation, no interest deduction, no rent deduction, no capital-gains treatment and no tax-free exchange.
• Refundable security deposits, since they are returned.
• Moving costs, and the cost or disruption of relocating at the end of a lease.
• Unusual capital replacements such as a roof, HVAC or parking, beyond the operating figure you entered.
• Rental income from part of the building, vacancy, and any tenant of your own.
• Transaction costs you did not enter, on either side.

Compare like for like

The comparison only means something if both sides describe comparable premises with comparable included services. A larger building, a different location, a gross lease versus a triple-net lease, or a buildout allowance on one side only will change the answer for reasons that have nothing to do with owning versus leasing. Check what each figure actually includes before trusting the difference.

Questions to answer before deciding

• How long do you actually intend to practise in this location, and does the horizon reflect that rather than the loan term?
• If you sell the practice, does the buyer want to buy or lease the building, and at what rent?
• What does the current lease allow, renewal options, assignment, relocation clauses, rent review mechanics?
• What would the property be worth to someone who is not a dentist? A single-purpose dental building has a narrower market.
• Does owning the building concentrate too much of your net worth in one asset alongside the practice?
• What does your tax adviser say about the entity structure, depreciation and the eventual sale? This model says nothing about any of it.