Deciding whether to sell your veterinary practice and its real estate together is a question many owners face. While some see value in keeping the property for rental income or as a future investment, others prefer the clean break and financial security that comes with selling both at once. With today’s lending environment, market conditions, and tax considerations, this decision can have a lasting impact on your retirement plans and financial future.
The Risks of Holding Real Estate for Rental Income
The sellers want the rental income. This may be a valid reason to hold onto the real estate, but there are likely better choices to accomplish the same goal. A veterinary hospital is usually a special-use building, meaning its highest value is its operation as a veterinary practice. That is not always true, especially in some markets where real estate values are skyrocketing. Those special-use rental properties carry significant risks. We could tell several horror stories about owners who refused to sell the real estate simultaneously to the practice but instead chose to lease to the practice buyer. In one such instance, after the first lease period, the buyers vacated the building. They moved into a freestanding location, leaving the original owners with empty buildings that required extensive remodeling. Leasing to another veterinarian is usually not possible in those situations because the previous tenant has opened a new facility nearby.
Is Veterinary Real Estate a Smart Long-Term Investment?
Another reason for separating the sales is because owners see the real estate as a future investment to sell later at a higher price. As to future investment, veterinary practice real estate has limited use and is probably not as profitable an investment as would be a sister piece of property nearby with a broader use. Moreover, the gain on the real estate sale is taxed as a capital gain. Unless there is a change in the tax structure, the capital gain tax will continue to be enacted and maybe even higher.
Using a 1031 Exchange to Defer Taxes
Why not take a 1031 exchange and roll over the real estate ownership into a more desirable property? This would defer the taxes and more effectively achieve the same investment goal. If you were unable to accomplish a 1031 exchange and you financed the real estate sale, you would pay a capital gain tax on the principal as you receive it over time. Rent is taxed at the higher ordinary income tax rate.
Waiting to Sell Until the Practice Proves Successful
Veterinary practice owners also prefer to sell their real estate later once they are sure the practice is secure under the new owner. One of the reasons commercial lenders are so eager to draft practice loans for veterinarians is that the loans “simply do not go bad,” as one lender reported. In our experience, the great majority of practices enjoy a healthy double-digit revenue jump during the first 12 months after purchase. Additionally, we have seen only two sales nationwide go into foreclosure after the sale. Combine these favorable statistics with the seller’s intuition about whether the buyer can follow in the seller’s footsteps and be well-received by staff and clientele. The long-term results following the sale, in this case, are excellent. So after-sale security is not necessarily a valid reason to hold onto the real estate.
Can Buyers Really Afford Both the Practice and the Property?
Many veterinary practice owners doubt that buyers could afford to purchase the practice and the real estate together. While this used to be accurate, it is not true today. Many commercial lenders are very aggressive in our profession, so loan funds are readily available for buyers to purchase the real estate and the practice, usually with a very small or token down payment. Moreover, with the current interest rates and favorable terms available today, the real estate mortgage payment is typically about the same as a rent payment.
A significant reason to consider selling the real estate with the practice is simply to accomplish the sale. Most buyers interested in purchasing the practice will insist on buying the real estate to avoid rent payments and begin building equity from day one. We have seen several transactions fall through when the seller refused to sell the real estate.
Choosing the Right Exit Strategy for Your Goals
The choice to sell your practice’s real estate along with the business is highly personal. It depends on your retirement goals, financial position, and appetite for continued involvement as a landlord. Take time to consider the real estate market in your area, your long-term financial objectives, and whether you truly want the responsibility of property management after stepping away from practice ownership.
At Simmons, we specialize in guiding veterinary practice owners through these complex decisions. From valuations to sales strategies, our team helps you evaluate all your options so you can maximize value and move confidently into the next stage of your life. If you’re ready to explore whether selling your real estate with your practice is the right path for you, contact Simmons today—we’re here to help you achieve a smooth and profitable transition.
