Why Private Practice Owners Must Own Their Real Estate with Colin Carr

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Practice owner should own the building they're in. Today we're talking to Colin Carr. He is an expert in real estate. Founder and CEO of Carr Incorporated, the nation's leading provider of healthcare real estate for services for only tenants and buyers. They're so niche. These. We only help healthcare professionals or private practice owners buy or lease their buildings. And we're going to be talking about how to avoid the biggest mistakes that private practice practice owners make when it comes to leasing and buying. We're going to talk about why buying is so important no matter what the market is. When the best times is to join the real estate game where you are in your stage of business and how that could influence whether you buy or lease. We're going to talk about saving hundreds of thousands of dollars with very small negotiating tactics. This episode is worth so much money and it's super short. I think it's like 40 minutes. Yeah. Colin, I am on a mission, like you are, to help private practice owners understand the importance of, of owning the real estate that their business is in. I didn't know until after I sold, like, how valuable that was. So let's start really, like fundamental stuff, you know, when a private practice owner is looking at their real estate consideration, when, what's. What do you think the pros and cons are of leasing versus owning the space?

Yeah, there's a lot of factors that go into whether you lease or purchase. But, but before I jump in there, I, I do want to hit on what you just said. Like, if you have the ability to own real estate, you know, you're. The real estate's going to be worth more than a practice once you get ready to sell. Literally, it's 80 or 90% of the time the real estate's worth more than the practice. And so when you look at the value of that, you know, might spend 10, 15, 20, 30 years building a practice and you can purchase real estate if you have the ability to and it fits your requirement, that's going to be worth more than the practice at some point. So it's really a two for one. I mean, it's two of your largest assets that you have, and they're both very salable. And the real estate becomes even worth more money when you have a practice tied to it. So. I couldn't agree more. Owning real estate is one of the greatest investments that healthcare providers will ever make. The question on what you should do as farther as far as leasing or purchasing, it comes down to a couple factors. Number one, it comes down to inventory you might have a desired own real estate. Like, you might have an established practice and say, like, I'm leasing, I want to purchase now. And you might go to the market and there might not be any properties for sale that meets your criteria. It's not like residential, where there's always another house for sale, or you can just push into another neighborhood or go a little further away from the metro area. Commercial real estate, if you're in a finite area and you want to stay in a certain market, you know, there might not be any options for you, for you to buy. And it depends on the market. If you're in Tulsa, Oklahoma, there's going to be land on the outskirts. If you're in Manhattan, there's no more land. And so, you know, inventory is going to determine real quickly whether you've got options to purchase or not. The next factor is going to be just what's your current situation? Do you have money for the down payment? What's the cash flow look like? You know, what's the quality of property? Sometimes you can buy real estate, but if it's in an inferior location, it's going to hurt your, you know, your patient referrals. If it's maybe not as good of a location as you could find a lease, you got to take that into consideration, too. So, and then you just get into the economics of it. You start looking at concepts like what's it cost to lease versus what's it cost to have a mortgage? What does it look like after you factor in tax deductions, like when you own commercial real estate, you, you can depreciate that real estate and you can pick up additional tax deductions. What does it look like after principal pay down? You know, when you cut a check to a landlord, that money goes to the landlord. When you cut a check to a lender, like a mortgage company, a portion of that pays down principal. And every month your net worth goes up. So you can take a portion of that principle away from the payment. Say, this is really just the forced savings account. And so the numbers are going to tell a different story. You might start out and have a lease that's 5,000amonth, a purchase that's 10,000amonth. But after depreciation, after some of the deductions, after principal pay down, the effective cost of owning might actually be less than leasing. And so you've just got to run the numbers and say, what's the actual cost of owning versus leasing? And then you factor in some of those other items like inventory and Quality of properties and so forth.

Yeah, but it sounds like as great as that was and thank you for defining that. It sounds like at the end of the day, whenever possible, owning is the way to go.

That's my preference personally. I mean there's, there's some exceptions that rule. If you just said, listen, I'm going to be selling my practice in a year or two, I've got, you know, a lease renewal coming up. I just want to just kind of stamp a lease renewal, then, you know, sell my practice in a year or two and drift off into the sunset. Like that's a different story. If you're just getting started and you think you're going to want a much larger space or a different type of building in the future, you know, leasing might be the best option for you to get started. Maybe you lease for five years, then once you get your feet underneath you and you know the exact area you want to be in, you know the exact size that's going to facilitate your needs for the next 10, 15 years, then you buy the right size building. So there are times leasing does make more sense. But if you are in a position where you can see yourself in that building for 15, 20 years, you've got the ability to put the down payment on it, the financing is going to work for you. You know, I'm going to push towards the purchase nine out of ten times.

Well, and that's what I want to confirm. That was the biggest surprise of my of on the financial end of my exit. So I had four to five locations and when I exited I had ownership in two of the buildings. And it was so amazing to me how that, how that played out because as one of my friends, Ed Drummond says, who's a real estate expert, he's like, it's not timing the market of real estate, it's time in the market. And so what you're saying is paralleled with that, you know, private practice owners who have their own business and if they own their own building while they're doing this thing called owning the business, there's all these like short term advantages, tax wise for owning the building. Not to mention, before I continue my Collin, there were times where we, we would have a financially slow month and so we just reduced our rent that month because there was a little bit of a gap there. So we were able to make some adjustments that helped the business in a way that a landlord wouldn't been able to do.

So.

Yeah. And then when we sold, it was so crazy because you said it best. Sometimes the value of the building is worth as or more than the value of the business. And like in my case, the buyers wanted to sign that the highest level leases they could to keep me engaged in the business. So I got a, you know, AAA lease with all these wonderful, like it was a great lease. No, and, and after selling the practice, having that business, the building, sorry, the income from the building come in has been huge and my net worth has continued to scale over time because that building continues to become more and more valuable. Anything you want to say on that piece before I start drilling you?

Yeah, no, to that point. I mean when you own the real estate and you go to sell the practice, you can decide at that point do you want to sell both assets, do you want to sell the real estate and the price and cash out of both. A lot of people though will sell the practice and then they'll write like a 10, 12 or 15 year lease with the buyer, the practice, and then they'll continue to either pay that building off or if it is paid off, they'll just continue to cash flow and it just becomes an annuity. And so you continue to pick up tax deductions as an owner. Every year you get depreciation, every year you get interest write offs and other operating expense write offs. Every month the principal pay down goes to build your net worth if you still have a loan on it. So a lot of people will choose to sell the practice, hold the real estate and at that point you could hold it for five years, then sell it, you can hold it for 10, 15, you can hold as long as you want to, but it becomes another like a secondary business if you will. And you know, as long as you're the owner of the practice, like you are the most sure fire tenant you're going to ever have. Like if you're going to bet on anyone, you bet on yourself. And then even when you go to sell the practice, you've got someone who's qualified enough to purchase the practice, you set it up, you know, if it's a good location, you know, if it's run properly, you know the property has been taken care of well because you've been the owner and it becomes one of your best commercial real estate investments you can get your hands on.

Yeah, Rockstar is what Colin is saying is so valuable in so many ways because I saw a guy in my exit who had multiple locations, he used the money that he got for his practice to pay off the remaining portion balances on his commercial real estate loans, which is by the way there's controversy in that. But he did it because he wanted the passive income. So it's like, like he, like Colin said, it's like starting, it's like having this whole other business that doesn't require effort. Like that was the thing. It's like it continues to grow value without you doing. I mean, there's some property ownership steps, but they're so small. And you can hire companies that are out there, there's great ones I can recommend, but ultimately there's this idea of like you're putting very little effort into this growing net net worth. And then the passive income. This guy was receiving multiple six figures every month because he had sold his, his business and then set up these crazy cool leases and just the freedom it creates. I always tell people, if you're going to start a business, buy the building. So Colin, my question to you is, do you, you, you're obviously recommending that even still with the interest rates being where they are now versus where they were. Let's talk about real time investments for people who are like, yeah, but aren't interest rates rising? What do you say to those people who are in a position where it would probably make sense for them to own a building, but like they're concerned about the market?

Yeah, that's great. So here's what I tell you. Interest rates are now, are very fair. You know, if you, if you had to compare them to where they were four or five years ago, that's the lowest they've ever been in the history of interest rates. And so it's not a real good comp comparison. No, you know, if you look at a historical chart of the last 20, 30 years, like, you know, the markets go up, markets go down, rates go up, rates go down. You can't, you can't anchor to where they were three or four years ago because that was an anomaly. You know where they're at today. I mean, if you're purchasing commercial real estate, you know, to get an interest rate like at maybe five and a half, six, six and a half percent, even seven, like that's still a very fair interest rate. And the bottom line is, you know, you know, we know a couple of things. We know the market's going to keep moving. We know rates are going to go up and down. If rates are higher than you want, you still transact, you still buy the right building at the right time and then you just simply refinance it. I mean, if rates come down in six months or a year, then you refinance it, and it's not hard to figure out. So, you know, savvy real estate investors don't sit on the sidelines indefinitely just because rates are not where they want. They still buy good properties and then they just wait for the market to adjust. And then when rates go down, they, they capitalize, they refinance properties, then all of a sudden things make more sense and they're even more profitable. So, I mean, we're not seeing any slowdown now. Again, if rates were 12%, yeah. You would see less people being able to afford the same amount of real estate. You'd have to either, you know, downsize the size of the building or the purchase price to make the numbers work. But I mean, you're talking about interest rates like in, again, the high fives, sixes, you know, maybe, maybe a high six or a seven depending on if it was an SBA loan or something was unusual about it. I mean, a 6% interest rate, that's as, that's as normal as it gets. I mean, that's still a very good interest rate. You can't compare it to when rates were at 3% because that was, that was the product of a lot of crazy things happening and that's just not where we're at today.

Yeah, it's so funny that you mentioned that. I think the key thing you said earlier, Colin, was this idea that we, this is for people who are going to be in their business for a while. Like if you have 10 years minimum. And here's, here's a story to illustrate your point. My first commercial building that I purchased for my physical therapy practice was in 2006. I bought at the peak of peaks, before the crash of crashes. We bought our building. It was a half million dollar building for 2,000 square feet back in 2006. Literally in a year and a half it was worth half that much. People were selling around for under $250,000. I was aware of this. I wasn't thrilled about it, but it didn't bum me out because I knew this was a practice that I was going to be growing for decades at least A decade in a decade's a long time, you know. So like for me, what we still even then enjoyed having the control of the mortgage. I think the key thing there was that we could afford the initial payment. That was big because as things fluctuated in that practice and it fluctuated, that was a secondary location for us. So we were learning how to be real business owners at the time. So like the profits would rise and fall and There was times where we cut rent down, but we always, we were always able to pay our loan. That was the big thing. But then, you know it, Fast forward to 2018 and we actually ended up selling that business just a couple of years ago, or the building. We sold the business in 2018, but then we kept the, the mortgage or the, excuse me, the, the renter income on that. And then we decided to leverage that into buying more real estate. So me and my partner sold that, that building and we ended up selling it for a profit. That was more than what our initial. Initial loan was.

Yeah.

So it's just kind of like a really cool illustration of what you said is like, when people are listening, they're like, I worry about timing the market. It's not timing the market, is time in the market. The bigger question I want health care providers to ask is, where is health care going in the next 10, 20 years? If they're going to be in their business for 10 to 20 years, where's health care going? Nowhere. So as long as they're going to stay in it and grind through the normal crap with insurance or whatever they're doing, there's gonna be a return on that. So what I love about you guys, and I mentioned this in the introduction, is that you guys specialize, like, you are the most niche and you're the biggest in the country that specialize in helping doctors and healthcare company owners find the right real estate options for them. So how does you being specialized provide additional value for people that you work with?

Yeah, I appreciate the question. So, you know, it's very similar to healthcare. I mean, if you want to get braces, you're not gonna go to an surgeon, go to an orthodontist. If you're to get your hip replaced, you're going to go to an orthopedic surgeon. Like, everyone's got, you know, their own lane in some form of healthcare. It's the same thing for physical therapy. Like, you're going to a physical therapist because they're trained in a way that helps you get back to your, your prime or to help you get beyond anywhere you've ever been before recovery from a surgery, an injury, whatever it might be. You're not going to a family practice doctor for that. You're going to a physical therapist. So it's the same thing for us. Like, all we do is specialize in representing healthcare providers. We're only on the tenant and buyer side. We don't do any landlord or any seller work. And so the first thing that comes up is we just don't have conflicts of interest. Like that's the number one thing that you have to work.

That's a big one because people will.

Drive around and call on a building or they'll get online and search a database and they'll call the listing agent. The listing agent will start facilitating information, love to show you the property. And all of a sudden that person doesn't realize the person you're talking to has a legal obligation, a fiduciary obligation to help the seller or the landlord maximize their profitability, meaning they're going to take you for the highest lease rate, the highest purchase price, the lowest concessions. They had a legal obligation basically to punish you in the negotiation. And so again, the person is not going to be an idiot. They're not going to tell you that. And they're not going to. They're going to be gracious, cordial, accommodating. They're going to follow up with you and you're, oh, this man. You're going to say this guy is really nice or this lady really nice. They're legally working against you. Like. And so once you realize that you can't be in a situation where there's conflicts of interest, that's, that's paramount. And then you get to the place where you realize that you've got to have specialized representation. You got to have an advocate on your side of the table who knows what they're doing, who understands how to maximize your upside, how do you get the most competitive lease rate or purchase price? How do you get the highest level of concessions? How do you avoid getting, you know, stuck in pitfalls, delays or, or traps that, that people fall into all the time when they don't know what they're doing. And you realize how much money is really on the line. That's the foundation of our business.

Yeah, and it's so true. I had a situation like that where I had a real estate agent who was working both sides of the thing and they weren't even healthcare specific. And I that that lease was so disappointing compared to these other leases I had. And I really value that part of being hyper specialized uniche. And that's where the value comes in. So let's talk about mistakes then. What are the most common mistakes that private practice owners make when they're purchasing their real estate?

Yeah, absolutely. So I'll give you three or four. And these are going to apply to whether you purchase or lease. It's kind of the same thing. The very first one is do it yourself it's the doctor or the administrator that says, I don't, you know, I'm a smart, intelligent person. I know how to pick up a phone. I know how to send an email. I can negotiate, I can sign a lease. You can do every one of those things, but you can't do them as well as someone who specializes. So the number one mistake we see people making is they just do it themselves. And, yeah, I mean, I can pull my own teeth. Like, I have a pair of pliers, and I can, you know, I can have my son, like, jump on my back and adjust my back. Like, I can do a lot of things myself, but I'm not going to get the same result. So the do it yourself is, is number one, unequivocally.

Um, number two, before you jump in, there's legal things, too. Like, there's. There's those things called you do it better, but there's a whole bunch of legal stuff that's just out there constantly floating around. And to not have to like to either just do it thinking I'll never affect me is silly. Or to be overly worried when you don't even know how. Where to start learning that stuff. It's nice to have the legalities of how these things work just kind of handled because you're working with professionals.

Yeah, there, there's the legalities, absolutely. But there's also just, like, street credibility. Like, there's no landlord on the face of the earth that's going to get a phone call from a health care provider and think, oh, this guy is a real estate savvy expert. Like, there's no way. Like, when a real estate listing broker or a real estate landlord gets a call from a doctor, they're. They're licking their chops. They're instantly thinking, like, I'm going to take him or her for a 20% premium. I'm going to. I'm going to save myself probably 50 to $100,000 in concessions. Like, there's no respect there. It's not hard to figure out, like, some random person that has no idea about real estate at Chipotle is not calling on properties. Like, Starbucks doesn't have some random, like, administrative assistant just dialing to say what's available. Take any Fortune 500 company. The only people that are making the phone calls on real estate are the most qualified experts in the country. And so, like, you look at what does a Fortune 500 or 100 company do? And then a healthcare provider will do the exact opposite of that and think that they're like, they're super savvy. And so I don't mean that disrespectfully. I just. But the amount providers, yeah, they just, it's like if you got, if you got a letter saying you're being sued, there's no one in their right mind would say, I'm just going to go it alone. Like, you, you would lawyer up instantly. Or if you get a letter from the IRS saying, like, you owe a bunch of taxes or you made a mistake, like, there's no way you're just going to pick up the phone and call the irs. Like, you're going to have your CPA or a tax attorney make that first phone call. Because there's no credibility when some random person who's not trained in an area you know is trying to do something.

And so I love the do it.

Yourself is by far number one, the number, the number two mistake, and this is one that's probably going to surprise people because it's very different than most people think, is they don't know how to negotiate. They'll pick one property and they'll just start trading paper or submitting offers. And the problem with that is there's no, there's no benchmark or plumb line to measure the deal again.