Medical Real Estate isn’t for you if you aren’t ready for the challenges it will bring. There are easier of real estate you can get involved in, and I will enjoy the advantages of medical real estate for myself. While medical properties can high-quality asset type in theory, without appropriate preparation and expectations, they can burn you.
On the bright side, the barriers to entry make the niche highly defensible. If you have the capability to get in, you get to enjoy less over-crowding of the market than you might in an easier-entry asset class. Everyone and their mother knows about single family homes; only a few know about medical real estate.
Expensive properties
Medical properties require more than entry-level capital. A quality building large enough for more than one doctor is going to cost at least $500,000, and probably more. For most individual investors, that is too much capital to sink into one property. It’s a lot of money to have on hand, and it makes diversification across properties challenging. One way to approach this problem is to form a partnership. With a group of 5 all willing to pitch in $200k you could get a $4 million building leveraged 75%. For passive ownership, there are pooled-capital vehicles that will invest your money in medical buildings—syndications, private funds, REITs, etc.
The bottom line remains. In most cases you need at least $100,000 to invest to get started in medical real estate.
Very particular tenants
Medical tenants have specific needs that you will need to understand in order to be an effective landlord. There are licensing codes and HIPAA restrictions doctors need to comply with, and you may need to facilitate this happening. If a facility is not to code, the medicine must stop until violations are fixed. In a well-run medical practice, that should never happen, but…anything that can happen will happen.
Decision making within a physician group may be shared among many doctor-partners making consensus hard to reach. Doctors will be the first to tell you there are a lot of big egos in the physician community. Real estate decisions can be another point of friction a practice doesn’t need. You can help their business thrive if you understand how to preempt problems and support physician tenants.
Not all medical practices operate effectively, and you need to find the ones that do. Practices partnered with national management companies, healthcare groups, and large, multi-location specialty groups have more operational resources than small, owner-led practices. They hire practice managers for each location and have well established operating systems.
I still love partnering with smaller practices in my investment properties, but only when it makes sense. Many of these are managed and run by the doctors themselves. A practice without an office manager on staff is not conducive to Triple-Net leases. I recommend avoiding the poorly managed practices.
High absorption tenant improvement cost (TI’s)
Medical tenants don’t frequently move, in part because there are very high replacement costs ($240-300 per square foot) for medical office space. But at some point someone pays those costs. The landlord and tenant will negotiate how much each party should pay. If you can front the absorption costs, it attracts tenants and secures top-quality leases. You don’t have to, but that capital is a useful bargaining chip. Physicians leave training with tremendous debt but tremendous earning potential, so many physicians prefer to pay higher lease rates than front the TI costs.
High general demand but low turnover
One of the huge perks of medical real estate is that tenants rarely turn over. Medical tenants rarely outfit a space just to leave after 5 or 10 years. However, that means at any time there may not be many physicians/physician groups looking for new space where your property is located.
If you are trying to attract tenants, you need modernized space at a good price. You may need to connect with a specialized broker or at least have relationships within the local physician community. You can convert the medical space into general office space, but the conversion will rent for less, decreasing value. I recommend having a tenant already in place or a signed a lease subject to satisfactory completion of tenant improvements. Hoping a medical tenant will stumble into your vacant building is risky.
Specialized space
If your tenant does not renew at the end of a lease, what will you do with the highly specialized space? A new medical tenant will require at least a partial renovation. If you shift away from medical tenants, rent will decrease.
You need to understand the intrinsic value in a medical property. Space near a hospital, in a community without many medical facilities, in affluent areas where healthcare reimbursement is higher, etc. are all good ways to increase your chances of releasing to a medical tenant quickly.
Medical real estate offers great opportunities for stable cash-flow, but it is best approached with caution. Ideally partner with someone who has first-hand experience investing in the asset class or with a physician who can help navigate the nuances of the tenant needs. Once you are established and understand the tenant base, invest in these properties for excellent stable income.