What are the main reasons Medical Real Estate is great? Simply put, stable, passive income from great tenants.
No looks back on life and says, “I wish I’d spent more time at the office.” Most of us wish we’d shared more time with our families and spent more time on our passions. We want more time at kids’ soccer games, more summer picnics, more time working on a project in the garage. We wish we had more flexibility with our careers, yet still had the resources to provide for those we love. Is there a responsible way to merge these two goals?
We can invest in assets that provide stable cash flow and appreciate over time. We believe that wisely chosen medical real estate properties meet these criteria.
Medical Real Estate can generate stable, relatively low-risk cash-flow with an appreciating underlying hard asset. While many focus on residential real estate, we see 6 main reasons medical real estate is great.
Doctors are “Sticky” Tenants and Sign Long Term Leases
How many times has your doctor or dentist moved in your lifetime? Probably never. And when they did, they probably waited until their old office was extremely outdated. Doctors “stick” in one location for a long time.
Why Do They Stick?
Medical properties are expensive to set up, and patients like convenience and familiarity. Moving a medical practice is extremely costly in terms of overhead costs, lost days of work, and a shift in patient base. Because of this, many medical leases are long-term. I commonly see medical leases in the 7-10+ year range with 3-5 year extension options. Compared to 3-5 years, more typical of a regular commercial tenant, or 1 year for tenants in an apartment building, I’ll choose the medical tenants.
So What?
Tenant turnover costs the landlord money, and vacancy is lost rent. If a tenant guarantees they will stay in one spot for 10 years and they will probably stay at least another 10 after that, you have 20 years without the headache of finding a new tenant. We want stable, passive income, and long term leases are more passive.
NNN Leases
What is a NNN Lease?
Triple net (NNN) leases are common in the medical field. A NNN lease makes the tenant pay utilities, insurance, property tax, maintenance, and property management. Some medical leases called “Absolute” NNN leases also require the tenant to maintain the roof, exterior, and structure as well.
Why Do You Care?
Picture yourself on vacation with your family. You don’t have to worry about the extra time away from work because you get a cool $3,000 direct deposited into your bank account each month from your investment property. Right before you go out for a special day trip you planned, you get a call.
“Hello? Yes, the bathroom sink is leaking on the floor. We thought you would want to know”
You don’t have a NNN lease, and it’s your responsibility to take care of this. Since water damages everything, you can’t leave a leaking sink for a few extra days. Goodbye, day trip plans. Sayonara, relaxed state of mind. Adios, overpriced plumbing invoice to pay for service fast.
NNN leases decrease your exposure to costs, both routine and unexpected. They also decrease the time you need to put into the investment. For the sake of simple, stable cash-flow, this is amazing, and you won’t get it with an apartment complex.
Do yourself a favor and stick with NNN.
Strong tenants that are not correlated with the market
Medical practices are high-income, stable businesses with government and private payor sources. Beyond the high billing rates in medicine, the demand for medical services is steady and increasing. As baby-boomers age and Americans struggle with obesity, the demand for healthcare just goes up.
Medical tenants tend to do better during economic downturns than retail, office, or hospitality. The government backs healthcare expenditure through good times and bad. Healthcare is not optional. Unlike many residential and other commercial tenants, medical properties have almost uniformly paid rent through the COVID pandemic. They are forecasted for strong post-COVID outlook.
Requisite in-person
As e-commerce takes over retail and many jobs remain remote through the Covid-19 pandemic, there is concern that brick and mortar stores are on the decline. However, many medical appointments (anything involving a test or examination) and all procedures must be done in-person. Reports such as the JLL 2020 healthcare real estate outlook, indicate tele-health will augment care more than replace it.
Less Location Dependent
Medical practices do not require core urban areas to thrive, which allows for value real estate purchases. As long as the usual fundamentals – revenue, expenses, and tenant strength are in place – success should follow. Due to national standards and local factors, medical revenues are often solid in secondary and tertiary markets. Just as in other real estate classes, a strong tenant is the key to success – national and regional companies as well as robust physician practices must remain local to stay viable.
Why is this one of the reasons medical real estate is great?
Property costs relative to rent in secondary and tertiary markets are lower than in urban cores. Capitalization rates are higher. This means we get a higher return on each investment, but we believe the medical investments are just as safe.
Market Inefficiency
Buildings in the $1-5 million range are too small for a large funds to purchase, but too expensive average real estate investor. You want to capture value while avoiding bidding wars with over-eager entry-level investors or large funds. Investing with a group that pools resources (partnership, syndication) to make strategic purchases in this real estate market is a great way to do this
You can invest in medical real estate and for stable, secure cash-flow. You can find deals in the space to make that cashflow pretty attractive for relatively little landlord responsibility. Real estate acquisition and management fundamentals still apply, and you will need to understand the unique tenant base, but it can work and be great.
If you agree with these reasons medical real estate is great and you want to learn more, reach out to us at Jacob@fallcreekpartners.com.