There are so many different ways for physicians to invest in real estate, but not surprisingly, most people like to invest in things that they understand. Doctors are no different, and fortunately, investing in medical office buildings is actually often thought of as a very attractive investment opportunity. This is because of the inherent stable need for medical office space, stable tenants that provide steady cashflow, and the potential for appreciation. Of course, that doesn’t mean that every medically related investment is a slam dunk investment opportunity. For example, in recent years we’ve seen many doctors caution about the pros and cons of investing in an ASC before assuming that each one will be supremely profitable. Below we’ll cover why investing in medical office buildings can be a great opportunity, pros and cons, necessary due diligence, and more.
Disclaimers/Disclosures: This page contains information about our sponsors, as well as affiliate links, which support the group at no cost to you, and sometimes provide you with perks. These should be viewed as introductions rather than formal recommendations - please do your own due diligence before making decisions based on this page. We are not formal financial, legal, or otherwise licensed professionals, and you should consult these as appropriate. To learn more, visit our disclaimers and disclosures.
Article Navigation
What is a Medical Office Building?
As physicians, you know this already, but just to frame it in the context of an investment, medical office spaces or buildings are a form of commercial real estate. These spaces are specifically designed to be used in the medical setting, so they have specific features and are outfitted to serve in that capacity. This could include plumbing and sinks in exam rooms, operating rooms, spaces that can accommodate imaging and the safety measures those require, labs, and other features needed by medical practices or facilities. While they could be leased to individual physicians, they could also be leased to private practice groups, other non physician healthcare professionals, or companies operating in the medical space, such as urgent cares or dialysis centers.
Additionally, given how highly regulated the healthcare space is, the buildings have to be built to comply with both local and national regulations, which may have very specific requirements.
As you likely realize, not just any office building can accommodate these needs, and therefore medical office buildings are rented at a premium compared to normal office buildings.
Background on Investing in Medical Office Buildings
If you talk to private practice physicians who are partners in their practices, you’ll likely find quite a few for whom ownership in the building where they work is a perk of being a partner in a private practice. In fact, many cite it as one of the best ancillary income streams for private practices. Not only do you get the benefit of monthly cashflow, but you save on rent and you gain the upsides of appreciation at the time of sale.
However, there are also ways to invest in medical office buildings even if you are not a partner in a private practice. Nowadays, there are syndications in this space, with large companies that invest in medical office buildings. Not surprisingly, they often seek physician investors familiar with the business model.
Regardless of how you get the opportunity to invest in this space, it’s important to know what questions to ask to appropriately do your due diligence.
What are the Pros of Investing in Medical Office Buildings?
In demand and recession resistant. One of the nicest aspects of investing in medical office buildings is the assurance that the space will likely always be in demand. With an aging population and more people living with chronic disease, the need for in person healthcare facilities is a pretty safe bet relative to some other sectors of commercial real estate. For example, while office buildings in general took a dive during the pandemic, medical office buildings remained a great investment. Similarly, regardless of economic cycles, where certain types of commercial real estate like shopping complexes may suffer, medical office buildings, like physician jobs, are relatively recession resistant.
Stable tenants with longer leases. Most medical office buildings have pretty stable tenants, as most people like to establish their practices and patient population and don’t move unless they’ve really outgrown a space or it is no longer fitting their needs. Most medical office buildings require you to sign a longer lease, which allows you to be confident in the income streams for longer. If it’s your own practice which you are a partner in that will be occupying the space, you know that it’s a particularly steady tenant that will always pay.
Reliable tenants. Most physician practices pay their bills.
Built-in rent increases. Many of the leases in this space have built-in rent increases, meaning you can usually count on steady increases in rent that hopefully will keep up with inflation (though we’ve seen that may not be the case in recent years!).
Diversification of your investment portfolio with passive income. For many physicians looking for a relatively ‘safe’ investment to diversify their income streams, medical office space allows them to do so without venturing too far outside of what they know. It also gives you the elusive passive income that so many doctors in our communities want.
Potential for Appreciation. Depending on your location, having a large office building can yield a lot of appreciation at the time of sale if there is a relative scarcity of similar property available.
Triple net leases (NNN). Commercial real estate leases often are NNN, which means that the lessee will pay not just for the rent and utilities, but also for the taxes, maintenance, and insurance. This is quite valuable given the maintenance upkeep and taxes for large medical office buildings can become a significant cash outlay over time.
What are Different Ways to Invest in Medical Office Buildings?
As we alluded to earlier, there are several ways to invest in the medical office space. These include:
Buying into real estate as part of your private practice buy-in
Investing in new buildings and locations as you grow your practice and increase private practice ancillary income streams
Buying a building yourself or developing a building yourself and renting it out - note that this requires a lot of capital and a decent amount of risk, so make sure you do your due diligence on market needs
REITs and Crowdfunding Opportunities in the medical office space
Syndications alongside other investors
Private equity funds - there are several private equity firms that focus on this space and allow investment opportunities
Performing Due Diligence on Medical Office Building Investments
Regardless of whether you are purchasing a building (or building a building!) on your practice’s behalf or looking to be an outside investor, there are several key things that determine whether a medical office building will be a good investment in the long run.
Location
As with all things real estate, location is 1, 2, and 3 on your list to consider. In the medical office space, several things determine the attractiveness of a building.
Population Density. Since literally everyone is a patient, you want an area with a lot of people where there will be a lot of demand for physicians. Tracking population growth patterns will ensure that there will be a rising demand for your building.
Patient population and demographics. In general, areas with lots of retirees will require more medical services.
Hospital systems in the area. This is important for several reasons. One, areas with major medical centers tend to have more healthcare related activity and needs for services. Two, if you are actually able to get a hospital system as a tenant, it offers stability as these tenants tend to have strong referral systems and get paid better reimbursements from insurance companies. They also will likely sign triple net leases where they are responsible for most costs. Many institutional investors really like this security.
Lots of parking space. You need to have enough parking convenience that patients aren’t turned away from a practice because of lack of parking. Due diligence is required here as specific specialties with higher patient clinic volumes will demand a greater ratio of parking spots to doctors.
Visibility from the main roads. Medical practices and services will look at this when considering whether a practice location is attractive, as it makes marketing their practice or services easier, so you’ll want to think about that as well.
Tenants
If you are considering a space that already has tenants, there is a lot to consider (which also applies to if you’re planning on building a space and who your tenants should be).
How long has the tenant been in this space? How long has their practice been around? You will need to develop a sense of what is the financial stability of the tenant.
Are they a part of a larger organization, practice, or hospital system? You’ll want to know if the tenant has a natural referral network or are they part of a larger financially stable organization.
How unique are they and what is their competition? For example, something in a very competitive space such as a medical aesthetics practice run by a non-physician practitioner may be more likely to encounter financial difficulty than a spine surgeon in a town where there are no other spine surgeons. Similarly an urgent care in a busy urban area where urgent cares are popping up everywhere has more risk.
How profitable is their business? This will affect what they can afford to pay in rent and per square foot pricing.
Physical Space
Whenever you make an investment, you want to think about its potential use as well as long term potential for growth and expansion, as well as raising rents. Tenants will also be thinking about this.
Size of the Space. Will the size of the building preclude certain types of tenants you’d like to attract? Is it too big or too small for your ideal tenant? Larger investors will want larger spaces.
Opportunities for Expansion. Is there a way to better utilize the property? Is there a lot of land that would allow you to build for additional revenue potential?
Parking. We mentioned this under location but again, medical facilities usually require lots of parking due to the high volume of employees and patients in most healthcare related businesses.
Age of the Building and Other Maintenance Requirements. How much is it going to cost to maintain this building? Keep in mind that one upside of the medical office space is that the tenants can sign NNN leases and will pay for repairs and upkeep, but know that if a tenant leaves, you may spend quite a bit of money renovating it to attract another tenant.
Versatility of the Space. Is there an ability to outfit the space for a laboratory or an operating room? A retail space to sell glasses? A coffee shop? Think about these as well as the other various additional revenue streams medical practices have and whether the buildings can accommodate those.
What are the Cons of Investing in Medical Office Buildings?
As with anything, there are always some cons or headaches with each commercial real estate class. For medical office buildings, these include:
Loss of the tenant is the most vital risk. Should the medical practice decide to change its focus or otherwise prove to be unprofitable in that location, you will lose your tenant. Additionally, if the tenant is highly profitable, they may want to move out and build their own building.
Need to comply with regulatory guidelines which are constantly changing
Loss of invested money if you have to repurpose to a non-medical space to sell it or rent it out
Large upfront costs to building and outfitting the space. Some examples:
Materials are generally of higher quality, and there is a need for more plumbing, electrical, etc.
More accessibility concerns in outfitting the physical space.
Lead lined rooms for imaging
Fireproof rooms for medical record storage if there are paper records that need to be kept (starting to phase out)
Tenant allowances during build-out if the tenant is available during the construction phase
Opportunities for Value Addition and Appreciation in Medical Office Buildings
In a lot of commercial real estate, part of the investment return proposition includes increasing the value of the property itself. The medical office space offers lots of opportunities to take an old building operating under a traditional model and apply new ideas, and those that are willing to think outside of the box can find lots of ways to force appreciation. For example:
Adding related commercial spaces, like a cafe or coffee shop, small pharmacy, or related merchandise sales
Repurposing spaces that aren’t being used to rent to related services like pathology labs, medical massage services, aesthetics, physical therapists, or other services physicians tend to refer to
Utilizing technology to reduce the need for some of the non-income generating spaces, like large waiting rooms (patients can now be texted when it’s time to come in and can wait in their cars or run errands instead)
Utilizing technology to add ancillary income streams where services can be provided on site but interpreted remotely, like imaging services or laboratory services
Increasing energy efficiency of the building by updating materials and reducing energy costs with more cost efficient lighting
Building out more physical space on unused land
Buying adjacent properties to increase the footprint and value of the space for large potential buyers
Red Flags to Look Out for When Investing in Medical Office Buildings
Especially if you’re buying a property from someone else or investing with a group that makes a large amount of fees from investing on your behalf, you want to make sure you scrutinize the business plan carefully to see if you really believe this will be a good investment. Things that you should consider (the answers to which may raise your eyebrows) are:
A purchase price that seems out of line with comps in the area
Lack of interest rate guarantees on the debt on the investment
How much experience the real estate company you are investing with has in this space - is this their first medical office building investment or their 50th?
How many properties the real estate company you are investing with has bought in the past year - are they buying too rapidly because they’re just making money on the fees? How much due diligence are they doing?
Any changes in local or federal law that will impact the profitability of your building
Current cashflow / net operating income (NOI)
Projections for increased NOI and how realistic they are
Price they plan on charging per square foot and how that compares with comps in the area
Competition in the area for their planned tenants
Availability of other office space in the area
Is the market dominated by a university or major hospital system in the area? What’s the market for individual practitioners if this is your target tenant base?
Their marketing strategy to lease up quickly if a new building - are there any tenants who have already signed on as guaranteed occupancy?
When the current tenants’ leases expire and what their financial health is
Conclusion
Investing in medical office buildings is attractive to many physicians because it’s a known sector within a space that many physicians don’t know as much about, commercial real estate. It allows an opportunity to increase cashflow from passive revenue streams, and if it’s the right investment, can prove to be a lucrative investment. Just make sure that you understand the risks and the business model, and if buying an existing property, what the pathway to making your investment appreciate will be.
Additional Real Estate Investment Options for Physicians
Investing in medical office buildings is only one real estate investment physicians can consider to help diversify their income and add passive income opportunities.
Other investment options include:
Learn more with our guide to real estate investing for doctors.