6 Advantages of Healthcare Real Estate

No one ever looked back on their life and said, “I wish I’d spent more time at the office.” Most of us wish we’d shared more time with our families and our passions, had more flexibility with our careers, and yet still had the resources to provide for those we love. The responsible way to merge these two goals is to invest in assets that provide stable cash flow, appreciates over time, and are understandable. We believe that wisely chosen Medical Real Estate meets these criteria.

Medical Real Estate can create stable, relatively low-risk cash-flow with an appreciating underlying hard asset. While most of BiggerPockets is dedicated to residential real estate, investing in healthcare properties can offer several advantages:

Long-term leases with sticky tenants 

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 And when they did, they probably waited until their old office was extremely outdated.

Many medical leases are long-term because of the expense of setting up the specialized space and the reliance on patient familiarity with a location. This results in lease terms often in the 7-10+ year range with 3-5 year extension options, as opposed to 3-5 years, more typical of a regular commercial tenant, or 1 year for tenants in an apartment building.

NNN Leases

Triple net (NNN) leases are common in the medical field. This means the tenant pays utilities, insurance, property tax, and maintenance. It can include paying for a property manager. It often does not include financial responsibility for the exterior and structure, though "Absolute" NNN leases will include that responsibility. 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 stable cash-flow, this is amazing, and you won’t get it with an apartment complex.

Strong tenants not correlated with the market

Medical practices are generally high-income, stable businesses with government and private payor sources. Beyond the high billing rates in medicine, there is a steady and increasing demand for medical services. As baby-boomers age and Americans continue to struggle with obesity, the demand for healthcare is only going to increase.

Governments understand the panic that ensues when healthcare is threatened as it both provides an essential need and employment and so fund it in good times and bad. Due to this increasing demand and stable support, medical tenants tend to do better in times of economic struggle than retail, office, or hospitality. And unlike some residential customers, medical properties have almost uniformly paid rent through the COVID pandemic and 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 have to locate in 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.

Market Inefficiency

Buildings in the $1-5 million range are too small for a large funds to purchase, but it’s also a high price tag for the average real estate investor. Investing with a group that pools resources (partnership, syndication) to make strategic purchases in this real estate market will enable you to capture value while avoiding bidding wars with over-eager entry-level investors or large funds. 

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.