Chapter 1: Lease vs. Buy for a Dental Office

Few decisions in practice ownership get argued about with more conviction and less arithmetic than whether to lease or buy the space you practice in. Owners who bought will tell you the building paid for their retirement. Owners who leased will tell you it kept them flexible when the neighborhood changed. Both can be right, because the answer depends on numbers and circumstances that differ from one dentist to the next.

This chapter lays out the actual comparison. You will see how owner-occupied dental real estate is usually financed, a fully worked hypothetical example that runs both paths side by side for five and ten years, how owning the building changes what happens when you eventually sell the practice, and the specific situations where buying turns out to be a trap. Real estate law, tax treatment, and lending terms vary by state and change over time, so treat this as the framework you bring to your dental-specific real estate attorney, CPA, lender, and tenant-side broker, not a substitute for them.

What you are actually deciding

When a dentist says "I want to buy my building," they are usually bundling three separate questions. Pulling them apart makes the decision much clearer.

1. Occupancy cost

Every practice pays for space, either as rent to a landlord or as mortgage payments, property taxes, insurance, and maintenance as an owner. In the early years, owning often costs more per year than leasing because debt service on a new loan is front-loaded with interest and the owner carries costs a landlord would otherwise absorb. Over time, a fixed-rate loan payment stays flat while market rent typically escalates, so the lines can cross.

2. Investment

Buying converts a large chunk of cash (down payment, closing costs, and often the full buildout) into an illiquid real estate position. That money is no longer available for equipment, working capital, paying down student loans, or retirement accounts. Whether that is a good trade depends on what the building returns versus what the money would have earned elsewhere.

3. Control

Owners cannot be priced out at renewal, cannot be relocated by a landlord, and can modify the space without asking permission. Tenants can walk away at the end of a term if the location stops working. Control cuts both ways: an owner who wants to move has to sell or lease out a specialized building first.

How owner-occupied dental real estate is financed

Most dentists who buy their building do not pay cash. The financing structure drives both the down payment and the long-term cost, so it is worth understanding the main options before looking at the math.

SBA 504 loans

The SBA 504 program is built specifically for owner-occupied commercial real estate and long-lived fixed assets. A typical 504 project splits into three pieces: a conventional lender provides roughly 50 percent in a first-position loan, a Certified Development Company (CDC) provides up to 40 percent through an SBA-backed debenture in second position, and the borrower contributes at least 10 percent. The required contribution rises to 15 percent for a new business (generally one operating less than two years) or a special-purpose property, and to 20 percent when both apply, so a startup should not assume 10 percent down. Confirm current requirements with your CDC, since SBA rules are revised periodically.

Key features to know, per SBA's program description as of 2026:

• The SBA-backed portion can be as large as $5.5 million.
• The CDC portion carries a fixed rate pegged to 10-year U.S. Treasury rates, with 10-, 20-, and 25-year maturities available.
• Program fees on the CDC portion total roughly 3 percent and can usually be financed into the loan.
• 504 proceeds cannot be used for working capital or for speculative or investment rental real estate.
• The business must be for-profit, with tangible net worth under $20 million and average after-tax net income under $6.5 million for the prior two years. Nearly every private dental practice clears these easily.

The first-position bank loan is a separate loan with its own terms, and it may be shorter, carry a variable rate, or include a balloon. Read both pieces.

SBA 7(a) loans

The 7(a) program is the SBA's general-purpose loan, with a standard maximum of $5 million. It can be used to acquire, refinance, or improve real estate and buildings, and unlike 504 it can also fund working capital, equipment, and a practice purchase. For real estate, SBA terms allow maturities up to 25 years. 7(a) rates are usually variable and capped at a spread over a base rate that depends on loan size. A 7(a) can make sense when you want one loan that covers a practice acquisition and the building together, but the variable rate means your payment can rise.

Owner occupancy rules

Both SBA programs are for businesses that occupy their own real estate, not landlords. The general rule is that the business must occupy at least 51 percent of an existing building, with higher occupancy thresholds for new construction. If you are eyeing a building with extra suites you plan to rent out, confirm with the lender how much space you must occupy and how the rental income will be treated.

Conventional and dental-specific lenders

Banks and dental-focused lenders also make owner-occupied real estate loans outside the SBA programs. These typically require a larger down payment than the SBA programs, may amortize over a long period but mature sooner with a balloon payment, and often move faster with less paperwork. Terms vary widely by lender, borrower strength, and the rate environment, so get multiple term sheets.

For the startup side of the financing picture, see financing a practice startup, and for acquisitions, the acquisition track and the practice loan calculator.

Worked example: leasing vs. buying the same 2,400 square foot office

The only honest way to compare is to model both paths with the same space, the same buildout, and explicit assumptions. Everything in this example is hypothetical. The rents, prices, rates, and growth figures are made up for illustration and are not quotes or forecasts for any market. Change every assumption to match your own situation.

The assumptions

Annual occupancy cost

Under these assumptions, the combined monthly payment on the two loans is about $5,684, or roughly $68,210 per year. That payment is fixed. The lease path starts at $84,000 per year ($35 per square foot all in) and grows 3 percent a year.

Two things stand out. First, owning costs more every year for the first six years, because a new loan's payment is mostly interest and the owner also funds a capital reserve. Second, the lines cross around year six or seven because the loan payment never rises while rent keeps escalating. Over ten years, total occupancy cost is nearly identical: about $962,966 leasing versus $970,990 owning.

So where does the owner come out ahead? Only through equity: principal paid down on the loan plus any change in the building's value, collected when the building is sold or refinanced.

What happens at the exit

The next table estimates the owner's position if the building is sold after five or ten years, assuming selling costs of 5 percent of the sale price (hypothetical; commercial commissions and costs vary). "Owner advantage" is the net sale proceeds minus the extra cash the owner put in: the $110,000 of down payment and closing costs, the $72,000 tenant improvement allowance the owner gave up, and the cumulative extra occupancy cost. It is shown before taxes and before counting what the owner's cash could have earned elsewhere.

Now add opportunity cost

The owner tied up $182,000 (the $110,000 cash in plus the $72,000 of buildout the landlord would otherwise have funded). If that money had instead earned a hypothetical 5 percent a year, it would have grown by roughly $50,000 over five years or $114,000 over ten. Subtract that and the picture sharpens:

• At five years, the owner is behind in every scenario, even with 3 percent annual appreciation.
• At ten years with flat values, the owner is behind by roughly $90,000.
• At ten years with 2 to 3 percent annual appreciation, the owner comes out roughly $95,000 to $200,000 ahead before taxes.

What the example teaches

1. Holding period dominates. Buying and selling commercial real estate is expensive. Short holds rarely recover those costs.
2. Appreciation is the swing factor, and you do not control it. The owner's advantage in the ten-year scenarios comes mostly from assumed growth in value. If the building is in a location that stagnates, the advantage shrinks or disappears.
3. The tenant improvement allowance is real money. A generous landlord contribution toward buildout is a significant point in favor of leasing, especially for a startup that is cash constrained.
4. Early-year cash flow favors leasing. The owner pays more per year during exactly the years when a new or newly acquired practice most needs cash.

What the simple model leaves out

The worked example deliberately ignores several factors that can move the result meaningfully in either direction.

Taxes

Rent is generally deductible as a business expense. An owner instead deducts mortgage interest, property taxes, and depreciation. Under IRS rules, nonresidential real property (the building, not the land) is depreciated over 39 years, and interior improvements that meet the definition of qualified improvement property have a 15-year recovery period and may qualify for bonus depreciation, which was restored at 100 percent for qualifying property acquired after January 19, 2025. Some owners commission a cost segregation study to accelerate deductions. When you sell, however, depreciation you took is generally subject to recapture, and gains may be taxed. The net tax effect depends heavily on your entity structure, income, and holding period. See IRS Publication 946 for the general rules, and have a dental-specific CPA model your situation.

Surprise capital costs

Roofs, parking lots, HVAC replacements, and code upgrades arrive on their own schedule. In a lease, many of these belong to the landlord (depending on the lease). As an owner, they are yours, and they tend to come in large lumps. The $1.50 per square foot reserve in the example is a placeholder, not a guarantee of adequacy for an older building.

Vacancy and leasing risk

If you buy a building with extra suites, rental income can help, but vacancies, tenant improvements for new tenants, and broker commissions can hurt. If you move out or retire and cannot find a tenant or buyer, you carry the building empty.

Your time

Owning means managing contractors, insurance renewals, property tax appeals, snow removal, and tenant issues. Some owners hire a property manager, which is another cost. Your time as a dentist has a high hourly value.

Rates at renewal

If the bank portion of your loan balloons or reprices after five or ten years, you may refinance in a worse rate environment. A lease has its own version of this risk: rent resets at renewal to whatever the market will bear.

How owning the building interacts with practice value at sale

This is the part most owners never plan for until a buyer is in the room. The practice and the building are separate assets. They are usually valued separately, often financed separately, and may be bought by different people, or not bought at all.

The practice buyer needs a lease, not necessarily a building

A buyer of your practice, and their lender, will want long-term rights to the location, typically a lease term that covers the loan period plus renewal options. When you own the building, you can offer that lease directly, which removes the most common late-stage deal killer in practice sales: a landlord who will not cooperate. That is a genuine advantage of ownership. See how dental practices are valued for why a secure location supports the multiple.

Rent must be market rent, in both directions

Many owners set rent between their real estate entity and their practice for tax or cash flow reasons rather than at market. That creates problems at sale:

• Rent set above market depresses practice profit, and buyers who value on earnings will pay less for the practice. Appraisers may normalize it, but you are inviting an argument.
• Rent set below market flatters practice profit, but a savvy buyer knows the rent will reset, and the building is worth less to an investor because its income is lower.

Get an independent opinion of market rent when you set up the lease and revisit it periodically. It keeps both assets credibly valued and helps with tax positions as well.

Three ways the building exit usually goes

1. Sell both to the practice buyer. Clean, but it requires a buyer who wants and can finance the real estate too. Many associates buying their first practice cannot or will not.
2. Keep the building and lease to the practice buyer. You become a landlord with a single dental tenant. This can provide retirement income, but your income now depends on the buyer's success, and you still carry the maintenance risk.
3. Sell the building separately to an investor. Investors value a building on its lease: the rent, the remaining term, and the credit of the tenant. A building with a fresh long-term lease to a stable practice sells better than one with a short or informal lease.

DSO buyers

If your eventual exit might be to a dental support organization, ask early how they typically handle real estate. Many prefer to lease, and some owners use a sale-leaseback or a new long-term lease at closing. The terms of that lease (rent, escalations, term, guarantees) can matter as much as the practice price. The DSO vs. private practice comparison covers the broader tradeoffs.

When buying is a trap rather than an asset

Ownership is sold as automatic wealth building. It is not. These are the situations where buying most often goes wrong.

You are opening a startup

A startup has no track record, needs every dollar of working capital, and is still testing whether the location works. Buying the building at the same time stacks real estate risk on top of business risk and usually increases the down payment requirement. Many advisors suggest leasing first and revisiting ownership once the practice is established and the location is proven. The startup vs. acquisition comparison and the realistic startup timeline explain why cash is so tight in the first year.

The purchase starves the practice

If buying the building means financing equipment you would rather pay cash for, skimping on marketing, or opening with thin working capital, the building is weakening the business that pays for it. A practice with a great building and no cash cushion is fragile.

You are not sure about the location

Tenants can leave at the end of a term. Owners have to sell first. If the neighborhood is changing, a large new competitor might open nearby, or you might want a second location or a different market in a few years, owning reduces your options.

The building is too big or too specialized

Buying extra space "to rent out" turns you into a landlord with vacancy risk. Buying a building so heavily customized for dentistry that only another dentist would want it narrows your pool of future buyers and tenants.

You are overpaying for the idea of ownership

Sellers of small medical buildings know that owner-users sometimes pay more than investors would. If your purchase price is well above what an investor would pay based on market rent, you are starting the ownership clock behind.

Your net worth becomes concentrated

A dentist who owns the practice and the building has most of their wealth tied to one address and one local economy. That is a lot of eggs in one basket, particularly for someone who also carries student debt.

The loans are cross-collateralized or personally guaranteed without limit

Lenders commonly tie the practice loan and the real estate loan together and require personal guarantees. A problem in one can trigger a default in the other. Understand exactly what is pledged to whom before you sign.

When buying makes sense

The flip side: ownership tends to work well when most of these conditions are true.

• The practice is established, profitable, and has healthy cash reserves after the purchase.
• You expect to practice in that location for ten years or more, and the location has already proven itself.
• The purchase price is supportable by market rent, meaning an investor would pay something close to it.
• The building is a size and type that other tenants, dental or otherwise, would want.
• Your lease situation is poor: a landlord who will not offer renewal options, above-market rent, or restrictions on assignment that threaten your eventual sale.
• Your advisors have modeled the tax effect for your specific income and entity structure.

A reasonable middle path for many owners: lease a well-negotiated space for the first term, build the practice, and then look for a purchase opportunity (sometimes the same building) from a position of strength. The lease terms in Chapter 2 can include a right of first refusal or right of first offer on the building for exactly this reason.

Structuring ownership if you do buy

Owners commonly hold the building in a separate entity, often an LLC, that leases the space to the practice entity under a written lease. The reasons usually given are liability separation (a slip-and-fall claim at the practice does not automatically reach the real estate), flexibility at sale (the practice and building can be sold separately), and estate planning. Whether that structure fits you, and how the entities should be taxed, is a question for your attorney and CPA in your state. Note that SBA and other lenders have their own requirements for how the operating company and the real estate holding company must be related and who must guarantee.

A few structural points worth raising with your advisors:

• How title will be held if there are multiple owners, and what happens if one wants out.
• How the building entity handles a partner or associate who buys into the practice but not the building.
• Insurance: property coverage for the building entity and liability coverage for both entities.
• Whether the lease includes the same protections you would demand from an outside landlord (term, renewal options, assignment rights), since a future practice buyer will need them.

Putting it to work

If you are opening your first practice, lease a well-negotiated space and put your capital into the business. If you already own an established practice in a location you love, run the worked example with your own numbers, get a real market rent opinion, and look hard at your holding period. Either way, the quality of your lease or purchase terms matters more than the lease-vs-buy label. Use a dental-specific real estate attorney and, when leasing, a tenant-side broker who is paid to represent you rather than the landlord. Commercial real estate law and practice vary by state, and the details decide who carries the risk.

Related reading: overhead benchmarks (to see where occupancy cost fits), startup financing, and buying a practice.

What's next

Most dentists will lease at some point, and the lease document decides more about your costs and your exit than the rent number on page one. Chapter 2: Dental Office Lease Terms That Matter walks through NNN vs. gross leases, tenant improvement allowances, personal guarantees, exclusivity, and the assignment clause that can make or break a future practice sale.

This guide is educational content and does not constitute legal, financial, tax, or clinical advice. Laws and regulations vary by state and change over time. Consult your own dental-specific attorney, CPA, and state dental board before acting.