Medical real estate investing is more and more popular in Australia as investors aim to diversify into secure, recession-proof property. Yet, many are making costly mistakes due to their lack of knowledge of the healthcare real estate market. To assist you in this specialist market, the following are the top five medical real estate investment mistakes—and how to avoid them.
Even though investing in medical property can be lucrative, one of the biggest mistakes that investors commit is buying a clinic with too few doctors to carry on the business.
– The majority of GPs split their time among various clinics, thus a practice that has five doctors may only have two or three full-time equivalent (FTE) GPs.
– If there are fewer than three or four FTE doctors in a clinic, it will not be viable in the long term.
– Always ask about the full-time equivalent (FTE) doctors, not the number of doctors clinic.
– Discuss with the practice manager to learn about doctor shifts and patient flow.
Healthcare technology and consumer demand are revolutionising at lightning speed. An investor error so widespread is to purchase older hospital premises with antique fit-outs, the tenants bound to relocate once the lease tenure comes to an end. Such was the instance with IPN Kedron and IPN Aspley (QLD), both of them closed operations and relocated to a new premises within Aspley. Kedron property building was acquired by an Investor just 11 months prior when they relocated.
– Corporate medical practices move clinics every 10 – 15 years to revamped premises.
– Tenants are drawn to best-of-class equipment, welcoming waiting areas, and good layout.
How to Avoid This Pitfall:
– Inspect the fit-out quality—is it new, well-maintained, and consistent with industry standards?
– Check the tenant’s relocation history—if they’ve done it once, they may do it again.
Medical practices are typically perceived as extremely profitable, yet actually the margins may be lean, particularly since Medicare rebates have not increased in 18 years.
– Bulk-billing practices (nothing charged out-of-pocket by patients) are increasingly cash-strapped.
– Mixed-billing practices (out-of-pocket charges applied) are more sustainable in the long run.
Avoid This Blunder:
– When the clinic is bulk billing, make sure there are sufficient doctors within the clinic.
– Invest in a mixed-billing clinic, as these have better financial sustainability.
Future-proofing your investment can be done by making sure the medical centre has a right of sublease to pathology providers such as QML or SNP, or allied health professionals.
– The majority of clinics generate additional income by subleasing to pathology, physiotherapy, or allied health services.
– Leases can restrict subleasing, making it harder for clinics to generate additional income.
– Review the lease contract for subleasing terms before purchasing.
– Ensure that the clinic has space and approval for additional services.
– Be prepared to give and take—a small loss of rental revenue can result in higher tenant retention in the long term.
The biggest danger to investors is the tenant leaving shortly after buying out, rendering the building empty and cash-light.
– Old medical centres might close up unexpectedly unless they have proper finance in place.
– Some medical operators don’t use bank guarantees or personal guarantees, and recovery in the event that they leave could prove difficult.
– Ensure the lease is backed by a bank guarantee or personal guarantee by clinic directors.
– Check the financial background of the clinic and patient load before investing.
– Negotiate longer lease terms with good renewal options to secure stability.
– Ensure there are adequate full-time equivalent doctors in the medical centre.
Medical real estate investment can be extremely lucrative if done carefully. Steer clear of these five common mistakes and you will help yourself make a good decision and maintain your investment in the long run.
We are experts in healthcare real estate across Australia at RWC Medical, helping investors to find the best properties with good tenants and secure lease periods.
Require expert advice for a medical property investment?
Phone or email our team today at rwcmedical@raywhite.com or 1800 717 674.
Written by Franz Stapelberg, RWC Medical Principal
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