The value of real estate is a critical factor in the valuation and success of preschools and childcare centers across Texas. Whether a center owns its property or leases it—especially at higher rates driven by rising property values—directly affects profitability, operational stability, and ultimately, the preschool’s market value. This article explores these dynamics with a focus on Texas, comparing large markets such as Dallas, Houston, San Antonio, and Austin with smaller or secondary markets, and provides actionable insights for owners, buyers, and investors in the early childhood education sector.
The Unique Role of Real Estate in Preschool and Childcare Center Valuation
Preschools and childcare centers are fundamentally location-dependent businesses. Their value is shaped not only by enrollment, curriculum, and reputation, but also by the cost, quality, and control of the facility from which they operate.
Key ways real estate value affects preschool and childcare center business value:
- Asset Value Addition: Owned real estate is a tangible, appreciating asset that directly increases the business’s net worth and sale price.
- Cost Structure: Lease rates, often tied to property values, can significantly impact operating costs and profit margins for centers that lease their facilities.
- Stability and Control: Ownership provides long-term stability and flexibility, while leasing exposes the business to market-driven rent increases and lease renewal uncertainties.
- Marketability: The ability to offer or transfer real estate with the business can attract a broader pool of buyers and increase transaction value.
Ownership vs. Leasing: Financial and Strategic Implications
Owning the Real Estate
Advantages:
- Equity Building: Mortgage payments build equity, and property typically appreciates over time, especially in growth markets.
- Stability: Ownership eliminates the risk of lease non-renewal or sudden rent hikes, providing predictable costs and long-term planning certainty.
- Control and Flexibility: Owners can renovate, expand, or rebrand facilities without landlord approval—critical for maintaining licensing standards and competitive differentiation.
- Tax Benefits: Owners benefit from deductions on mortgage interest, property taxes, and depreciation, improving after-tax profitability.
- Exit Strategy: When selling, owners can choose to sell the business and real estate together or retain the property and lease it to the new operator, creating ongoing passive income.
Disadvantages:
- High Upfront Costs: Purchasing requires significant capital or financing, which may limit resources for other business needs.
- Maintenance Responsibility: Owners bear all costs for repairs, compliance, and upgrades, which can be substantial in older buildings.
- Reduced Flexibility: Relocating or resizing is more complex and costly for owners compared to tenants.
Leasing the Real Estate
Advantages:
- Lower Initial Investment: Leasing frees up capital for business operations, marketing, or expansion, and is generally easier to qualify for than a mortgage.
- Flexibility: Leasing allows centers to adapt to changing enrollment or market conditions, relocate, or expand more easily.
- Simplicity: Maintenance and exterior repairs may be covered by the landlord, depending on lease terms.
Disadvantages:
- Rising Lease Rates: Lease rates in Texas metros are rising with property values, increasing operating costs and reducing margins.
- Lack of Equity: Lease payments do not build equity or add to the business’s asset base.
- Limited Control: Tenants are subject to landlord decisions on renovations, lease renewals, and property use.
- Market Risk: In high-demand areas, lease renewals can result in significant rent escalations, impacting long-term viability.
The Impact of Real Estate Value on Business Valuation
Owned Facilities
When a preschool or childcare center owns its facility, the real estate’s market value is directly added to the business’s overall valuation. In Texas, where property values in major metros are robust, this can significantly increase the sale price and attract more buyers. For example, preschools for sale in Dallas County with real estate included often command prices from $1.6 million to over $4 million, reflecting both business cash flow and property value.
- Asset-Based Valuation: The property is valued as a tangible asset, and its appreciation over time is factored into the business’s net worth.
- Income Approach: If the owner leases the property to the business, fair market rent is used in the valuation to ensure profitability is realistic for a new owner.
- Marketability: The ability to offer the business and property together is a major selling point, especially for buyers seeking long-term stability.
Leased Facilities
For leased facilities, high property values often translate into higher lease rates, which can squeeze profit margins and lower business valuations. In Texas’s major metros, where demand for childcare space is strong, lease rates can be a significant operational expense.
- Profitability Impact: Higher lease rates reduce EBITDA—a key metric used in business valuations—making the business less attractive to buyers or lenders.
- Fair Market Rent Adjustments: During a sale, financials are often adjusted to reflect fair market rent, not just the current owner’s rent, to ensure the business can support market-level lease costs.
- Financing Considerations: Lenders and buyers want to see that the business can pay fair market rent, cover debt service, and still generate sufficient cash flow for operations and owner compensation.
Texas Market Comparisons: Major Metros vs. Secondary Markets
Major Markets: Dallas, Houston, San Antonio, Austin
- Dallas: High property values and strong demand drive both ownership and lease rates. Preschools with real estate in Dallas County frequently sell for $3–$4 million, with cash flows reflecting both tuition revenue and property appreciation.
- Houston: Slightly lower average childcare costs than Dallas or Austin, but property values are rising in core neighborhoods, impacting lease rates and business valuations.
- Austin: Rapid appreciation and strong demand have made Austin one of the most expensive Texas markets for both ownership and leasing. Centers that own their property in Austin enjoy significant asset appreciation, while tenants face high and rising lease rates.
- San Antonio: Lower average costs and property values compared to Dallas and Austin, making it more accessible for ownership and resulting in lower lease rates for tenants.
Market |
Average Monthly Childcare Cost |
Typical Asking Price (with RE) |
Lease Rate Pressure |
Business Valuation Impact |
Dallas |
$900 |
$1.6M–$4M+ |
High |
Strong for owners, challenging for tenants |
Houston |
$770 |
$2.1M–$5.6M |
Moderate |
Good for owners, manageable for tenants |
Austin |
$890 |
$2.75M–$4M+ |
Very High |
Excellent for owners, difficult for tenants |
San Antonio |
$760 |
$1.2M–$3M |
Low–Moderate |
Attractive for both owners and tenants |
Secondary and Small Markets
Secondary and rural markets in Texas—such as Kaufman County or communities east of Dallas—offer lower property values and lease rates, making ownership more accessible and operating costs lower. This can result in higher margins and more stable business valuations, though with potentially slower property appreciation.
- Lower Entry Costs: Both ownership and leasing are more affordable, allowing for higher profit margins and easier access to real estate for new owners.
- Growth Potential: Many secondary markets are experiencing steady population growth, supporting stable enrollments and property values.
- Liquidity Considerations: Selling a business or property may take longer due to lower transaction volumes compared to major metros.
Real Estate and the Sale of Preschools and Childcare Centers
When selling a preschool or childcare center, the structure of real estate ownership is a pivotal consideration:
- Business + Real Estate Sale: Bundling the business with real estate can maximize sale price and attract a wider range of buyers, especially those seeking long-term investment and stability.
- Sale-Leaseback: Some owners sell the business and retain the property, leasing it back to the new operator. This creates a passive income stream for the seller and can be attractive if the market supports strong lease rates.
- Business-Only Sale: If the business leases its facility, buyers will closely scrutinize lease terms, rent escalations, and renewal options. Unfavorable lease terms or above-market rent can reduce the business’s value and marketability.
Fair Market Rent and Valuation:
A key consideration in any transaction is whether the business pays fair market rent. If owners undercharge themselves for rent, profitability may be overstated; if rent is above market, it can depress profits and value. Lenders and buyers will adjust financials to reflect true market rent when assessing value and financing options.
Regulatory and Tax Considerations in Texas
- Property Tax Relief: Recent Texas legislation (such as Proposition 2) offers property tax relief to qualifying childcare centers, potentially saving thousands of dollars annually for centers that own their property. This can improve profitability and make ownership more accessible, though the benefit varies by location and property value.
- Licensing and Compliance: Facility quality, safety standards, and compliance with state regulations directly impact both enrollment and valuation. Well-maintained, purpose-built facilities command higher prices and support higher tuition rates.
Strategic Recommendations for Texas Preschool and Childcare Center Owners
When to Own:
- You have the capital or financing to purchase and maintain the property.
- You plan to operate long-term in a stable or appreciating market.
- You want control over renovations, expansions, and compliance.
- You seek to maximize exit value by selling both business and real estate or retaining the property for passive income.
When to Lease:
- You need flexibility to adapt to enrollment changes or market shifts.
- Capital is better allocated to operations, marketing, or scaling.
- You are entering a high-cost market where ownership is prohibitive.
- You plan to expand to multiple locations and need to preserve liquidity.
Conclusion: Real Estate Value is Central to Preschool and Childcare Center Valuation in Texas
For Texas preschools and childcare centers, real estate value is inseparable from business value. In major metros, owning the property can be a powerful driver of wealth and stability, while leasing at high market rates can compress margins and reduce business value. In secondary markets, more affordable real estate supports higher profitability and easier access to ownership.
Owners, buyers, and investors must carefully evaluate the interplay between property value, lease rates, and business performance. Whether you’re planning to buy, sell, or grow a preschool or childcare center in Texas, understanding how real estate shapes your business’s value is essential for making informed, strategic decisions.
For expert guidance on buying, selling, or valuing preschools and childcare centers in Texas, consult with specialists who understand both the business and real estate markets—like the team at Gateway School Sales.
Give Gateway Schools Sales Team a call today at (972) 267-9003 or send us an email.
This article is for informational purposes only and should not be construed as legal or financial advice. For tailored legal or financial advice guidance, consult a qualified legal or financial professional.