Financing Rentals and Debt

[paigemart]

Been doing a lot of listening on Bigger Pockets and reading some books.

I'm currently a dental student, looking at $400k+ in loans when I graduate.

Do any of you doctors have experience trying to find financing for rental properties while having such a high debt-to-income ratio? I know banks usually trust dentists more than the average Joe with paying their primary mortgage back, but I wasn't sure if that applied to rental properties as well.

[portlandia]

Rental properties?! I applaud your enthusiasm, if not your priorities.

Your financial priorities right now should revolve around maximizing your educational experience and cutting expenses to the bone to minimize debt. 400K? Yikes! Is that the best case scenario? I would think long and hard about EVERY budget item if I were staring down that much debt. Outside of school expenses, every other expense should be scrutinized for elimination/reduction. Next on the priority list should come networking/job hunting to search for a position that will maximize your income, because your gonna need every penny for a long time to get out from under that debt.

Even after graduation, I still wouldn't worry about rental properties, at least not yet. Maximize your income, live like a resident, eliminate your debt, maximize tax advantaged investing space and then begin to think about buying a practice and maybe a reasonable home. Only after those things are in place, would I recommend buying a rental property if you are so inclined.

[paigemart]

With all due respect, I plan on tackling my debt a different way. I don't want to knock it out right away because it *is* so substantial. I want to stay on a REPAYE plan, save that extra money for investments, and use cash flow from properties to help cover loan payments.

[Dont_know_mind]

Before 2008, they used to do more low doc and NINJA loans. Hopefully we’ll get back to that one day !

If you are planning on getting an IP as a student, that is aggressive/risky. It might work out but it might not and you might end up with student loans and no degree. Yikes !

Be careful out there.

[MPMD]

paigemart wrote:

With all due respect, I plan on tackling my debt a different way. I don’t want to knock it out right away because it *is* so substantial. I want to stay on a REPAYE plan, save that extra money for investments, and use cash flow from properties to help cover loan payments.

Click to expand...

Unless you are in a Kobayashi Meru situation (see what I did there?) I don't think this is a good way to think about the next 5-10 years of your life.

I'm not an expert on rentals, but to be cash flow positive I think the general idea is that you need to have a pretty significant amount of money down (30%?). Otherwise your "profit" ends up getting eaten up by incidentals, vacancy, etc. Even in my short time paying attention I've spoken to many people with cash flow negative real estate "investments."

Live like a resident, max out your tax advantaged space, drive a crappy car and then when your loans are taken care of you can start getting becoming a real estate investor. Anything else is not advisable. Don't start being a leverage guy where you are thinking that this game is all about the interest rates that you assume you're going to get.

 

[Gas_Doc]

I'm going to echo the sentiment of others. Don't put the cart ahead of the horse. I'm also looking to buy rental properties, but I'm two years out of training and I have paid off my student loans. Honestly, the best thing you can do right now (assuming you are still a student or resident whose loans are still growing) is live as frugally as possible to minimize that final debt number.

That being said, the FHA limit for so-called "back-end" debt to income ratio (which includes you non-housing debt) is 43%, though I've talked with mortgage brokers who have quoted as high as 53%. That ratio is the payment you have to make each month, not your net worth. I have no idea what your REPAYE payment will be, but to be save you should be taking in at least twice (gross) the amount of money from your day job compared to your debt payments.

[jmserret]

I have not had any problem getting loans for primary residence or investment properties despite $180k in student loans.  My understanding is that student loan debt does not count toward that debt-to-income ratio.

[AlexxT]

OP: You asked for advice. Almost everyone has told you that this is a bad idea. But you think you know better because you read about a great way to get rich on the internet.

Of course you must know better. After all, it was on the internet.

I think the fact that you will owe $400k+ and will be struggling to pay that back on a dentist salary would give some people pause. But apparently not you.
Good luck.

[CordMcNally]

I must say, going into more debt to pay your current debt is a rather unorthodox plan. Focus on paying your current debts and saving for retirement and then you can venture into the world of real estate investing if you still want to.

[ENT Doc]

https://i.gifer.com/Yew.gif

[CrockettsRiver]

The Bigger Pockets guys do a fair bit of leveraging, but they aren't looking at 400K in student loans as well. They are also full-time real estate investors so can jump on properties, find partnerships etc - stuff that you won't be able to do as a dental student and resident.

If you have read much of what is here, you would have guessed that you won't find much support for getting into even more debt.  There's a good reason for that - there are many ways that much debt can go wrong (and remember, student loans aren't forgiving in bankruptcy).

[DCdoc]

I feel like we’re being trolled. But on the off chance the OP was serious, what type of rental are you looking for? Do you have any money for a down payment? How will you find the inevitable repairs that are needed? And how are you selecting an investment property?

[wonka31]

paigemart wrote:

Been doing a lot of listening on Bigger Pockets and reading some books.

I’m currently a dental student, looking at $400k+ in loans when I graduate.

Do any of you doctors have experience trying to find financing for rental properties while having such a high debt-to-income ratio? I know banks usually trust dentists more than the average Joe with paying their primary mortgage back, but I wasn’t sure if that applied to rental properties as well.

Click to expand...

I would work on establishing an emergency fund, paying off debt, investing, saving up for a downpayment (if you're planning on buying a residence), etc. first. You are going to have a huge debt to income ratio coming out unless you have an extremely lucrative career on day 1. Don't overthink it, 400k is daunting. The only thing more daunting in your situation is 400k that is compounding without you reducing the principle.

If you choose to invest in rentals, I have a few recommendations/comments.

1) Your high debt to income will impede your ability to obtain loans at reasonable rates. After the housing boom (drunken sailor loaning) of the early 2000s, banks, credit unions and lenders are much tighter. They have to be by law. In addition to this, you need to have 30-35% down in order to get the best interest rates in today's market (as of three months ago). I looked hard at turnkeys and other direct real estate investment and eventually decided against it. I began adding more investments to my syndication portfolio.

2) You will need a significant downpayment. If you're looking at 100k houses, you'll need 30-35k plus closing costs, inspection costs, etc. If you are looking at more expensive properties or multiple properties, you'll obviously need more. Maybe you're in a different situation than when I was as a medical student, but that's a fair amount of capital. I certainly didn't have that at your stage in the game.

3) Why don't you just house hack to get started? They talk about this extensively and it is a pretty bright idea. If I were younger and/or in a different life situation, I would have jumped all over this. You will kill two birds with one stone-have a residence and learn 'the business' assuming you like and want to continue with real estate. Maybe you learn to love real estate, continue to invest and do well. Maybe you hate it, sell the duplex when you're ready to move and you're done. Either way, as long as you find a stable renter for the other unit, you win BIG.

 

Bigger Pockets is an excellent podcast in that it provides some excellent information, but I think we can both agree they are 'rah rah real estate!'. I mean, they have to be, they are a real estate podcast. Don't get wrapped up in the excitement, the people who own two hundred doors in eighteen months, etc. Stretch goals are good, but don't have delusions of grandeur. The people who do that kind of volume are rare. Furthermore, it is much easier to do this in a market upswing, which has been present for 5-7 years in most real estate markets. Some of these people will be crushed when the cycle hits a downturn (probably not super far away).

 

Have a concrete plan on your loans, spend less than you earn, invest the rest (whether it be index funds, real estate), stay the path and you will do well.

 

Best of luck.

[StarTrekDoc]

paigemart wrote:

With all due respect, I plan on tackling my debt a different way. I don’t want to knock it out right away because it *is* so substantial. I want to stay on a REPAYE plan, save that extra money for investments, and use cash flow from properties to help cover loan payments.

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We're docs AND this forum trends toward the financially conservative side.  Leaverging is a hard concept to sell here.

Debt repayment will have it's own track, and you'll need to account for that along the way on the income stream.

Please take heed that $400K in educational debt AND starting off a practice are two large variables where caution would be had before diving into the world of landlord.  You haven't even mentioned that family situation or job stability situation either.

You'll have to establish a consistent revenue stream before banks will lend you more money; that income stream also counts differently.  W2 income is valued more than small business income.  If you're striking it out alone with SBO --- I highly doubt folk will lend even more money on top of general rental investments.  Same if you're getting 1099 income paid.

My suggestion is that you plan for this 1-2 years into practice while saving up the 30% down that any real estate venture will require and setup financial contacts so when the right property comes along, you'll be ready to pounce with your primary financial base on firm ground.  Leveraging is absolutely the right way to maximize your growth and accumulation period; but get your footing first.

[trebizond]

Lol unbelievable OP.

You're broke. You have 400K of debt. Pay that off first before making any massive investments and if you do invest before it's paid off you should be filling up your Roth IRA and 401K to the employer match before jumping all over rental properties. How are you gonna fix that broken roof across town while you're a dental resident? Where's the money gonna come from - student loans? Doesn't it make sense to you to first buy your own home and figure out how to maintain it before overextending yourself into buying rental properties?

Ridiculous.