Financing Rentals and Debt

[portlandia]

Kudos to you for being willing to listen to the collective wisdom of some very experienced, and successful, folks on the forum.

paigemart wrote:

I knew to put most my money on a reliable company.

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This is the problem. You don't know what a reliable company is, and neither do I. Markets change, companies form and others go bankrupt. What might be a "reliable" company today could be gone tomorrow. You may be too young to remember a time when there was a Blockbuster on every corner, now there is only 1 in the entire country (Bend, Or). There are numerous other examples of companies that seemed very solid for a long time and then went bankrupt (Enron, Radio Shack). The approach that us indexers take is that the market is too complex and too fickle for even the experts to reliably get right, so we aren't going to try. Instead we will be content to take the returns the whole market gives, instead of trying to gamble on individual stocks.

I encourage you to read as much as you can on this site, bogleheads, JL Collins and others to learn more about this investing philosophy. It will be time well spent.

[artemis]

paigemart wrote:

I know it was untraditional to buy the individual stocks, but I was just getting started with a couple hundred dollars. I wasn’t ready to dive deep into looking at the different index funds. Regardless, I’ve learned how to trade the stocks on the portal, learned some new vocabulary, and know what doesn’t work. My plan is to get an account with Vanguard once I have the thousands to save.

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FYI, you don't need to have thousands of dollars to invest with Vanguard (or Fidelity, or Charles Schwab, the other two companies worth considering).  You can buy ETFs; all you need is the purchase price for a single share of the fund you want to get started.

Get started investing for the long-term via diversified stock and bond funds (whether mutual funds or ETFs) now.  Treat individual stock purchases the way you'd treat a night on the strip at Vegas:  only use "fun money" for that.  That way if you lose your shirt buying those stocks it won't matter.

And DON'T get comfy with your student loan debt!  It's very dangerous, because it's the only debt you basically can't discharge in any other way than by paying it off.  Having $400k in student loan debt is much riskier than having $400k in mortgage debt (to use just one example).  To rid yourself of a mortgage you can sell a house or allow the bank to foreclose on it, but good luck doing that with your dental school diploma!  Yes, you'll have to make some major lifestyle sacrifices early in your career in order to pay it down expeditiously while still saving for retirement, but you basically have to do it.  There's absolutely no guarantee you'll be able to work as long as you'd like to work, or that your income will remain at a high level over the entire course of your career.  That sort of thinking is what leads to medical professionals still working in their late 60s because they literally can't afford to retire.  Believe me, it's very comforting when you're in your 50s to realize that if your job disappears it's not a crisis, because you can just retire early since you have no debts and you saved and invested wisely.

Investing's a marathon, not a sprint.

[Sajimone]

I agree with StarTrek's opinion.  Most people here are too conservative... not bad advice from a conservative standpoint.  But if you're smart/savvy.. you will figure out the dental business with 1-2 years of employment first, save up the large down payment for a multi-unit building where you can now lease out the extra units to multiple health professional tenants (generally safer and consistent tenants), let them pay down the mortgage and your student loans for you.   Then build up with multiple other dental practices and buildings.  Come back in 7-10 years and brag about it.   Its a calculated risk where if don't know what you're doing from a business/financial standpoint... you will forever be a slave to the banks.   Good luck!  I have some dental friends that are doing exceptionally well given that this more of a cash business compared to medicine.

[AlexxT]

Sajimone wrote:

But if you’re smart/savvy.. you will figure out the dental business with 1-2 years of employment first, save up the large down payment for a multi-unit building

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Right, but figuring out the business, and saving up a large down payment were exactly the things he wasn't planning on doing.

 

Sajimone wrote:

), let them pay down the mortgage and your student loans for you.

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Here's the problem with your plan, and his:   Can you show me how much of a down payment and how many units he would need to buy and at what price in order to have his loans paid off by the positive cash flow?    You can't just wave your hands and say that it will happen.   Sure, the rent could pay the loans, but first he has to be able to buy the property.  Where exactly will that money come from, and how can you be sure that there are properties that will give him the cash flow he needs in his area?

[MaxPower]

As another data point for growth in a Roth IRA account, since the Rest of it has been hashed over multiple times, I have about 10 years of data on my Roth IRA. In that time I have invested just under $55,000 and the growth is about $45,000, for an annualized return of over 10%. But I just invested in boring index funds...

[q-school]

A lot of times, my old ears hear something that may not be there.

question is posed by young person.  Lots of grizzled veterans present a pretty unanimous opinion.

The young person responds with a yes, but .... here is why i’m different.

i don’t hear that from you, so i’m optimistic.  

here is what i do hear from you though-

i learned from mistakes i made by not going the traditional route, it’s okay because it was only small money and i feel like i’ve learned the lessons well.  I can only hope you are not doing the same thing with your dental practice.  We really do need to learn from other’s mistakes in the field of medicine.  

you will obviously do what you think is best.  I’m telling you a very very safe road that will get you where you want with some time is to take the traditional road.  Focus on learning dentistry.  Focus on debt repayment, index fund, and practice development.  It may be that the biggest opportunity you have to create wealth is to invest in yourself, in your practice.  Learn to practice, learn the business end of practice.  There is so much to learn in accountancy, tax optimization, billing, art of managing your bedside manner, art of encouraging recalcitrant patients to prioritize your payments instead of thinking you are a rich doctor who can be stiffed, real estate ownership, creating partnership plans, creating your own professional retirement plans, HR policies, obtain health insurance, negotiate leases, prevent theft in the office, prevent employees from forging your name on narcotics, give talks to the community, etc.  if you join someone else’s practice, you are likely to have a big buy in that will need to be addressed at the same time you are trying to get your real estate empire started.  If you are asking if i know through hard knocks, the answer is yes.  This stuff is hard.  You can do an okay job at it, or you can learn to do all this stuff well.  The real estate debt and management headaches may be a distraction at a time when you can really create a foundation for wealth through your primary job.  Plus all the stress may double if you have kids sometime in this time frame.

Most of us were young once.  We all thought we were smarter than the man once.  We thought if i only do what everyone else does, i will wind up like everyone else.  I think we are encouraging you to be sure that real estate opportunities will always be there for you.  You don’t need them to be successful.  You don’t have to do something drastic to get to where you want to be.  We have all made mistakes.  For me one mistake that you will have a hard time recovering from (UNLESS YOU ARE EXCEPTIONALLY LUCKY IN REAL ESTATE), is not index fund investing and focusing on your core business.  The tried and true path will get you there.  But if you are exceptionally unlucky in real estate, that will leave a mark for decades.

 

truly, wish you the best.  Just want you to make an informed educated decision born of considered thought rather than fear.  I really am concerned about the process you used to decide to invest in individual stocks for your ROTH IRA.  Those are the sort of mistakes that leave a mark.  Compound interest is the most powerful force in the universe, i hear.  Use it to your advantage.  The loans that you have taken out are working against you, need to get those under control imo.

 

[Sajimone]

AlexxT wrote:

Sajimone wrote:

But if you’re smart/savvy.. you will figure out the dental business with 1-2 years of employment first, save up the large down payment for a multi-unit building 

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Right, but figuring out the business, and saving up a large down payment were exactly the things he wasn’t planning on doing.

 

Sajimone wrote:

), let them pay down the mortgage and your student loans for you. 

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Here’s the problem with your plan, and his:   Can you show me how much of a down payment and how many units he would need to buy and at what price in order to have his loans paid off by the positive cash flow?    You can’t just wave your hands and say that it will happen.   Sure, the rent could pay the loans, but first he has to be able to buy the property.  Where exactly will that money come from, and how can you be sure that there are properties that will give him the cash flow he needs in his area?

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You have to understand the numbers. If you don't.. don't try this.   Its a calculated risk that any real estate investor makes daily... ie rent/sqft, cap rate, noi, cash flow, depreciation, income/expenses, etc.   If he buys a 3-4 units place where it is already rented out in 3 of the units with NNN leases in place and he comes in an owner-occupant understanding the numbers... the tenants will pay down his mortgage while he enjoys the profits from the practice.   Hopefully by then he can pay down the mortgage and/or student loans.   Rich dad vs poor dad... ?   If you don't know what your doing or getting into... you will be a financial slave to the banks.   Maybe you can declare bankruptcy and lose the business debts but the federal students loans don't go away, bad on the record, etc.

[AlexxT]

Sajimone wrote:

You have to understand the numbers. If you don’t.. don’t try this.

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Exactly my point.   He doesn't, therefore he shouldn't

Sajimone wrote:

, save up the large down payment for a multi-unit building where you can now lease out the extra units to multiple health professional tenants (generally safer and consistent tenants), let them pay down the mortgage and your student loans for you.   Then build up with multiple other dental practices and buildings.

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I'm asking: what are the numbers that will make this work on his salary.

Sajimone wrote:

You have to understand the numbers. If you don’t.. don’t try this.   Its a calculated risk that any real estate investor makes daily… ie rent/sqft, cap rate, noi, cash flow, depreciation, income/expenses, etc.   If he buys a 3-4 units place where it is already rented out in 3 of the units with NNN leases in place and he comes in an owner-occupant understanding the numbers… the tenants will pay down his mortgage while he enjoys the profits from the practice.

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I get that.

I'm asking for real numbers that show that he can do it.  I don't think he can.   There is some amount of positive cash flow that is reasonable, and some amount that's not reasonable or possible.  Please show me the range of possible properties that this dentist could buy on his income ( currently with no assets and no down payment money ) in order to generate enough of a down payment to buy enough property with enough of a cap rate to pay off his loans.

I know that  he can buy an infinite amount of property with no money down earning lots of income.  I heard all about it on late night tv.  

And let's not forget that he has a good chance of ending up with a negative cash flow on his properties.

I think that you agree with me. There are a lot of "ifs" in your statements.  I am simply emphasizing them.  in the long run, index funds and real estate will get you to exactly the same place, but index funds are safer and easier.  But a guy already over leveraged ( 400k in debt with no tangible asset to show for it ) shouldn't be investing with more leverage.

I can get higher returns in the stock market, too.  All I have to do is buy the right stock with leverage.

 

 

[SerrateAndDominate]

Like several others on here, I am one of the people who made the boneheaded decision to buy a house in med school thinking I would stick around for residency and so on.  That didn't work out because my home program took a rather quick nosedive so I ended up renting out for just over 4 years now.  The house is priced fairly, but after doing a few grand of updates (saved some by doing myself), I can assure you that it isn't worth the hassle, especially if you end up switching jobs (most people do).  Throw in bad tenants, neighborhood goes bad, city infrastructure stinks, increasing taxes without homestead.  I've handled a few of those things.

I get the desire to get some hands-on learning, but I would listen to everyone here and research a lot.  Don't make any moves until you are really settled down somewhere for a while.

I'm sorry if I missed this, but are you doing a specialty training after dental school? You mentioned doing REPAYE, which would make sense if you did a fellowship.  If not, I don't understand the reason to pursue that route if you won't get any benefit from government interest subsidy.  Just refinance to a shorter term and pay off your loans at a lower rate.  I don't remember the numbers, but there are a lot less PSLF-eligible medical jobs than people claiming they will achieve it.  I'd imagine the same is true for dentistry.  Looking into some federal jobs for my wife, their pay isn't worth it.

[The White Coat Investor]

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.

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First, let's address the question that wasn't asked (like a few above have done)

Being a landlord is a noble and profitable profession. So is dentistry. Which profession are you most interested in, dentistry or landlording? I would structure your life accordingly.

If dentistry, then I'd really focus on learning your craft right now, minimizing your debt as best you can by living frugally and perhaps even with a side gig. Certainly, if there is a spouse/partner, get them out earning. Afterward, I'd focus on buying your own practice and really making it profitable. If you like real estate as an asset class, you can start buying into some syndicated properties/funds as your practice becomes more profitable. If you so desire later, you can transition into a part-time direct real estate investor or even a full-time landlord.

If landlording is your passion, then you probably ought to give some careful consideration as to whether or not you wish to continue borrowing for a dental degree. If you're nearly done, might as well finish. At least you'll have a solid back-up in case landlording doesn't work out.

Landlording as a profession, at least in the beginning, requires A LOT of work and there isn't much income. Certainly not enough to service $400K in student loans. You can't afford to hire a property manager, rehabber etc so you end up doing a lot of that stuff yourself. You don't start with 40 cash-flowing doors. You start with none. Then you buy them one by one, and either they're not cash-flowing, you got an incredibly difficult to find deal, or you put substantial money down. None of those are particularly compatible with being worse than broke.

Also, consider whether carrying debt at typical student loan rates of 6-8% is compatible with successful real estate investing. Go ask the successful real estate investors you know what they borrow at. The only ones I know who borrow at those rates are house flippers, and they do it for as little time as possible.

Now, let's address the question actually asked.

Yes, you can probably still borrow despite having tons of student loans. It'll be a little harder and you'll likely end up with less favorable terms (making it even harder to be successful.) You may have to get creative and do things like seller-financing or go to hard money lenders. You can also borrow from family, borrow against your primary home etc. But the $400K in loans BY ITSELF probably won't disqualify you from any financing. However, if you combine it with a $130K/year earned income, a $500K practice loan and a $500K mortgage, it probably will.

[burritos]

sorry. deleted.

[Hank]

You have $400K in debt.  That's worse than broke, but on the plus side, you have dental school and soon a dental license.  You want to take on a lot more debt, and I agree that you should.

However, the next big debt burden you should undertake is a practice acquisition loan.  You need to get enough money in the bank to qualify for a practice acquisition loan.  You also need to get your hand speed up and learn enough about the business of dentistry to be smart with your practice acquisition.

Finish school, pass your regional board and get your license, work as an associate for a year or two to sock away some money.  Go to high quality clinical CE to learn profitable procedures that interest you (ortho, implants, molar endo?) and also attend practice transition seminars and business of dentistry CE.

You can make plenty of money in dentistry.  You can grow a substantial nest egg in qualified funds.  You can build a small empire (or a big empire) in real estate, multiple practice ownership, or several other ventures.  There will be a right time for real estate investing and potentially for debt financing that real estate.  Dental school is not that time.

[AlexxT]

@paigemart , if you still think real estate is the road to guaranteed riches, please read this article from today's NY Times.  These people had lots of experience and knew what they were doing.  I have zero sympathy for them, but maybe you can learn something from their mistakes.

https://www.nytimes.com/2018/08/03/nyregion/kushners-building-fifth-avenue-brookfield-lease.html

 

[StarTrekDoc]

That's the crazy part about real estate, it can scale big --- quickly.  Have the right luck and reputation, get the right funding ---viola.  empire.   have a misstep, take it over a barrel.   It's not too unlike option stocks which also can be highly leveraged.

Like THE WCI echoed, it's another job; one which takes time and effort to learn and would suggest to do after finding your feet and initial capital the first few years.

Totally agree that index funds are safer.  Done correctly, leveraged real estate can work defer a lot of taxes AND shift to a lower bracket which is invaluable for high tax folk like most in the forum that have fairly large taxable side funds.  1-2% moves in real estate can be equal to 5-10% moves of the stock market.   It's not easy, but it's certainly getting to goals faster IF DONE RIGHT.  <----- that's a big capitalized IF.

[Dont_know_mind]

AlexxT wrote:

@paigemart , if you still think real estate is the road to guaranteed riches, please read this article from today’s NY Times.  These people had lots of experience and knew what they were doing.  I have zero sympathy for them, but maybe you can learn something from their mistakes.

https://www.nytimes.com/2018/08/03/nyregion/kushners-building-fifth-avenue-brookfield-lease.html

 

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The long term returns of most investments rely on the long term macro drivers for it. That applies for commercial property also and relies on the area being able to attract more Tennant’s in the future.

I guess index investing relies on macro drivers also - in this case that world economic growth tends to increase over time, and hence company earnings and the benefits of diversification.