New dentist: balance between paying student loans & beginning REI
Member since 2019 · 2 posts · 0 votes
Good morning BP! First post, here’s my intro: I’m a new dentist finishing a 1 year residency training soon, the plan is to then work in a group private practice for 2-3 years then become a practice owner.
One big question I have right now (maybe specifically for other dentists, but welcoming all comments) is the following: My wife and I are interested in learning about and beginning REI, especially rental income properties. Because dental school is so awesome, my student loan balance is $380k. For theses first years in my dental career, how do you recommend I balance the following:
A) pay down extra student loan balance
B) begin using that cash for REI
Hey @Eric Palmer, when I first graduated I had to battle with this same question. This is how I thought about it...
If I believe that my ROI from investing will be greater than the interest rate on my student loans, I invest.
If I believe that my ROI from investing will be less than the interest rate on my student debt, pay off my loans as quick as possible.
To play devils advocate for the thought above here are some additional things I considered....
1. This simple equation does not account for the feeling you will receive after being debt free.
2. If you dedicate 100% of your time towards being the best dentist possible, you may create more wealth in the process than you would have created by sticking your toe in the water in real estate investing while maintaining the full time dentist job.
3. The opportunity cost of not investing right now may outweigh the return you will get from putting that extra money towards you loans.
4. But with no experience and a demanding schedule as a dentist, you may not have the time, energy and focus needed in order to create outsized returns above that of your interest rate.
5. Another option could be investing with partners who have more time to spend sourcing, underwriting, acquiring and managing investments, enabling you to focus on your work, while investing that money into real estate and potentially receiving a return above that of the interest rate on your student loans.
Just some of the thoughts that ran through my head when I was contemplating the same question. For the record, I chose to invest!
The return on investment you make by paying down your student loan balance is the interest rate of your student loans (which is probably a known fixed number [let's say it's X%]). The return on investment you make with REI is the investment returns of the deals you make (which is probably not known right now [let's say it turns out to be Y%]). The finance text books tell you to go for alternative that pays the higher rate of return. If X% > Y%, go for the loan paydown. Otherwise, go for REI.
One topic many finance text books don't focus on is liquidity reserve. In other words, how much cash should you keep on hand to cover known short-term needs ("working capital") and unexpected emergencies where you have to come up with a lot of cash in a hurry ("contingency reserves")? This decision is a judgement call on your part. You and your spouse are the co-CEOs of your REI business and household, so the decision is yours to make. Articles on personal finance sites discuss the tradeoffs you might want to consider.
One approach I took when I was building my wealth was to have large pre-approved credit lines (credit card limits, HELOC limit) I could draw on when I had an unexpected need for cash to cover an emergency. As long as I didn't have an emergency, I left the lines untouched. Note that banks can reduce credit limits at their whim when they need to (as many did during the Great Financial Recession), so this approach has its risks. But if we don't have another financial crisis anytime soon, the approach works. I still keep my credit cards, but I use them at least once a year as debit cards (banks sometimes cancel credit cards that haven't been used in a while as a security precaution).
The other avenue to explore is publicly-traded real estate securities (REITs), including ETFs and mutual funds. These investments give you exposure to the real estate asset class for a few hundred to a few thousand dollars. Investing in direct real estate usually requires higher minimum capital (tens of thousands of dollars or more). There is also the liquidity angle. If you need cash in a hurry to cover an emergency, you will usually find it easier to sell a publicly-traded security (seconds [during market hours]) than trying to sell illiquid direct real estate (which often has escrow periods of weeks or more). A recent entrant into the real estate asset space is crowdfund real estate. You often get the higher return of direct real estate for a relatively lower investment minimum, but the investment is still illiquid if you need to convert it into cash quickly (The Real Estate Crowdfunding Review and YieldTalk).
Hey @Eric Palmer, when I first graduated I had to battle with this same question. This is how I thought about it...
If I believe that my ROI from investing will be greater than the interest rate on my student loans, I invest.
If I believe that my ROI from investing will be less than the interest rate on my student debt, pay off my loans as quick as possible.
To play devils advocate for the thought above here are some additional things I considered....
1. This simple equation does not account for the feeling you will receive after being debt free.
2. If you dedicate 100% of your time towards being the best dentist possible, you may create more wealth in the process than you would have created by sticking your toe in the water in real estate investing while maintaining the full time dentist job.
3. The opportunity cost of not investing right now may outweigh the return you will get from putting that extra money towards you loans.
4. But with no experience and a demanding schedule as a dentist, you may not have the time, energy and focus needed in order to create outsized returns above that of your interest rate.
5. Another option could be investing with partners who have more time to spend sourcing, underwriting, acquiring and managing investments, enabling you to focus on your work, while investing that money into real estate and potentially receiving a return above that of the interest rate on your student loans.
Just some of the thoughts that ran through my head when I was contemplating the same question. For the record, I chose to invest!
@Eric Palmer - I opened this to weigh in (not a dentist but faced a similar situation) and after reading @Kevin Dean ‘s post I basically would copy paste everything he said as advice haha. Just consider the setbacks on starting in REI for the first time and determine if you're able to weather those. If not, start paying down the debt and save as much cash as possible over the next 12 months and then re-evaluate.
There is additional debt to also consider here. . .the cost of buying into a practice, or starting one on your own if your current group does not work out. Also, potentially buying into your office building should your practice own it.
In light of this, I would recommend holding on real estate investing until you have a handle on what these endeavors will cost, and how you plan to fund it. Once you are settled into a practice for the long term as an owner, and you've vetted the option of owning your own office building, then revisit REI otherwise
Hello @Eric Palmer
Welcome to BP and your real estate investing career!
I would recommending learning more about which realm in real estate you would like to focus in on and educate yourself in that aspect. I would continue to research on BP and then join local meetups to help learn from established operators. That way you can develop a strategy and even partner with someone to help the learning curve.
In this process you may decide that you want a more passive role in which you can find new opportunities as a passive investor.
If you have any questions feel free to reach out at anytime!
Congrats on your profession and moving forward in your space.
If you could find investments with others that produce more in returns that can help cover your student loan payments and pay it down more then do it. Invest in a opportunity where it could pay you to pay your loans.
Hey,
Military Dentist here. I know your feelings. I would have been $400K in debt. My solution was to join the military and get it all paid off immediately, but if you wanted to pursue repayment options, there are Indian Health Services Program, Federally Qualified Healthcare Center loan payback, and military loan repayment programs. These are not a silver bullet, but in each one, you get a good chunk of debt forgiven while you make money as a dentist (albeit less on average).
That being said, don't shy away from practice ownership. Owning as soon as possible is THE most important factor imo (in a good area of course). My advice would be to pay the MINIMUM on your student loans. Banks generally are understanding that you have student debt and it generally will not disqualify you from receiving a practice loan. Your #1 priority should be to build liquidity in the short term. Some banks will not loan to dentists who have less than 2 years of experience, but I'd advise shopping around. Dentistry has great margins as far as new businesses go, so often you can find a bank to give you a loan.
Every dentist needs a retirement portfolio, and yours will just consist of RE!
Hope that's helpful and feel free to reach out if you have questions for me.
@Eric Palmer It's tough to say what you should/shouldn't do. If it were me in your shoes, I'd work on paying down that student loan debt. Maybe get one investment property over the next few years while you work on that and learn form that experience until your loans are paid down.
I say that because it seems the govmit is pretty Fing serious about student loans, I'd rather have them off my back if I were you.