We're told to skip small deals and start big. What about lending?

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We're told to skip small deals and start big. What about lending?

Scott V.
Member since 2019 · 28 posts · 48 votes

Hey everyone, first post on BP but been lurking for a bit. 

I know many people on here have started their REI journey with single family and other small investments. Some "gurus" out there say to skip the small stuff and go big from the start. This strategy makes sense to me because of the value of my time as well as my ability to fund down payments on medium size properties (10-20 unit apartment buildings in C areas). Economies of scale and lesser buyer competition come together to make a $1M apartment building make much more sense than a $70k SF home.

What these gurus never seem to mention however is how someone starting out is supposed to secure commercial lending when the requirements are so much different than residential. The main obstacles seem to be net worth and experience. I'm a relatively young (29) professional (dentist) and have high future net worth and income potential but I've only been out of school for a year and have low net worth and experience. Given these limitations, am I going to be constrained to the following options?

1) Be forced to start investing in small deals that will earn me negligible monthly cashflow to gain "experience" in the eyes of commercial lenders

2) Continue to sack away capital year after year until I have cash reserves that will allow me to obtain a commercial loan

I have heard some people say that they found co-signers on the loan who have high net worth but the last thing I want to do is approach family or friends with this when so many of them are also young professionals with little net worth or are highly leveraged and busy business owners. 

Any advice is welcome  and you won't hurt my feelings if you call me a complete dumbass. I'm trying to learn as fast as I can. 

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y

I would concentrate on your practice..  

last thing you probably need right now is 20 C class tenants..

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y

    I would concentrate on your practice..  

    last thing you probably need right now is 20 C class tenants..

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    11Reply
  • Scott V.
    OP
    Member since 2019 · 28 posts · 48 votes
    7y
    Originally posted by @Jay Hinrichs:

    I would concentrate on your practice..  

    last thing you probably need right now is 20 C class tenants..

     Point well taken. That being said, I'm sure you can also empathize with me that it's not ideal to know you're only producing income when the drill is spinning. 

    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Scott V.:
    Originally posted by @Jay Hinrichs:

    I would concentrate on your practice..  

    last thing you probably need right now is 20 C class tenants..

     Point well taken. That being said, I'm sure you can also empathize with me that it's not ideal to know you're only producing income when the drill is spinning. 

    I like to call it doctor dentist office hacking.. I was you I would be going in with some fellow professionals and buy your facility. I would do that before I would go chasing low end rentals that may produce cash flow and could very easily lose money thereby making you work on Friday instead of golfing :)  

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    4Reply
  • Matthew Paul
    Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
    7y

    Base hits all day long turn into a lot of home runs . Grand slams are nice , but rare 

    7Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Scott V.:
    Originally posted by @Jay Hinrichs:

    I would concentrate on your practice..  

    last thing you probably need right now is 20 C class tenants..

     Point well taken. That being said, I'm sure you can also empathize with me that it's not ideal to know you're only producing income when the drill is spinning. 

    PS one of my very short stints was attempting to sell dental equipment door to door.. you know high speed drills low speed and delivery systems and chairs and lights etc.. sit down dentistry was just starting to take off.. turned out Dentist before that had a huge problem with back aches.

    I worked with a start up called healthkit.. they had a delivery system way ahead of its time.. it was all numatic and was used in the military because the holder of the drills was solid aluminum block 2 X 2 X 6  with no moving parts.. unlike in those days the ones that looked like something out of a sci fi movie and would break all the time.. but of course ours was the most expensive and well .. being that and being the industry was very difficult to sell. So that career lasted  a very short while.   But the guy that owned the place was a great salesmen and taught me some life long techniques for closing.

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    0Reply
  • Scott V.
    OP
    Member since 2019 · 28 posts · 48 votes
    7y

    Thanks for all the input Jay I really appreciate it 

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Scott V.:

    Thanks for all the input Jay I really appreciate it 

     YUP get your buddies together and first order of business is to buy your building.. 

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    1Reply
  • Scott Mac
    Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes
    7y

    Hi Scott,

    I agree with Jay Hinrichs about buying into your own facility with a group of other dentists and establishing your practice for a while.

    I've personally known (socially) many successful medical professionals  and many successful commercial owners over the years. Both are jobs that take time and emotional energy.

    Beginning both at once, one you are trained in and one you're (learning on your own dime for better or worse) is a big bite.

    If I were you, I'd buy into a facility with others as Jay recommended, which will add to your net worth and be likely to benefit you long term, and in the mean time stack up liquid cash, as much as you can, and study this business.

    Or if you want, just go for it and move forward with ether multi-family or single family knowing it's not as time free or risk free as many make it seem. It is a business.

    Because you already have a good thing going though, I still agree with Jay as to step one. With step 2 being more education on multi-family ownership, and hang around in here. You can learn a lot in here.

    Regards,

    Scott...

    0Reply
  • Lee Bell
    Real Estate Appraiser · Isabella lake, CA · Member since 2018 · 628 posts · 491 votes
    7y

    Looking at an insurance document for some dental work, I also think you should stick with dentistry for a while, as that would seem to be the highest and best use of your time. Congrats on making the grade as a dentist.

    1Reply
  • Jai Reddy
    Edmond, OK · Member since 2012 · 456 posts · 270 votes
    7y

    @Scott Voiers If you're gunning for the big stuff, amass capital equal to 30% of the big stuff purchase price, and ensure that your big stuff cash flow will cover monthly debt payments (DSCR). Think banks look at numbers first, before any track record.

    0Reply
  • Nick C.
    Investor · Tampa, FL · Member since 2011 · 2k+ posts · 3k+ votes
    7y

    Most people start with the small stuff for the same reason you go to dental school before becoming a dentist. You need to learn how to crawl and walk before you can fly. Gurus aren't in the business of giving practical advice, their job is to make your money become their money. Everything they say and do has that goal in mind. 

    I'm sure there's success stories of people in very unique situations who have gone big right away and made something happen, but the truth is most fail at that $70k SF house, and the failure rate on a 10 - 20 unit would be much higher. 

    10Reply
  • Alex Shin
    San Antonio, TX · Member since 2018 · 103 posts · 31 votes
    7y

    Adding onto Jay's point.. calculate your current rent per sqft on your dental office and calculate the rent on a possible medical building youd buy and compare the per ft cost of each building. You'll save money on owning the building and build equity

    1Reply
  • Michael T.
    Los Angeles, CA · Member since 2018 · 326 posts · 279 votes
    7y

    @Scott V. congratulations for starting now in your real estate investing career!  Most medical professionals just read The White Coat Investor and think they've got it figured out so congratulations to you for taking a step further.  (I'm assuming you've already read The White Coat Investor?)

    Most medical professionals don't typically gravitate to real estate since it requires a little more time and effort but ultimately it's the fastest way to become wealthy.

    FYI, I have a few brothers who are dentists and doctors so I've worked with them on quite a few opportunities.

    There are some good comments here on the post and if you're already in your own practice then definitely look to buy the building you're in or plan on setting up your practice in a commercial building that you own and can have a professional management team rent out the remainder of the space.

    If you're not to the point of starting your own practice and buying a building that's okay it will take time.  

    As a medical professional you'll start meeting the people in the community who make money and those who do not.  Many of those who do make money will be commercial developers.  Once you learn of those developers in the community you'll then begin to be able to create relationships with those individuals and start to invest in the commercial deals. 

    Don't rush it but if you're anxious feel free to reach out.

    1Reply
  • Michael T.
    Los Angeles, CA · Member since 2018 · 326 posts · 279 votes
    7y

    @Scott V. if you want to get started in real estate investing just to get started then by all means do it.  Don't let anyone dissuade you from doing it.  

    Unfortunately, there are too many medical professionals that are broke because they haven't properly managed their money and assets over time.  Just because you make a lot of money now doesn't mean you'll want to stay in dentistry for your entire career.

    I encourage you to get started now if you are ready! Start how other real estate investors get started. Do a house hack, purchase a SFR or small duplex and either manage it yourself or have a property management company do it. Once you've done a few small investments and you save enough over time you can work on the larger commercial properties with those in your community, other dentists or other investors.

    Just because you're a medical professional doesn't mean you don't have the time or ability to do it.  You can and should do it.

    1Reply
  • Scott V.
    OP
    Member since 2019 · 28 posts · 48 votes
    7y

    Thanks Michael, Nick, and the rest for all the great insights. I should be paying you guys for helping me avoid these pitfalls but I appreciate the free advice. 

    A couple points I'll briefly address regarding the above posts: 

    • I'm an associate dentist in a group practice owned by my father. It consists of two buildings he has mortgaged and one building which is much larger that is owned by another party (it's a multimillion dollar downtown building that's out of my reach to purchase). Because of these factors, I'm not really in a position to buy any of these buildings at least in the near term. 
    • I do understand the "crawl before you walk" philosophy regarding purchasing properties. I'd certainly have major regrets if I failed to capitalize on a large investment versus a small one for my first deal. The reason I have such pause to invest small is because of two reasons. The first being that I can direct that time and energy to my work and easily multiply whatever small profits I would gain from a small investment property. My time is simply more valuable being used in my profession. In addition, I have no experience in the rehab world and couldn't put much sweat equity into a single family home. It seems like larger apartment buildings are generally better maintained than SFHs and are a bit more turnkey (although this could simply be an error in perception on my part). 

    Thanks again and to answer one more question from above, no I haven't read white coat investor but I have read millionaire next door, the rich dad series, and a few others. To be frank, the traditional view of obtaining wealth as outlined in the millionaire next door is almost depressing to me in a way. I can't picture myself stunting my entire lifestyle through the prime years of my life just to suddenly come into financial freedom when I'm 65 and less able to enjoy it. My dream is to own a ski home in the mountains of Vermont and have a family to take there for vacation for a week every couple months while I'm in my late 30s and 40s. 

    Sorry for the rambling and my naivety but I can't thank you all enough for checking out my thread. 

    1Reply
  • Lesley Resnick
    Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    SFH are not sexy or exciting like saying 100 unit multifamily. However, I would propose that multi-family only offers one significant advantage, scale. It would be tough to buy 100 sfh at a time. Beyond that they are an inferior asset class.

    1.  Common expenses are higher - Trash, landscaping, lighting, etc

    2. All things being equal, tenants will pay more and stay longer in SFH - garage, parking, yard.

    3.  They are far more liquid than large properties.   You can buy and sell properties at will.

    4.  I have complete control.  I make all the decisions and do not have a series of partners I need to convince we should mow the grass. 

    5.  My portfolio is diversified.  I have A, B & C properties in different parts of the city.  

    If you purchase a large scale property, you are going to need partners and more complex financing. It is far simpler to obtain an approval on a 100k, than 10 million. By that I mean you will need more experience, reserves, and you will get a lower LTV.

    In today's market, I have more net income in SFH, than if I were to follow the gurus and bought something large. This is not to say that if the right project came along, I wouldn't consider it. I go where the numbers take me, not the gurus.

    7Reply
  • Dave G.
    Investor · Phoenix, AZ · Member since 2016 · 349 posts · 418 votes
    7y

    @Scott V.

    Some random comments to this thread:

    • 110% agree with @Jay Hinrichs that you solely focus on your practice at this point. How many years did you just invest in education to become a dentist? I believe you should concentrate on becoming a successful, experienced dentist before learning another trade (successful, autonomous investing). Not sure how that would limit you from buying a ski home in your mid-thirties (unless you intend to pay cash?).
    • Reference the Millionaire Next Door, my take from that book was not to have to live like a hermit and cut coupons until you become rich at 65. Does that work? Yes, but it does not have to be that extreme. My take was to focus on not wasting money on the artifacts that traditional society (and American marketing) considers a wealthy person should own and that you should optimize your financial resources to what brings you true happiness. Separate utility from excess & bling and stop trying to impress people that don't matter (like strangers on the freeway looking at your newly-leased $700/month Mercedes - foolish!). 
    • A life-long friend of mine's dad has been an oral surgeon for 40 years. He focused on his practice early and became a highly compensated specialist by about his 10th year in practice. One time (in the 80s) I went to my friend's house and there was a new Ferrari in the garage. My friend humbly exclaimed that his dad had more money than he knew what to do with. More to the point on this though, was that his dad made some very shrewd investments including buying the building he operated his practice in. He managed it himself too. There were some obvious synergies with this as he was at the property everyday since he worked there himself, and most tenants (~15 suites) he knew personally and professionally (dentists & doctors). He purchased and managed at least one other successful commercial property that I was aware of. He also made some very poor investments (stereotypical bad Dr moves) such as a spec-home flop, land purchases out of state and scammed by a con-artist advisor for about a $1M (guy went to jail, not sure about $$ recovery). He did not perform appropriate due-diligence on these and/or maybe fell into the high-income Dr. mindset of "money is an easily renewable resource". Another source you may consider for learning about investing is https://www.physicianonfire.com/.
    • My wife and I are also high-earning professionals. We had lots of fun in our 30s & 40s with lots of toys and travel. We own a fun vacation home now we go to 2x/month. We vacation internationally at least once/year now (more with work). We have fun "despite" still working. We could probably retire just fine now, but we enjoy our jobs still and will work for another few years at least (to mid-fifties). 
    • My investment style is fairly conservative (multiple buy/hold rentals) balanced with low-cost index ETFs in our 401ks and brokerage account. I'm testing the waters with crowd funding now too, trying to find an alternate place to deploy idle capital in what I consider to be an expensive real estate and stock market. I continually seek to balance the work/time required to manage our investments with my 50+ hour workweek, recognizing what the highest & best use of my time is. Recommend others to do the same.
    • Recommend starting small and building your knowledge. Maybe I'm just not that smart or hard-working, but I can't imagine diving into a Multi successfully out of the gate. There are many BP podcasts of people going from 0 to 100 properties in a year or two. I think these are outliers, not common realty....my opinion. Building wealth within reasonable risk takes time. Long, slow and steady is boring. No one wants to hear about the overnight success that took 10 years. That's why the guru's make money. You can still get your ski cabin, have lots of fun in your 30s and beyond, while building significant wealth. I just think someone should not expect to do it in 5 years.
    • You're clearly a smart dude asking these questions, stimulating critical-thinking discussions. You have a lot of runway in front of you and will do very well I'm sure.

    Best of luck,
    Dave

    3Reply
  • Scott V.
    OP
    Member since 2019 · 28 posts · 48 votes
    7y

    Amazing posts Dave and Leslie you guys are amazing. Can't thank you enough and I'm going to run with all this advice. 

    0Reply
  • Vinay H.
    Cambridge, MA · Member since 2017 · 268 posts · 247 votes
    7y

    I must add the following:

    I notice that flip funding is a little easier to obtain. I have been prequalified with 20% down. Last year, nobody wanted to entertain fix and flip loan for me due to 0 flip experience...

    So I would say now is time to get into fix-flip or BRRR....

    0Reply
  • Vinay H.
    Cambridge, MA · Member since 2017 · 268 posts · 247 votes
    7y

    @Scott V.Purchase and fix with HML at 11% and refi - in 6 months at conventional rates

    0Reply
  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    7y

    @Scott V. congrats on saving down payment! I work with a lot of young professionals in very similar situations and my recommendation is to start big but not 10-20 units big. Instead go for a 4 unit in a class A-/B location that is turnkey and use a property manager. These investments tend to perform as planned on paper vs the 10-20 units that often have surprises such as much larger turnover costs, vacancy, overall headaches, etc. 

    You are right that bigger deals have less competition. In my Chicago market under $600k has a ton of people who can afford it while a $1.2 million deal is still competitive but smaller buyers pool and typically can get a better ROI on it. I assume it will be similar in your market with some nice turnkey million dollar 4 units or atleast in closest major metro.

    P.S A bit off topic but if you decide to house hack check out special mortgage options for doctors. I did one a few months a go and the terms were insane. They will do $0 down for some deals and 10% down for multi units at lower rates then conventional mortgages. Definitely something you want to take advantage of being in the field. 

    1Reply
  • Jon W.
    Investor · Matamoras, PA · Member since 2015 · 111 posts · 32 votes
    7y

    buy a duplex. Live in one side and rent the other. Best way to get experienced I think on a small scale. 

    After 2 years fannie Freddie banks will count rental income as income towards qualifying for more loans. You will qualify immediately after being qualified for a loan to offsetting dept to income ratio.

    Although, you might find managing a non sophisticated tenant is a huge stress on your main squeeze.

    0Reply
  • Account Closed
    Rental Property Investor · Glens Falls, NY · Member since 2016 · 176 posts · 169 votes
    7y

    I'll be that guy.. What are you living situations now? own a single family that you live in? What about meeting with your local portfolio lender and getting into a 3-4 unit with low money down and live there for a little? If you have a house now make that your "rental" move to the multi and get some experience that way?

    0Reply
  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    7y

    Oops double post

    0Reply
  • Scott V.
    OP
    Member since 2019 · 28 posts · 48 votes
    7y

    Thanks Henry, Jon, & Vinay. All points noted and appreciated. 

    Dylan that's a good question regarding my current housing situation. I haven't mentioned it because in light of the opportunities out there for house hacking I feel a little bit bad about the situation I'm in. I was not as financially educated at the time.

    I have a mortgage on a townhome for the amount of $399,000. My mortgage payment is approximately 15% of my gross income. The home was a partially emotional decision on my part. Yes, it forces me to save in the form of equity and is protected from the rent increases I was facing at my previous residence, but I turned a blind eye to house hacking because of my love of home design, architecture, and having a space to myself that I really enjoy. 

    Because of my guilty conscience regarding the housing situation, I do rent it out a couple days a month at $250 a pop to subsidize my mortgage although I don't really need to (it just makes me feel good). In my market, it is considered a high-end townhome in one of the most desirable areas in the city. I'm the least expensive unit so far out of all my neighbors. Based on rental comps in the area, I could probably rent it out for about $3000/mo if a tenant could be found (not sure how this would affect my mortgage, however). 

    I'm interested to hear how this may change your view of my situation and how you'd approach it in my shoes. 

    1Reply
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