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Trying to decide whether to purchase a practice or a home first? In this jam-packed episode, I sit down with Morgan Stump to unravel this complex decision-making process. With 15 years of diligent industry experience, Morgan delves into a point-by-point comparison of these life-altering choices, examining the ramifications for your long-term financial health, risk profile, and adaptation to shifting market conditions. Whether you're a first-time buyer or reconsidering your next investment step, this episode is brimming with expert advice tailored just for you!
Morgan doesn't stop there. To help doctors looking to relocate, he dishes out practical tips to ease into new markets while understanding the challenges posed by mortgage lenders. He explores why top-notch financial health and liquidity remain crucial, sheds light on economic telltale signs, and navigates the turbulence of market fluctuations. Wrap up your listening with direct access insights from Morgan—offering personalized advice just when you need it most.
Take a deeper dive into financially transformative decisions and smart relocation strategies by tuning in to Morgan's episode today!
You can reach out to Morgan Stump here:
Website: https://www.getprovide.com/
Phone: 503-686-3284
Email: morgan@getprovide.com
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Michael: Hey Morgan. So talk to us. What's one piece of advice you can give us this Monday morning?
Morgan: Sure. Thanks for having me, Michael. I really appreciate it. So the one piece of advice is surrounding a question that has been brought up over and over again during my 15 plus years in the industry.
And that question is, should I buy practice or should I buy a home first? So what do you think about that?
Michael: Interesting, man. I think a lot has to go into that like, the financial health of the person, risk assessment. Economic market considerations, right? All these things. But what are your thoughts?
because we see this a lot on the forums, Facebook groups, even downtown, right? They want to do one or the other.
Morgan: Well, I see this specifically come up a lot when a doctor is looking to relocate to buy a practice. And, the housing market, the rental market is really crazy.
And a lot of folks that are especially going to be larger earners, a lot of folks that might already have a family or be married, they don't want to put off buying a home for two years, Pretty much every bank, every mortgage bank has required that you own a practice for two years before they're going to lend to you to buy a home.
The really cool thing is that some banks have adapted to that. And that includes us. In a practice scenario, we're able to actually use the target practices historical cash flow to qualify the new buyer for a home. So as soon as you close on the practice, you can close on the home simultaneously.
There still are a few mortgage lenders don't go that route. And so to speak to your larger audience. while it might be a little bit painful to think about renting for a couple of years and then moving again, one of these assets is going to earn your household money.
The other is going to be your largest debt. So if it comes down to one or the other, I would always go with buying the practice first. Usually when you're buying a practice, you're buying it for a reason. The demographics fit the procedures that are being done in that practice fit.
You might have a good relationship with the seller. And I would argue even in times like this, where, the housing inventory might be a little bit light, I would say the practice acquisition and target practice. Inventory is even lighter. Particularly if you're looking for the right fit, we see doctors have all sorts of, different risk tolerances, where some folks just say, Hey, do you know what?
I'm going to buy this practice. I'm going to invest in myself. I see that the seller is somewhat declining. Maybe they're referring out a ton of procedures, that the buyer is going to be able to capture. So now they're not referring out that business, and they're keeping that revenue in house. But I would say eight out of 10 times, nine out of 10 times a buyer is buying that practice because it's a really good fit for them.
And that is not an easy thing to find. So I would typically default to buying the practice before you buy the home. Now just to kind of, Back up a little bit. The reason why it is so difficult for mortgage lenders to wrap their head around financing a new buyer is mortgage holders and mortgage banks are much more comfortable underwriting to W 2 or 1099 income.
So if you absolutely need to buy that home first, And the bank that you're working with, the practice finance group that you're working with does not offer the option of closing them simultaneously, then your best bet is to qualify for that home as a W 2 or 1099 associate. That's going to allow you to get into the house.
And then once you're in that house and it closes, you are free to go, because you've already bought the home. As long as you're making payments on time, there's not going to be any issues with your mortgage. So that's my advice there, but I am very encouraged that banks are starting to adapt and recognizing the difficult situation that this puts doctors in.
So this is a topic that has gotten easier to answer over time.
Michael: Nice. Okay. So then what would. Those conditions look like where you tell them like, yeah, can see why you do that.
Morgan: where they want to buy the home before the practice?
Michael: Yeah.
Morgan: So in that scenario, they're already making income as an associate in the area that they want to practice. That is really key because if you are trying to buy a practice and you know, okay, we've got 90 days to close. But it's out of state or more than a couple of hours away from where you currently live, then the mortgage bank is going to be collecting bank statements.
They're going to be collecting paycheck stubs. And if you're trying to buy a house in another state, but you're showing bank stubs, and paycheck stubs that are out of state or hours away, it's going to raise some red flags saying, Hey, why are you living? Here, meanwhile, you're working hours away or in another state.
So you really got to be aware of that because you don't want to put yourself in a really bad position of getting far down the road in the mortgage process, the home buying process, and all of a sudden you get qualified and these questions start coming up, which could really blow up escrow, really, Kind of turn things a little bit sour.
So that would be my one big piece of advice to look out for if you are trying to buy a home before the practice, utilizing your W 2 or 1099 income from a job that you know you are going to have to leave. So out of state or multiple hours away, You're not going to have too many options unless you secure some sort of associate position closer to the home that you're buying So be very aware of that And if you are going out of state and the practice finance group that you're working with doesn't have this Mortgage option for youunless you've got a spouse that also makes money might be able to qualify for loan on their own Then you're probably looking at a situation where you are going to have to rent for a couple of years before you buy that house
Michael: So when it comes to the mistake here, your eyes, it's like, Hey, you should have gotten the practice first. Right.assuming they're not an associate there. Is it more an emotional decision?
Morgan: It's absolutely an emotional decision, especially people with families. You know, If you're married, you've got kids, you want a stable home, and you've also got a partner that's probably pushing for you to buy a home. The flip side of this is, when you're qualifying for a practice, the liquidity level, so the cash in the savings account, cash in checking, stock market, life value life insurance.
All of those are considered liquidity. And that is a very important metric when you're buying a practice, most lenders want to see that you've got at least seven, sometimes 10%. If you're buying a big practice. They're wanting to see that you've got 7 to 10 percent on hand that you can show as verifiable liquidity when you're qualifying for that practice.
So the banks aren't typically going to take that money, I want to point that out. They just want to verify that you've got it. That makes the bank feel warm and fuzzy, that you've got some reserves sitting there, that you've been reasonable, saving your money with your eye on the prize of buying the practice.
So Usually buying a home, there's some good docker loans out there that have very minimal money down, but oftentimes you have to put 10, 15, or even 20 percent down to secure the lowest interest rates. So that's another thing to consider because if you're trying to buy a practice, but then you want to buy the home beforehand, let's say you're looking to buy a million dollar practice.
That's a pretty standard average number. In that scenario, most banks are going to want to see that you've got about 70, 000 liquid. So using this example, if you're buying a home that is. 500, 000 and you're trying to put 20 percent down to secure the lowest interest rate in the best terms for yourself, then that 500, 000 home is going to cost you 100, 000 of your liquidity.
So you really want to avoid a situation where you're buying a home, you put money down, which completely drains your liquidity position because that is going to then put in danger your ability to buy a practice until you build that back up to about the 7 percent range of the practice that you're looking to acquire.
Michael: Okay, so when it comes to that liquidity and financial health, what advice do you give? about maintaining financial health and liquidity when taking on significant investments like a home or a practice and how can they avoid overextending themselves?
Morgan: That's a great question. And to be honest, the answer is pretty nonsensical.
I grew up on a farm in Oregon, right? Pretty conservative, from a fiscal standpoint where I was raised to not carry debt. That was just, How it was, you pay your bills on time, you don't accrue debt. And we're seeing the average dentist and doctor come out with 400, 500, 000 of student loans, sometimes six, 700, 000 for specialists.
So a lot of people have that mindset of I've got to pay this down, that's how they were raised. That's the mindset that they have. If you're looking to buy a practice. Well, and a home, I guess you're looking to buy a practice, soon after graduation, maybe you're going to associate for six months, a year, two years.
You've got to put yourself on that income based repayment program. I know it's painful. sometimes you're going to watch the balances rise during that short period, but it's a means to an end because you need to start stacking your liquidity, stacking cash. To get to that 7 percent mark. So let's say you come out of school, you've got 400, 000 of student loan debt.
It's stressing me out, but you do know that, Hey, I've got my eye on the price here. I know that making 150, 000 as an associate is not going to, pay down that debt quick. It's going to accomplish my goals of, saving liquidity to be able to buy a practice. Because if you buy that million dollar practice, now you're looking at income levels, likely of 300, 000 plus.
So the way I talk to my doctors is, put that out of your head, right? When you get out of school that, Hey, that loan balance on the student loan might be growing a little bit, but this is a path to being able to get out of debt sooner because I'm going to put in a position to be earning more money.
Then I'll go pay down those debts as I'm bringing in more income for me and my family. So that'll help you accomplish not only the goal of buying a practice quickly, But also buying a home because liquidity is the name of the game for both of those products.
Michael: Gotcha. Okay. I like that.
So given like the fluctuations in real estate and business markets, how should practice owners weigh the timing of these purchases? Are there economic indicators that should heavily influence their decision?
Morgan: I try to stay away from looking into that crystal ball because this is such a unique time, with so many homeowners holding on to their houses because they're, in a 30 year fixed rate at 2.
675. That's what I got in at back in 2018. If I was to try to sell my home and buy a similar house at today's rates. I've been taking on an extra 1, 500 to 1, 800 a month in monthly payments, So my advice to doctors is look at their current situation, prioritize what is the most important thing for you and your family.
Is it buying a home? Is it buying a practice? Do I need to relocate? I also try to tell my doctors to go back and look at history. I'm kind of a nerd when it comes economic history. So if you look at the prime interest rates in 1980, 1981, they were upwards of 20%. So I think that a lot of us got very spoiled, coming off of 2008, 2009.
Coming off of the pandemic, lenders and the Fed were basically giving money away. The cost of funds for banks were down near zero. So you were seeing people secure these mortgages at two and a half, three percent, three and a half percent, which historically is just. Not relevant, nor is it sustainable.
So if you're able to get in right now, The fed just came out and said, Hey, the indicators are that inflation has slowed. He's indicated that we are going to be lowering rates. The prime interest rate, maybe multiple times this year and into next year.
So if you do have a little bit of time to wait, I am a believer that interest rates will be coming down a little bit, but at the same time, if you're able to get a 30 year fixed interest rate, or maybe you're confident that rates are going to go down in the future. You could get a 30 year amortization that keeps your payment low, but only lock that rate for five years.
So you would have to refinance before five years. But there's usually as much as almost a full percent discount to that interest rate, if you're willing to take that shoulder money. So right now you can likely get into a home for five, five and a half percent interest on one of those adjustable rate mortgages, which historically is incredibly low.
So I tell people to not get too wrappedup in the past or the future because all you can do is live for right now and what you and your family need to do over the next year or two. And quite frankly, in this crazy world, nobody really knows what's going to happen. There's so many, global factors involved.
There's elections involved. There's all kinds of things that you can't control. So you need to focus on what you can control. And that is Hey, I found this house that I like, the mortgage rate is this, that equals this payment. Am I able to afford that? That should be the bottom line. You shouldn't start speculating about too much in the future because then you're going to get, decision paralysis, which, in my world doesn't usually lead to the best decisions.
Michael: Nice Morgan. I appreciate it and appreciate your time as well. And if anyone has further questions, you can definitely find them on the dental marketer society, Facebook group, or where can they reach out to you directly?
Morgan: I try to make myself super available. So, Name of our bank is provide.
My email address is just Morgan at get provide. com. You're also welcome to text me. I don't mind giving out my cell phone number. Set up a time to speak that's five zero three. 686 3284.
Michael: Awesome. Thank you so much. That's going to be in the show notes below. And Morgan, thank you for being with me on this Monday morning episode.
Morgan: My pleasure, Michael. Thanks so much.