Should You Buy a Dental Practice or a House First?

If you're a dentist planning to buy both a practice and a home, there's a good chance your goals of buying a dental practice and a home are competing for your attention. Maybe you're earning enough to afford a mortgage, you're thinking about starting a family or you're simply ready to stop renting.

I generally recommend buying the practice first, then the house. Your practice could determine where you work for the next 10, 20 or even 30 years, so it makes sense to establish that location before deciding where to live.

But there's one complication that can make this order difficult: Buying a dental practice can temporarily make qualifying for a mortgage harder. You'll want to understand how that affects your timeline before committing to either purchase.

Why buying the dental practice first makes sense

I recently went through the homebuying process myself, and I understand how easy it is to get caught up in finding the perfect house. You start looking at homes, imagine your family living there and maybe even stretch your budget when you find one you really like.

There's also pressure to become a homeowner once you're earning a dentist's income. You might feel like you should already own a house, especially if your peers are buying homes and starting families.

The problem is that buying a house first can limit your options when you're ready to purchase a practice.

When evaluating a dental practice, location and demographics are incredibly important. You want to consider the number of competing practices, the local patient population and the financial performance of the business. Sometimes the best opportunity is in a different community from where you'd initially planned to live.

Imagine you buy a home in a neighborhood you love. Your kids start school, make friends and get involved in sports. A couple of years later, you find an excellent practice for sale, but it's 45 minutes away.

Now you're potentially spending an hour and a half commuting every workday. Over a decade, that's a tremendous amount of time you could have spent with your family. And moving closer to the practice becomes harder once your family is established in its community.

Living near your practice also makes it easier to connect with patients and become involved in the community you serve. Imagine being five minutes from work, having lunch with your family occasionally or being able to stop home between appointments.

Of course, you could buy the house first and move later. But selling a home after only a few years can get expensive. Between closing costs, real estate agent fees and repairs needed before selling, you could spend a significant amount of money just to relocate.

Buying a practice first can complicate mortgage approval

Here's where the decision gets tricky.

If you're working as an associate dentist with W-2 income, qualifying for a mortgage can be relatively straightforward. Your lender can review your employment history, pay stubs, credit profile and existing debt payments to determine how much you qualify to borrow.

Once you purchase a practice, your income situation changes. You're now a business owner, and mortgage lenders generally want evidence that your business generates reliable income.

Lenders commonly look for two years of self-employment income history. Some borrowers can qualify with a shorter history, depending on their prior employment, tax returns and other underwriting requirements.

That creates an awkward situation. You may have purchased a profitable practice and have plenty of cash available, but you could still have trouble qualifying for a mortgage immediately afterward.

Your student loan repayment strategy is another consideration as you plan for a mortgage. Many dentists worry that their student loan balances will prevent them from buying a home, but mortgage lenders generally consider the monthly payments used in their debt-to-income calculations. How those payments are calculated depends on the loan program and your student loan repayment status.

How dentists may qualify for a mortgage sooner

I've seen two situations where dentists were able to qualify for a mortgage relatively soon after buying a practice.

• Work with your practice acquisition lender. The lender already has access to the practice's financial history, including earnings under the previous owner. Some lenders may consider that information when evaluating your mortgage application, depending on their underwriting requirements.
• Qualify using your spouse's income. If your spouse has stable W-2 income, they might be able to qualify for a mortgage without relying on your new practice income. Your household's debt and other financial obligations can still affect approval.

If you're the sole income earner and have just purchased a practice, you may need to allow more time before buying a home.

How to save for a practice and a house at the same time

The good news is that you can often prepare financially for both purchases simultaneously.

In my experience, dental practice acquisition lenders commonly want to see liquid assets equal to approximately 5% to 10% of the practice purchase price. That doesn't necessarily mean you need to put 5% to 10% down. Some lenders primarily want to know you have enough accessible cash and other liquid assets to provide financial flexibility.

While you're looking for a practice, you can continue building your house down payment fund. Depending on the lender's requirements, those savings may also help satisfy the liquidity requirements for the practice acquisition.

If you're planning to purchase a home within the next few years, I'd generally keep that down payment money in a high-yield savings account or another appropriate low-risk cash account. You don't want a stock market decline to force you to delay your home purchase because your down payment savings lost value.

Renting can also give you the flexibility to wait for the right practice and build your savings in the meantime.

I've rented large, comfortable houses before. There are tradeoffs, of course. You can't always make improvements or customize the property the way you could with a home you own.

But you can have a comfortable home for your family while figuring out where you want to live long term. You also avoid committing to a property that you might need to sell just a couple of years later.

When should you buy the house after the practice?

Once you've acquired the practice, I'd give yourself some time to see how the business performs under your ownership.

You want to know whether patients are staying after the transition, whether your staff is stable and whether the practice is generating enough cash to pay you consistently. Those are important things to establish before taking on a major new personal expense.

That doesn't mean every dentist needs to wait two years to buy a home. Some dentists may qualify for a mortgage relatively soon after the acquisition. I'd still want to see that the practice is operating well before committing to the purchase.

Look at the complete housing payment, including your mortgage principal and interest, property taxes and homeowners insurance. Make sure you can comfortably afford that payment with your current cash flow.

And while interest rates may eventually decline, I wouldn't base the purchase on the assumption that you'll be able to refinance at a lower rate in a few years. Nobody knows exactly where mortgage rates are headed.

You also don't need to rush into the first house that's reasonably close to your practice. Maybe you're temporarily commuting farther than you'd like, and a house comes on the market that checks most of your boxes.

Giving yourself a little more time could help you build a larger down payment, understand your practice income and find a home that better fits your family's needs.

Make a purchase plan that works for your finances

For dentists who want to own a practice, my preferred order is to buy the practice, establish stable operations and then purchase a home nearby.

Your timeline will depend on your household income, cash reserves, student loans and mortgage options. You might be able to complete both purchases relatively quickly, or you might benefit from renting for another year or two.

At SLP Wealth, we help dentists work through these decisions regularly. We can help you evaluate how much cash you'll need for a practice acquisition, what you can afford to spend on a home and how both purchases fit into your financial plan.

If you're considering buying a practice and a home within the next few years, schedule a call with our dental-specific financial planning team to discuss your options.

FAQs: Buying a dental practice or a house first?