Rookie Reply: Should I Invest in Real Estate or Pay Off Student Loans?

Ashley:
This is real estate rookie episode 94. My name is Ashley care, and I’m here with my cohost, Tony Robinson. How are you doing today, Tony?

Tony:
I’m doing great, Ashley. It’s a beautiful day here in SoCal. I’m looking forward to talking some more real estate talk with you today though.

Ashley:
Before Tony and I started recording, we were just looking at our schedule and it appears that we did not plan our vacations well we’re actually doing vacations back to back instead of the same week. So we’re going to miss each other, not recording for almost three weeks.

Tony:
For three weeks, yeah. I think that’s one of the good things right? It’s something that you have to remind yourself of as you’re kind of building your business is to not get stuck in just the day-to-day grind of analyzing this and putting in this offer and working this deal. So I’m looking forward to a week kind of uninterrupted with my wife and my son. We’re actually going to Lake Tahoe for the first time here in California. And then I hear it’s beautiful there so we’re looking forward to it.

Ashley:
That’s awesome. I’ve never been, but I agree with you. It’s very, very easy to say yes to things, especially virtual things and packing up our camera equipment and recording on the road. That’s very easy to do and a lot of times I don’t mind and I prefer it. I love it, but I’m deciding that this is actually going to be a vacation.

Tony:
A real vacation.

Ashley:
So I did schedule one call so far, but we’ll see. I’ll try to say no and limit myself and have that time to relax.

Tony:
Yeah, I’m going to try to not even bring my laptop with me. I just want to like leave it and not even have the opportunity to do work while I’m out there so we’ll see.

Ashley:
Yeah. Okay. I’m going to hold you to that. I’m going to make sure that happens.

Tony:
What do you got for us today?

Ashley:
Let’s get into today’s rookie reply. Okay, so today’s question comes from my Instagram. Actually, it was a DM I received from Benjamin. It says, hey, Ashley, recent follower of Real Estate Rookie podcast, and love the content you guys produce. I am just getting my feet wet learning about the real estate mental game. I know you’ve mentioned subscribing to the Dave Ramsey school of thought in some ways on the podcast. I wanted to get your thoughts on the idea of starting investing in properties while you still have a fairly substantial amount on student loan debt. My wife and I are both in the medical field and have good salaries, but I don’t want to wait another five to seven years until I can pay off student loan debt to get involved with passive cashflow for rentals. Just wanted to get your thoughts on the matter, thanks. What do you think, Tony?

Tony:
What was this guest’s name or the name [inaudible 00:02:36] first name…

Ashley:
Benjamin.

Tony:
Benjamin, so…

Ashley:
We can call him Ben.

Tony:
Ben, this is like a deeply kind of personal decision to make because the idea of debts and investing, it’s kind of variable or kind of a polarizing topic. I can share with you what my story was. In comparison to the income that we have from our W2 jobs, our debts was a relatively small percentage in comparison to the amount of money that we had saved up. We could have easily paid off all of our debts with the money that we had in our savings account and in the stock market. We chose to kind of focus on the high interest debt. So we paid off most of our credit card debt. We decided to leave our car loans and our student loan debt, because both of those were at relatively low interest rates, right?
I think our car payments that like 3% or something like that. So for us, we made the decision that we could either pay off that debt that’s only costing us 3% in interest, or we could use those funds to go out and buy investment properties or to do four or five, 10 X that. So we made the decision to say, okay, we’re comfortable with the small amount of debt. Because again, in relation to our total income, it’s not ruining us financially, right? It’s not preventing us from moving forward, but we want to put this money to work and our investments.
I think if we were in a position where we didn’t have a good amount of money saved up, or our debt load in relation to our income was really tight, right? Like there wasn’t a lot of space there. Then maybe I would put a little bit more focus on paying down that debt. So I think it’s going to be a really personal decision, Ben, based on a lot of factors that unless you and I are kind of sitting down together, really getting deep into Ben’s personal finances, might be hard to give you a solid answer.

Ashley:
The first thing I would say is if you do have credit card debt, pay that off because interest rate is so high on credit card debt, but it doesn’t sound like Ben has that, just seems like he has a student loan debt. So, I actually had student loan debt when I started investing. We had a student loan debt, we had a vehicle debt, we had farm equipment that, and we also had a line of credit on our house. So, I had no interest at all at paying off our debt. I thought we were normal, everything was fine and I started buying rental properties, but I also didn’t use any of my own cash to start. So I think that makes a big difference. If you’re able to invest with no money down, such as taking on a partner like I did, or [inaudible 00:05:04] a property where you’re going to be able to refinance and pull all that money back out.
I think that’s a great way because it’s not cutting into the actual money that you would use to put towards your debt payment. So I think after maybe two, three years after I started buying rental properties, I would take all of my cashflow, all of my W2 income and I started pouring that into paying down our debt. Any extra money my husband had, I’d pour that into debt. So I think if you feel comfortable taking on the mortgage debt of your rental properties and you want to get rid of your other debt, use that cashflow from those properties. But if you have to make the decision, it’s like, okay, I have 20 grand and I either need to pay off my student loans or put it towards a down payment on a property. I think, look at what Tony was saying is look at the interest rate comparison, where are you going to get the better return?
If you’re a student loans are 8%, but on the rental property, you’re only getting a 6% return, then definitely pay off the student loans. So I think go about it that way. Look at the numbers. So, what makes you feel comfortable and then try and buy with no money down because you make sure you have those cash reserves. You’re not putting everything to your student loans debt so that you have nothing. But I do believe that I sleep better at night not having any personal debt. And it’s funny, I was talking to someone the other day that we’re talking about my house and how I just want that mortgage gone. Even though it’s the cheapest debt I can get. And they said they feel the same way. They said they don’t even want to count how much debt they have an investment property, but they care about their little house.
Like if something really, really goes wrong, their house is not going to matter. It’s what helps you sleep at night too. I think, look at personally, what makes you and your wife feel comfortable, but then look at the numbers, where are you getting the better return? And I think you’re definitely able to do it both ways. There’s a lot of controversy about Dave Ramsey and in my opinion, I think he’s great to get out of debt. And if you need help budgeting, or you need help paying down, using the snowball char I could not wait to check off that I paid off debt and so that very helpful, but I think once that debt is paid off, his advice doesn’t really apply to me, after that. Even I was still investing while I had debt. So as far as Dave Ramsey for investment, I don’t listen to him, but as far as paying off debt and staying personally debt free, I do like what he says about that and his opinion on that.

Tony:
Well put Ashley and I think if you tried to follow the Dave Ramsey approach for investing in real estate, it would just be such a long time to try and make that work, right? Like I think Dave Ramsey’s approach to investing in real estate where he just pays cash for pretty much everything works for him because he’s a multimillionaire, that’s got a lot of money coming in, so he can just go in and drop a big chunk of cash on a property. So maybe if you’re in that position where you’re pulling in millions and millions of dollars a year, right, then maybe the mortgage don’t matter that much. But I think for the average, everyday American who isn’t Dave Ramsey doesn’t have that income. I think the timeline to achieve something like that is just not sustainable, not realistic. And it doesn’t really help you achieve your goals in that way.

Ashley:
And I think too, it’s not like you’re going to quit your W2’s and rely on this rental income right away to keep paying your student loans. I think if you still have your W2 income, you’re buying a couple rental properties. You’re throwing that cashflow at your student loans. I think that can be a great situation that you’re in and even taking extra money from your W2 and throwing it at your student loans and then getting those done. And I think that cashflow from rental properties can actually really help you increase that debt pay down. Actually, if you have bought into a great property and you’ve done your due diligence and you have your reserves in place, and that is a producing cashflow for you can definitely speed up paying down any kind of debt.

Tony:
Yeah, well put. I think we hit the nail on the head.

Ashley:
This is going to be a great teaser, a headliner would it like click bait, uh oh Ashley and Tony bash Dave Ramsey or something like that title it, but okay. Well, thank you guys so much for listening to another episode of rookie reply. You guys check us out on YouTube and you can watch the videos of these recordings. And you’ll get to see that Tony wears a black shirt every single time and today I attempted to match him a little bit. But in the comments of this video, let us know what you think about paying down debt versus starting to invest. We would love to hear what you guys think. Thank you for joining us. I’m Ashley @wealthfromrentals and he’s Tony @tonyjrobinson on Instagram. We’ll see you guys later.