Pay off student loans versus invest in real estate?

Question

I'm back on BP after a long break. I have a lot of federal student loans (sigh) that is currently sitting around 200 grand. I do want to invest in real estate but with such debt, I'm unsure if it's smarter to get started or just aggressively pay off debt and think about real estate in the future. Any guidance/insight would be appreciated. Thanks!

Edit: Just realized I had asked this question years ago. Still would love further insight to see whether or not the advice still stands or if anybody has any further input. Thanks!

Nathan Gesner · Answer

Here we go again.

Pay off the debt. Nobody should invest until they are debt free and have complete control of their finances. He who is faithful with very little will be faithful with much.

If your debt is at 5% interest and you can earn 10% interest with an investment, that's 5% growth and the better option, right? Wrong!

1. If you make the minimum payments, your student loan of $200,000 will burden you for the next 50 years. You may think it's not a big deal, but it will wear on you, it will slow you down in many respects, and you will be enslaved to the lender. You better hope they don't come calling.

2. Use that college education to do the math. Run a scenario where you pay the minimum balance and then invest $200 a month. After you pay off the student loan at age 70 or whatever, then add the student loan amount to your investing. See what you have by the time you reach 80 (if you live that long). Now run a scenario where you put that college education to work to increase earnings and pay off your debt as quickly as you can. Let's say it takes you 10 years to pay off, then you take the same money you've been putting towards the loans and invest it. See what you have by the time you reach 80.

I am not an "educated" man and certainly don't have a $200,000 college degree. What I do have is some basic wisdom. Debt is damaging to your psyche and to your performance. Paying off the debt as quickly as you can is the best option. You will feel better as a man and you will perform better as an investor. Do the math and you'll have your answer.

Chris Seveney · Answer

What interest rate is your student loans at? Have you invested in real estate prior? If your loans are 6-7% ish I would pay them down, maybe not pay them 100% off before investing in real estate but I would work on paying them down further. Too many people will say "you can make" - yes you can in real estate - some studies say 95% of rental investors do not make money...

James Enyeart · Answer

Well too damn little information for any of us to give you an informed answer.  What's your degree? What sort of money are you making.  If it's medical for example are you taking advantage of student loan options to only pay 10% of your salary, for 10 years?  That would be the first question I would ask?  I would first off do research on any potential employment opportunity that might allow for some student loan forgiveness. So far you likely haven't paid a dime toward the principal, with the current student loan forgiveness in place.  But MANY employers also offer some assistance with student loan repayment. $20K for my kids employer a an example.  I think the first thing you need to do is research any potential ways to reduce the loan repayment.  Then do the math on the potential return on real estate with heavy emphasis on any potential downsides for self awareness.

You have to have a plan to have the loans paid off, instead of minimum forever payments. Get that plan in place, give us some actual numerical information, and you can get a lot better and more specific advice.  Like what sort and amount of extra investment capital are you talking about? I assume you are not sitting on a pile of cash and your W2 is your leverage into real estate.

My advice would be to buy a fixer upper primary residence and fix it up and REFI.  You will have a place to live you are not renting and if your remodel was good you created equity beyond the cost of the improvements that you can access via a refi.  You could also sell the place and pocket all the profit tax free via your $250K homestead exclusion after 2 years of ownership. What is the math on that for your loan repayment?  Your primary real estate investment is you own home, which will provide you with the most leverage and lowest interest rates.  More importantly the most security on your RE investment.

IF the appreciation is enough and you can REFI and get they home expense covered by the rent, then rent it and buy another primary residence.  You could rent the place for another two years and still sell it and take advantage of the $250K cap gains exclusion on the sale with the 2 out of 5 year rule for cap gains exclusion. If the appreciation numbers are big enough you simply are on your way to a real estate empire that will pay off the loans!  So that you will be looking for your next homestead to cash out on... when you come back and post in 5 years. ;-)

Good luck.

Jim Wellington · Answer

With smart investments in real estate, the real estate can also pay your student loan debt. A perfect example would be to purchase a rental property.  With the positive cash flow you can use that to pay down your student loan debt.  In addition you’re holding onto an asset that will appreciate, a tenant pays down that debt and builds equity for you. Lastly it provides that benefits for the expenses including depreciation.

Eliott Elias · Answer

Putting money in real estate makes you money, not your student loans. Invest in RE and pay off your debt with 2 deals.

Garrett Crosby · Answer

I'm a huge fan of making your money work for you. Real estate does exactly that. Arguably the interest from student loans is negligible compared to the cash on cash returns from a good real estate investment. It's still important to run your numbers and work with someone who knows how to help you so that you don't get caught in more debt. :)

Happy to help any way I can! Best of luck!

Allan C. · Answer

@Mohammad Haidarasl based on you asking the same question a few years back and not making progress, I suggest you focus on reducing your debt first.  Seems that you need to prove that you can maintain focus on a goal before getting into complex matters.

Bud Gaffney · Answer

@Mohammad Haidarasl invest in real estate! Use some of the cash flow to throw at the student loans. The two worlds will collide. Keep investing in real estate!!!

Quentin Trisler · Answer

@Mohammad Haidarasl

After graduating in 2008 with $100k in debt, a 9-5 was certainly not going to pay that debt off.  In 2010, I bought my first house/investment property.  The BRRRR process.  Took a portion of the refinance to pay down my student loans.  Other portion as capital for the next project.  After doing this a few times, all student loans were paid off.  Tenants essentially paying off the loans.  Houses/multi units are appreciating and cash flowing.

I now own and operate 105 rental doors and 21 storage units.  Multi flips have also been completed.

I recommend you do the same process.

I hope this helps.    Reach out with any questions.

Nicholas L. · Answer

@Mohammad Haidarasl

some good posts in this thread.  i don't have any advice, just questions...

-do you own or rent now?  have you considered house hacking?

-do you have a lot of other debt, or just the student loans?

-have you ever invested before or are you looking for your first?

-are there other expenses you can reduce to free up cash for debt paydown or have you done that already?

Pay off student loans versus invest in real estate?

Most Popular Reply