Recent Grad wanting financial freedom: Pay off debt or House Hack first?

Question

Hi everyone, I'm Kari, I'm 24 and I graduated college last year. I had a bit of a career pivot my first-year post-grad but just started my first $60K marketing job this month. I've known since about half-way through college that I wanted to use real estate to achieve financial freedom as soon as possible, however due to moving to the US as a teenager, I didn't necessarily understand how to approach financing my college education.

Post-grad this puts my debt profile at $27K (4% fixed interest) in federal loans, $96K (7.99% fixed interest) in private loans and $5300 (0% interest) left on a car lease. I plan to refinance my private loans again for a better interest rate, but once federal repayment starts again, I'll pay $1330 per month to my debt. DTI 27% and credit score 746.

In terms of expenses other than debt, I currently live with my parents and have none. This leaves me with a solid $2500 saved per month, and in addition to my side-hustles I'm projected to have ~$15,000 by October 2023 - which is when I plan to move out, and no I can't continue living at home :(

My question is whether I should put the 15K onto my debt, move out and rent, continue to grow my income and save as much as possible OR use the 15K as a down payment, take the next few months to hunt for a house-hack and use the house hack to live "rent-free" which would give me the opportunity to continue paying down large amounts on my student debt. My job is fully remote, wfh and has no location limits, and because financial freedom is my goal, I don't care much where I move as long as I can set myself up financially.

Would appreciate advice since I have a lot of moving pieces and almost too many choices with a remote job!

Abbey Humphreys · Answer

Hey Kari- a DSCR loan could work for you given that the underwriting is done based on rental income and not your personal debt. I can message you about options!

Theresa Harris · Answer

If you are moving out in the fall, talk to a loan officer at the bank now to see where you are at if you wanted to buy a home and live in it.  Look at how much rent is vs a mortgage (realizing there are property taxes and repairs with owning a house).  If the costs of the two are comparable AND you can afford to buy a home, why not look at a 3 bed, 2 bath home (not a condo, no HOA) and rent out two of the rooms?  That gives you extra income to pay down your debt faster.

As you just started a new job, they may say you have to wait until you've been there for a while (eg 6 months) to get a mortgage.

Keep finding extra ways to increase your income and decrease your expenses (bring your own lunch, don't buy coffee at the coffee shop, etc).  While you say you are staying in your parents' home for free, I'm assuming you are paying for some of the groceries.

Nathan Gesner · Answer

Most people will tell you to pay the minimum on the debt and use your extra cash to invest. If you pay 5% interest on the debt but have a rental making a 10% return, then you will be 5% ahead, right? Wrong! Do the math with two different scenarios and you'll see that the best option is to focus your effort on paying off the debt first, then investing.

Calculate the results on two scenarios:

1. You pay the minimum on your student loans and put anything extra into investments. After the loans are eventually paid off, then add that to your investment plan. Where do you end up in 20 or 50 years?

2. Pay the debt off like a madman. If you work extra hours, get $20 in your birthday card from Aunt Gertrude, or pick up a nickel off the ground, you put it toward the debt. After you've paid off the debt completely, start using that same hustle to invest. Where do you end up in 20 or 50 years?

Carrying the debt will result in less wealth, and it holds you down in a variety of other ways. True wealth - like anything of value - comes with hard work and sacrifice. Don't think you can shortcut your way to success.

Kari Karanikos · Answer

Thank you for the advice, yes its definitely not ideal but that's just life sometimes! I was thinking about also exploring a DSCR loan to purchase purely an investment property - do you have any thoughts on that?

JD Martin · Answer

Nathan is right. With $100k of student loan debt at 8% and another 32k at various, you're nowhere near it. Making a guaranteed 8% annual is a great return. If/when you have to move out, either a) rent the cheapest thing you can and continue to get your debt paid off, or b) buy a wreck of a duplex with an FHA, live in the worst part and rent the other side out.

You need to start with some assets to have "financial freedom". Right now you are severely in the red.

Kari Karanikos · Answer

Hey Alecia, thank you for the insight! I’m going to try and continue refinancing that loan till the interest rate hits 4% or lower and thinking to follow that plan!

Alecia Loveless · Answer

@Kari Karanikos Hi Kari, I’d pay the car off as fast as you can using the snowball debt method if you’ve ever followed Dave Ramsey then get busy working on the student loans. Ramsey would say to work on the smaller one first to keep your momentum going and pay any excess funds towards the principal on the small one while continuing to pay the minimum on both. That way you get the smaller one paid off first then you tackle the larger one.

Unless when you refinance the one at 7.99% you consolidate the two into one loan and then you just put as much as possible towards it every month based on what you have available after you’ve saved up your emergency fund.

I’ve used this method to pay off about $70,000 that I had on 4 different credit cards at one point, paying off the one with the least amount on it first then going in order of next least amount and so on until I was done. It took me about 3 years but I got it done. Today I only have about $4,000 on my cards at any one time due to my rehabbing rental properties.

So this goal can be achieved if you work towards it, and you can buy your 1st home/rental property to house hack while you’re paying off the debt. You may have to shop a few lenders to find the right one for your needs but there are many lenders with many different loan options.

Theresa Harris · Answer

I've never used a DSCR loan, so I can't help.

Scott Mac · Answer

Look into it and see if it is for you.

Good Luck!

Recent Grad wanting financial freedom: Pay off debt or House Hack first?

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