Eliminate debt before purchase?

Question

I am in a little bit of a predicament. I have a property I am interested in investing in and it would be my first purchase to get started in real estate. I am really anxious to get started but I have also been told to eliminate debt first as well. My only debt at the moment is school loans for a total of $38,000.  If I were to pay that off I would have to set back in buying a property for a little over a year.  So my question is what should I do first; pay off student loans or go ahead and get started? I don't see why I can't do both but it would just take longer to pay loans off. Please let me know what you would do.

Account Closed · Answer

It depends on your strategy. Why not do both. Buy a deal that you intend to resell and use the profits from it to pay down the debt more quickly. If you can't find a deal that you're quite certain you could turn a quick profit on, then pay down the debt first as the others stated. Especially if it'll only take a year.

Account Closed · Answer

@Austin Collins I don't think we know enough about your particular situation to give really good advice. My initial reaction is that while paying off your student loans would change your risk profile (and maybe be a big relief!), an income producing rental property is a totally different kind of debt. As @Jean Bolger and @Zach Morrison pointed out -- you could do both.

What kind of property are you interested in getting into?

Jean Bolger · Answer

Look for a property with enough excess cash flow to cover your student loan payment!  Have you considered an owner occupied duplex?

Jamal White · Answer

You are better off paying your debt. Once all of your debt is paid off you get better rates if your are going to a bank to get a loan. Plus that money you keep in your pocket.

Brian Mathews · Answer

Pay off the loans if it will only take a year.  There's houses everywhere to buy.  Think about how much better you'll be if no debt and something expensive breaks in the house and you have to pay to fix it.

Annette Hibbler · Answer

Here's my advice.  So long as your student loan is set at a reasonable interest rate, why the rush to pay it off?  Purchasing an investment property is your best bet because it will give you an income generating asset to that will put money in your pocket (to pay off that loan quicker if you so choose), increase your asset value AND give you yearly tax write-offs that will help you save money each year.  Building your income generating portfolio has sooooo many advantages.  Have you ready any of the Rich Dad, Poor Dad books?  The one nettled What the Rich Teach Their Kids, is highly recommended.

Daren H. · Answer

If your income allows it,why not do both. I currently do both. My interest rate on my student loans is relatively low (~5%) but I am getting between 15% - 20% return on my money invested in rental properties. The rental income can pay the student loans.

Jon Klaus · Answer

What's the interest rate on your school debt?  If you can safely and substantially beat the rate you are paying, you might want to invest now. If not, pay off the debt first.

Aaron Montague · Answer

@Austin Collins

You should be able to do both. If you can put most of 38k towards debt in a year, you must be making pretty good money AND have minimal expenses.

I'd advise you to follow the "do both" strategy. Treat your loan payments just like any other expense. Then invest so you can eliminate expenses. With your income I'd imagine you could be making several hundred extra dollars per month and have fully managed expenses. Microsoft Excel is your best tool for estimating how your finances will look 12 months from now.

A further advantage of creating rental income in 2014 is that you can claim it on your taxes. Most banks won't count rental income until it has appeared on 2 years worth of tax returns. So you'll be able to count the income once you file your 2015 tax returns in early 2016.

Brant Richardson · Answer

Have you talked to a lender yet?  If your debt to income ratio is not good enough to get the loan then you will need to work on your debt.  If your student loan is at 4% and you can find an investment property that will pay you 15% on your money its pretty clear to me that you should buy the house.

When I graduated I aggressively paid down my higher interest loans but I still carry about 40k in low interest student loans.  I pay about double the minimum payment every month so that I make some progress but most of my earnings are saved for investment.  I have found properties that pay much more than my debt costs so I am investing rather than paying off the student loans.

So tell us about this property and what your student loan interest rate is.

Eliminate debt before purchase?

Most Popular Reply