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To pay off student loans or put $$$ down on a rental
Hello Friends! I'm a realtor working in the twin cities and I do a lot of good business. I got into real estate to pay off my student loans without really thinking too much about investing. However, the more I work with investors and listen to podcasts, the more I think I really need to get into this. I've got about 30k left on my student loans and about 18k saved up. What are your thoughts on just paying those stupid loans off over the next year-ish vs. buying a rental now and paying the loans off more slowly?
I feel like I go back and forth a ton. I've made offers on a few properties but our market is pretty competitive at the moment and I don't want to bite off too much with my first one.
Thanks for you input!
I would be the first one to always suggest looking at the power of leveraging money to acquire appreciating assets, that others pay for while giving you cash flow to increase standard of living or pay off debt. Except when it comes to student loans, it is the only debt that will follow you for the rest of your life even if you had an unfortunate turn of events and had to file bankruptcy those debts don't go away. My two cents would be as painful as it is, payoff that debt ASAP build up some reserves and go after some rental, flip, wholesale properties. Even when you get these assets you will need reserves for operating capital and since you don't have any more student loan payments you will be sitting pretty.
Hey Amy Ranae without knowing all the details I would say keep your student loans outstanding because it's a better overall return for you. Student debt is typically "good debt" and you get deductions for the interest paid, ultimately lowering your tax bill. Put your money towards an investment property because nine times out of ten you're going to get a higher return on your investment property (especially if you can leverage it) than you would get paying off your student loans.
@Amy Ranae @Devan Mcclish...I have a few questions on direct mail, I don't do it currently, but hearing a lot of people promote the strategy, what is your typical investment in one single campaign? How many campaigns do you do a month/year? And how many actually call you back with listings for you to sell?
Hi @Amy Ranae,
I'm coming in late to this but you've already said the loans weigh on you. And things weighing on you weigh on your family. If you think that in one year with those loans paid off, you'd be in a better frame of mind to aggressively pursue deals, then I think that's a winner. Like a previous poster said, the pure math will typically point towards paying the minimum on the loans...but how we feel about it can impact everything. I'd suggest blending some of the advice you've received here--pay off the loans as aggressively as you possibly can, and in that time, come to terms with how YOU are going to generate leads and be ready to put your plan into action. When the loans are paid off, keep funneling that same amount of money from the loan payments into your "seed money" pot and work your plan hard.
One thing though...if you're simply afraid of making a bad deal, acknowledge and address that! What is one person's legitimate issue could be another person's excuse...and as I read somewhere recently, "excuses are just the logical voice we give to our fears."
@Amy Ranae Why not use real estate investments to cover student loan debt, car payments, rent and more? I would use that money to purchase either 1 or 2 turnkey properties or an apartment. It's ultimately up to you. Research and weigh the pros/cons.
Best of luck and let us know what you decide to do.
@Amy Ranae - Hey Amy! I totally understand what you are going through. I too have student loans north of your amount and was on the fence as well.
After talking with a few lenders they told me that since I have an ideal credit score that they will work with me on securing future rentals (and can offer additional loans beyond that). I told them that I was looking in the northern metro (Brooklyn Park, Brooklyn Center, Robbinsdale, and Crystal) and what my range is and they are willing to play ball. I am looking for more Blue Collar/median income neighborhoods myself, because that is both what I can afford and what I feel comfortable with.
I am looking for conventional lending for my next 2-3 rentals, but my two cents for your situation would be similar to what @Travis Sperr touched on with your risk tolerance and what you feel comfortable with. A few months ago I too had about $6k left on my car in addition to my student loans so I decided to get a second job during the holidays. After 5 months, I cashed out the car and lowered my risk tolerance and now only have to worry about the student loans (in addition to my own liabilities). If I could go back, I probably would have saved the cash since the car loan was 1.89% interest, but at the same time, Lenders were telling me my DTI (debt to income) ratio was too high for them to borrow at the amounts I am now asking for.
If your looking to finance a deal using conventional financing, maybe check with a few lenders in the area (I used Bell Mortgage, Leader1 Financial and I can give you references if you'd like) and see what you qualify for at this point in your loan repayment process? They may be able to let you know your price point you can "afford" (comfortably of course) for an investment property, or if your DTI is too high? That may give you the guidance to help make a decision?
I'd personally love to be debt free, but its all about the tolerance at the end of the day. I am a relatively new investor myself, so feel free to message me whenever. It looks like you are located around my targeted cities so maybe we can talk shop or go over any deals or questions you may have. ^_^
100% without a doubt, pay off the student loans in the next 1-2 years.
I was in a similar situation 2 and a half years ago. I owned a house, was making minimum student loan payments, but had some extra $$$ after a raise. I put my house up for rent, bought a bigger, more expensive house, but it was a HUD foreclosure that needed some updating. Completely livable. After 2 years of slowly updating the house while I lived there, I sold the house for a $50k profit due to the upgrades and market rising. I paid no capital gains, and I had just enough to pay off all my student loans. I have now bought a smaller, right sized house, and have enough cash flow to invest aggressively with no loan payments to worry about. The first rental almost covers itself and my current house.
@Amy Ranae You have to be comfortable with the risk tolerance, but the return on investment answer is buy the rental (unless you have a crazy high interest rate on your student loans). You never want to be over-leveraged say take inventory of other costs and ensure you have a safety net of savings - at least 3 months, preferably 6 months.
Is your home owned free and clear? If not, I'd be more concerned with paying that off than student loans. Once you have the education, they can't take that away from you. If you still owe on a house or car, they can swipe in and take that away no matter how many years or payments you've invested.
Completely agree with Kurt K. On this one. You will NEVER regret paying off the student loans first. It seems you are young and doing many of the right things. Clearly your gut seems to be telling you to pay them off but you are conflicted by the "numbers". Having gone through your situation we chose to get to a debt free position except for income properties and I can tell you it is emotionally freeing. Your greatest wealth building tool is your income. Free up the $1000/mo and let it rebuild. Patience is the hardest thing when you are young. Over leveraging is much more difficult to overcome if you don't have your entire income to battle it in the event of a poor purchase. If you only make your future purchase decisions on the "ROI" then you will find at times you will make the numbers too rosy because it becomes emotional. Paying off all personal debts and staying that way with a good emergency fund will give you protection. Good luck in your decision!
Buy your property. As we continue to hear on all of these podcasts.... Dive in! Study your market and get involved. I've closed many properties in the last 12 months and still have college debt. It's less than 30k, but I'm completely happy to pay the interest, get a tax deduction, and have cash to invest in real estate. Paying that loan off early will not gain you any passive income. Good luck!
Hi Amy Ranae I would always put your personal feelings before the math.
With that aside, I would go with Jonathan Fowler and the 2-3 unit purchase on this one. You made a brief remark about it not being possible but I am wondering why. Maybe your in a long term lease?? No multi units in your area?? You would be able to crush that loan in a heart beat with a Fha low down and extra income from another unit.
Maybe house hack. Anyway I wish you the best.
I'm in a similar situation, although the amount of student loans is quite a bit higher than 30k. However, my wife and I have quite a bit of excess cash flow every month. I have talked with my financial advisor about the situation, and he favors making (smart) investments now over putting every cent of excess cash flow into paying off the loans as soon as possible and deferring investing.
@Account Closed The answers to your questions vary a little since each campaign is different. But typically, it takes me 1,000-1,500 pieces to get a deal (500-750 for postcards : 900 - 1,300 yellow letters). But a deal for new is typically new construction. Each new construction project we embark on should make us A LOT more than 1,000 dollars that I had to spend to find the deal.
I send out 5,000 a month now. spread out over 4 weeks, so 1,200 a week. Usually per 1,000 I get 30 calls on average. My market is hot with mail right now, so I have to send more than maybe other markets to get the results I need.
And I am not marketing for "listings." I am marketing to buy their house, so I cannot speak to listings. But I cannot imagine the results would be much different, you would probably get a better response and conversion rate than me. You just have to do more volume since your margins are a lot smaller than mine if you're going for listings.
The key is follow up. If you are not going to answer the phone and call them back 30 days after they told you maybe or no, then don't do it.
@Amy Ranae you really need to pay off those student loans! If this was 2012 and the housing prices were bargain rate, I would recommend buying rental properties. The problem this is 2016 and the market rates are inflated, so the responsible thing for you to do is pay off your student debt. Then save up and be ready to invest when there is a market pull-back. Student loans are the worst of all debt because there is no escape. I know there are lots of people with good intentions suggesting you get rental property. Most of them are at a different phase in their investing career. Please trust me the smart thing to do is get that debt paid off. You don't want to be the person that bought rental properties at the height of the market instead of paying off your loans. When the market crashes, your real estate commissions will plunge. You will be thankful if you don't have student loans to worry about. History will repeat itself like it always does. Be smart instead of getting caught up in the excitement of a great market.
Originally posted by @Andrew Bauer:
I'm in a similar situation, although the amount of student loans is quite a bit higher than 30k. However, my wife and I have quite a bit of excess cash flow every month. I have talked with my financial advisor about the situation, and he favors making (smart) investments now over putting every cent of excess cash flow into paying off the loans as soon as possible and deferring investing.
Your financial adviser gets paid when you invest, not when you pay off loans. Real estate and the stock market can and do plunge. You can lose considerable money in both. Your student loans are with you forever. Why not get them paid off, then you have more money coming in to fund investments. Look at it this way. How many people regret bad investments versus how many people regret paying off loans? I know your investments will be good investments, but everyone who ever made an investment thought they were good at the time they made them.
@amy - I wouldn't worry about getting outbid - it happens all the time - I was outbid 6 times in one day the last time I was trying to get a multiplex - I was going through offers so fast - I was making 3-4 offers a day hoping that something would finally stick - so don't give up on making bids - and don't make bids that don't fit you numbers just to get the bid - stick to you numbers and stick to your guns - the right offer will get accepted if you're tenacious.
As far as direct mail -sometimes it's good to step outside of your comfort zone - I get what you're saying about do unto others - but remember - just because YOU don't like direct mail - doesn't mean it wouldn't be helpful to someone else - example - I hate junk mail too ... but back in 06' when I was losing my SFR - I would have welcomed a letter offering to get me out from under it. So I guess it comes down to preferences - I hate to feel like I'm bothering people too , but in this business - there is a fine line between bothering someone and offering to pull their *** out of a fire... I am just now getting started on a mailing campaign since it seems to be the most successful path to deals from everyone I've been speaking with - most of their deals come from mailing yellow letters.
As far as were to put your money - I have to agree with some of the others who have recommended a blended path - put as much as you can into your school loan until you find a deal. Use wholesaling and flipping opportunities to get your foot in the door and earn some money you can use to pay off your loan. I can attest to how much student loans can hold you back with the monthly payments - but I am also glad that I was able to use some of my rental income to offset my expenses. It really is a personal choice and there is no one right answer - many times when we have a wad of cash - we have to determine weather we will pay off a bill or use it to invest - then I run the numbers and see what my rate of return is on both - if I pay $2,000 to a bill right now and it lowers my monthly expenses by $175 a month or $1884 a year- that basically represents a 92% return on my money - now is there somewhere else I could put that 2k that would generate $175 a month? That's the kind of simple math I use to figure out how my money can work the hardest for me. If I put that same $2,000 into a REIT that pays 15% a year - I would still only earn $25 / a month.
If you scale this up, then it gets more complex because you have to imagine what you could do with $40k and the rate of return you can get if you flipped it or something ( plus what you can do with the profits) vs what paying off 40k in debt would do for your situation - maybe use the time you have now to study your market so when there is great deal you can recognize it.
I'm no tax consultant , but we have been able to write off a lot of our student loan interest which helps to offset any profits we make throughout the year. It's not the best reason to hold on to debt - but it helps justify it a little until we can really afford to knock it out.
Looking forward to reading about what you decide to do ultimately. Have a great weekend!
Jay and I agree. Just so you know where I'm coming from. I Graduated in '10 and went from about 25K in school loans to 24 with some back interest. There are programs that will allow you to make lower payments. I don't have 18K but I have focused on my loans for 4 years now (the other two I put them off and not I'm paying for it). If you have multipal loans I would recamend paying off the larger one like if you have 6; 2 are $1,000, 1 is $4,000, 1 is $6,000, 1 is $8,000 and the last is $10,000. look at what each payment is and determine if you can manage payments when things get rocky. $266 would be the monthly payment but with this program I pay $117. I used to have seven loans and next year if all goes well I will have four.
As for the investing, you should have a enough for a good down payment if you find something that cash flows at $250 (I think that was your student loan payment). you won't have to make the payment, Mostly just finding and managing tenants. Guess what happens after your Loan is paid off.... part of your mortgage is too and you still have a property that spits out money.
If I was you I would be all in with RE but I have a feeling paying the higher balance off (if you haven't consolidated) would fit better with what you would like to do.
let me know if this helps or you have questions.
@Amy Ranae Congrats on being in a position to choose which route to take :) That's a good place to be.
Personally, I would not pay off the student loans. At the pace you seem to be moving and how you've responded, it seems like you are aggressive and seeking for another rental property (even though it's super hard to find right now) but it'll pop up. You know that the 6.8% is a fixed rate, and you write off student loan interest anyway. 18k can go a far way given the proper placement and property. Good luck out there!
I know this is a real estate investor site, but I'm going to play devil's advocate here; without some serious insider knowledge, a 6.8% return with zero work and zero risk is amazing. Yes, most real estate investors are making double that right now (I'm basing this purely on comments on BP, if someone ever figures out a way to gather reliable data on this I suspect it will be a few % lower), and stock market investors are making about 7% annually over the long term, but both of those things require additional work and additional risk. If I could make a guaranteed 6.8% per year with zero risk, zero work, and zero volatility right now, I would sell all my real estate and stocks and put it all in that and retire today. No matter what you decide, however, dedicating your money towards your financial future is never a bad idea.
@Amy Ranae - My wife, son and I live in Minnetonka; however, I was in the same boat (regarding loans) a few years ago. We completely rehabbed our first home (in Richfield) and then lived in it for 2 years. At that point, we reached our capital gains tax exemption, and sold for a solid tax-free gain.
I had a significant chunk of student loans. Roughly half of the loans had interest at 6%+, while the other half had interest at 4%-. I ultimately decided to pay off the loans in the previous category, as most investments (stocks, RE, etc) will out perform 4% if you place your capital correctly. Are there deals that could also out perform 6%? Absolutely; however, I deemed that the awesome feeling/overall relief of cutting my student debt in half was worth paying off that portion. Since then, my remaining loans have dropped in interest (for direct payment enrollment, etc). They currently average 3% interest, which to me is nearly free money. As such, I'll be paying on those until the end of their respective terms.
I flipped houses full time for 3 years (roughly 30 total single family homes), and now work full-time as a general contractor specializing in interior residential remodels and whole house renovations (though I'm always keeping my eyes peeled for good rehab deals, buy and hold deals, and partners). The thing I find most often is that construction costs are significantly under-estimated (which obviously makes/breaks the viability of a flip).
If you're interested, I'd love to meet with you for lunch/coffee sometime and brainstorm. I'd be more than happy to provide my thoughts on deals you're considering, and would also be interested in partnering, to help you get started. No pressure either way! Let me know what you think!
#2 General Landlording & Rental Properties Contributor
There are two types of debt, good debt and bad debt. Good debt earns it's keep bad debt is a financial drain. Bad debt will only hold you back in life and must be eliminated.
@Amy Ranae What about rolling your student loans into a property and having the tenants pay it off for you? In other words, instead of you paying off the student loans yourself and then investing in real estate, why not kill two birds with one stone?
Find a deal and negotiate terms that allows you to incorporate your student loans into the property while still maintaining a positive cash flow every month. This way your student loans are technically "paid off" even though they are wrapped up in your rental property. Over the lifespan of your mortgage, the student loans get paid for, your mortgage gets paid for, you get all the other benefits of owning a rental including monthly cashflow.
The trick here would be finding a property with enough meat on the bone to allow you to do this
Hi Amy,
At the end of the day, it is still dependent on your comfort level, but let me tell you what I did.
I bought a property, the estimated value was 85k but I bought it for 45k. I took out a home equity loan at an interest rate of 3.97% and took that money and paid off my student loans a chunk of my student loans. My loans were around 6.25-6.75% so I though this was a better deal. It's kind of like borrowing from Paul to pay Bill (or whatever that saying is) but Paul's interest rates were better. Good luck!
