Ashland, VA · Member since 2017 · 8 posts · 2 votes
Hello everyone -
My wife and I are looking to get started in RE investing by flipping a house. We have sizable student loan debt, but we have good jobs and income. As such, we are in a position for 2018 where we should be able to save up enough money to pay off our student loans by the end of the year. However, the amount that will cost would probably cover at least a down payment plus rehab costs on an investment property, and potentially the entire purchase price plus rehab costs if we found a good enough deal.
So my question is: do we use that chunk of money we save to pay off our student loans? Or do we just accept that student loans are a fact of life right now and use that chunk of money to get started investing in real estate?
Thanks all.
For me it comes down to which interest rate would be higher: the rate you are paying on the debt or the rate of return you could get if you invested the money.
@Kenneth Swartz my wife has a pretty high student loan. We decided it's a part of life like you said. This is just my opinion, but I wouldn't let the loans keep you from investing. You stand to gain so much more by investing it, should you invest intelligently.
For me it comes down to which interest rate would be higher: the rate you are paying on the debt or the rate of return you could get if you invested the money.
1. What's the interest rate on the student loans (and what's the return for the flip) and does that make sense to pay on the student loan until the flip is done and can be applied then to the student loans?
2. *Can* you get a loan or does the student debt put your DTI too high? (Hint: If you haven't yet, talk to 3 different lenders and see what what you can or can't do --- they will literally advise you on this exact thing from a financing standpoint! And how/if to repair any credit to get a better interest rate and stuff like that! (and also hint: if they don't do that, move along and find someone who will!))
3. Timelines - I assume the student loans have a long life left on them, but also remember to plan longer than you will think for the flip and see if, worse case scenario, will one be up or will this cause any strain?
Most important to me is #2. It will make all the answers clear as day =)
Eric James is guiding you onto the right path. This is a mathematical question. Barring factors such as your debt ratios being too high to secure financing, if the {after-tax}} returns of investing your money exceeds the cost of servicing your personal debt (student loans, credit cards, etc) by a sufficient margin (to warrant the risk of the investment) then you are better served, in the long term, to invest your money. If the return on the investment is equal or less, then it is better to service your debt.
Thanks for the responses everyone. That makes a lot of sense - weighing which option is going to let our money work the hardest for us by comparing the interest rate of the loans with the likely return rate of our potential investments. To me, it would certainly seem that analysis leans toward the decision of putting the money into real estate investments.
Might as well flip a coin as opposed to relying on a difinitave answer on here. For myself I would never start investing with bad debt. If you do and you hit the inevitable major bump in the road your bad debt will return to haunt you and may be the tipping factor pushing you into bankruptcy.
Do not overlook the fact that real estate investing is both very hard work and very high risk. Defiantly not a passive investment vehicle.
If you can pay off the loans in one year I would knock them out. That is such a short period of time to have to wait to invest. It will also be easier to handle unexpected expenses with your first rehab if you do not have to worry about loan payments.
Kenneth Swartz I would pay off your student loans only since you stated that it would be paid off by this year. Would be in a better position to have no student loan and that money for investing than worrying about the paying the loan. Just my two cents.
Jonathan Smith I see you’re right nearby in Moseley, you do anything with the local REIA or any other meetups around here? Always looking for more opportunities to get out and meet other investors around here.
Looks like you already got a lot of answers on this but to give you my two cents. From my own personal experience, knowing that I had student loan debt hanging over me always weighed on my mind, at the time I didn't realize how important knowing interest rates and weighing the options what's a better ROI, invest now or after paying off debt.
It was more of a psychological decision than anything, I decided to pay off my debt first and it's been a world of difference in really allowing me to go head first into investing. It all comes down to whether or not you are comfortable holding that debt.
I'm in a similar position to you (I'm a healthcare professional, graduated with a nice chunk of student loans, and have a decent income and am now looking to invest).
Choosing whether to invest or pay down student loans involves two competing thoughts: an analytical one and an emotional one. As long as you are doing investments INTELLIGENTLY which are mathematically sound, you will be alright. Remember that paying down debt is a guaranteed return on your investment. Can you beat the interest rate? If yes, then investing is better. If no, then pay down debt.
However, you can do all the math you'd like but if you cannot stomach the possibility of having debt, then you will end up paying down debt no matter how much the math tells you not to. Emotions are a real thing in decision making!
Based upon the fact that you can completely wipe out your debt in one year if you had to, you are in a relatively secure spot. If the worst were to happen (i.e. you and your wife both lost your jobs and you were unable to unload your property) do you have sufficient funds to a) carry your personal expenses until you found a new job, and b) pay your mortgage? If yes, this safety net will help take some of the stress from your decision and help numbers, not emotion, guide you. It's what I'm doing to make myself ready to take the plunge.
@Kenneth Swartzundefined. I didn’t realize your area and that you are in the Richmond. I haven’t been to any meet ups in the area but I think there are two organizations. Private message me if you have any questions or would like to discuss or meetup.
I would strongly suggest to pay the minimum on student loans, if it is reasonable interest rate. My friend is in similar situation. He wants to be debt free, before he starts investing. I encourage him to keep that cheap debt on the books and start using his extra money to go towards rental purchase. In my opinion, only benefit to paying student loans off early is a peace of mind you and your wife can get from having them gone.
Wow, lots of good information and lots of food for thought. No doubt there is an emotional component to wanting our debt gone. I despise it hanging over our heads and love the idea of having a “clean” balance sheet. And I do worry it would be a risk to keep it around as we start investing - the monthly payment between my wife’s loans and mine is around $1,200 a month. That’s a significant monthly expense to maintain if things went off the rails and we hit an emergency as we started investing (job loss, etc...). But...on the other hand, the interest rates are only in the 6’s, so...it’s not crazy expensive as debt goes. Shouldn’t be too hard to beat that rate by investing.
One thing I was considering was using this year to build up our savings to the level of our student loan debt (ie, put the money in Betterment as we go rather than paying off the loans as we go). If a deal comes along that’s too good to pass up, and we can swing it with what we’ve got saved up at that time, we use the money to jump on it. Conversely, if we get to the end of that time and haven’t found a deal, we decide then whether to just keep looking for a property with that money or pay off the loans and then start saving again. A side benefit of this plan is that as we go through the year, the amount we’ll have saved will earn returns as it sits in our investment account (which over the past year has done amazingly well, north of 30%).
Just an idea though. Comments/critiques are certainly welcomed.
@Kenneth Swartz Depending on how your loans are set up (mine were sold off and split up -- so I would make one payment to XYZ Loan Company, but it was going towards 3 different loans). If that's the case, and one or more of the loans in a particular "group" of loans is at a higher interest rate, you can call up the loan service and tell them which loan to put extra money on (I always paid at least a little extra on payments) and they can pay off the higher interest rate loans faster, otherwise they tend to split the extra principle money evenly.
In any case -- I would pay off the loans first, but that's just me. At least pay off as much as you can while it still allows you to save your minimum required monthly savings (whatever amount you decide on to dedicate towards investing) per month. I'm not a Dave Ramsey fan per say, but my student loans stressed me out! I paid off 80k in under 6 years by working multiple jobs on top of my full time gig. It really helps you go into investing with less fear about the unknown costs when you don't have extra bills to pay every month.
How long would it be to pay off your debt without especially dumping all of your extra money into it? If it's only 2-3 years, maybe just keep going, if it's much more, I would pay them off. If you've been paying extra principle, you should be several months ahead on loans potentially too as a safety net.