Invest in real estate or pay off student debt?

Question

I’m currently working full time making $30/hour with frequent overtime and have saved up about $8000. I also have about $58000 in student debt at an average interest rate of 6-7%. I am eager to use an fha loan to buy a multifamily ( Rahway NJ area) but don’t know if it is smarter to attack my student debt first. Doing so will likely eliminate all extra cash for several years, keeping me from investing. Any advice on which path I should take?

Gordon French · Answer

If your loans are 7% will you make an ROI of greater then 7%? Its kinda simple math to decide the best approach. I own 90,000 is student loans and have 11 properties. I don't give a flip about the student loans as they range from 2% to 7%. I do make additional payments on the higher interest ones. My 11 properties average a ROI of 14% not counting the fact that I will own them free and clear in 15 yrs. I will keep my student loans at the 30 years and invest in everything I can that makes more then they cost. The homes will easily pay off the student loans once the house is paid for.I would not put money in stock that might make 7% when I owed 7% in student loans or 21% on credit cards. That is a bad investment at that point in time.

Caleb Heimsoth · Answer

This is also another common question on BP. It basically comes down to what return you can earn investing real estate and what your interest rate is. If your interest rate is 7 percent and you can earn 12 percent doing REI is it worth it? Maybe, but this argument is short sighted and doesn’t take into account risk. Despite what most people on here say, REI is one of the more risky investment vehicles as compared to say stocks or bonds (don’t hate me, I love REI too, I just do both). Real estate involves leverage which increases risk and is very illiquid. My point is if you look at all this, I would pay down your student debt as that Is a guaranteed return of 7 percent before you go out and take on more debt.

Steve DellaPelle · Answer

@Josh Thompson The 8k will not be enough to purchase a multi-family house...down payment and closing costs are expensive. You have a good job that sounds stable, that is good news for lenders but that student debt will be bad news. I would advise you to use extra money to aggressively pay down these debts to free up your budget and allow you to save at a greater rate. After a few years you will have a higher savings, less debt, and a better DTI ratio when you go for your loan.Good luck!

Account Closed · Answer

I am in a similar situation; so my advice has no proof to back it, or value really...But, is the gain expected (on property flip/rentals) and probability of that gain 'WORTH' it to risk, over paying off debt that will forever follow you? If you're confident enough and have corrections it's still a risk, but a safer risk. I lost over 60% of my networth in stocks, the joys of being a day trader..... Yet, I am still excited to jump into a new field and learn. I can't take my money when I die!

Josh Thompson · Answer

@Jessie Huffey I do not pay much rent to my mother, usually $200 a month. If I choose to go after the student loans first it will mean postponing REI for several years. Since I'm not getting any younger I guess I should try and save for real estate while paying the monthly loan payment. Then move into a multifamily when I can afford to. The problem is I live in NJ and work in NY so everything is expensive. Thanks to everyone for the input

Jessie Huffey · Answer

It depends. If you are already wasting monthly income paying rent, it might make sense to put that towards a property you can live in and own. If you are not paying rent, I would get rid of the student loans first. If possible, allocate 50% of your income to student loan payback, 10% towards saving for RE investment and remaining 40% for other living expenses.

Josh Thompson · Answer

Michael do you know what areas in NJ are best for cash flow? Doing analysis on listings on Redfin are not very promising because properties and taxes are expensive compared to rent. I think if I buy right in my area, a duplex could cash flow a tiny bit after all expenses. 3 units and 4 units aren’t too common here

Michael Ablan · Answer

If I were you, I'd invest in an FHA 4 unit and save the cash flow. Just make sure you buy in an area that actually allows for Cash flow.This should help you 1.) Get into real estate2.) Accelerate your wealth when combined with your current job3.) Help you pay off your student debt faster

Gordon French · Answer

I moved to a small town in the middle of no where. I was Blessed to find a house for $14,000. My Grandmother loaned me $18,000 at 7% to cover closing and moving. This was more of a shack then a house. Over then next year I was able to put $30,000 into the house making it a home. Since I was no longer paying rent I was able to put almost 100% of my income into it. I took loans out on my cars to find more cash.... then paid them off over the next 4 years. That house is currently rented for $550. The loan was off the record so I was able to use this house to help finance the next one. It is possible to use a first time buyer program to get into a duplex with 3% down, 5% would be much better. I have no idea how doable that is in the area you live. I was determined to make money in real estate and move to where I could make it work with what I had. I only made $20 an hour back then.... but I had my wife's income to help with the bills. I also did 80% of the work on the house my self. For example I raise the house 3" with a 40 ton bottle jack from the parts store. Then put shims on the foundation to level it. I was all about doing whatever it took to get that house livable. Thankfully the house had new electrical and solid plumbing. My issue was the roof leaked, so the inside was trashed. Kept a bucket in the attic to catch water the first 3 months. Thought my wife was going to leave me.... It all worked out in the end. For the next house I went to every bank in town.... 3 times... I listen to why they told me no and worked to fix that. After a few years and hundreds of rejections I finally got a bank to say ok. I now have 11 homes and two cars financed with that bank. Once I proved I could do what I said I could.... they started saying yes to pretty much any loan I ask for. My point is.... how bad do you want it to work. Don't give up... don't take no for an answer and save all the cash you can get your hands on. --------As for the student loans... put them in deferment 45 days before you try to get the loan. This will show no payment due and fix the debt to income level in the short term. Find a bank first and plan it out. That is only one of a few options to make it work with them. Student loans are fine if your still under 40% debt to income ratio. Just don't buy some fancy car to look cool.

Josh Thompson · Answer

Gordon, did you use your own money for your first property or did you use hard money? It’s going to be hard to find a multifamily in NJ with only $8000 saved up.