Buying my first property while I have student loans; bad idea?

Question

Hello All,

I'm looking to jump in and get my feet wet. The only caveat is that I still have student loans…

I currently work in Hartford, CT making a slightly above-average salary for someone two years out of college. I am able to make my student loan payments no problem and have been putting in extra on top of the minimum amounts. Even while making excess payments on student loans, I have been able to wrack up 15-20k on the side as a cushion for worst-case scenario in life.

Now I am at a crossroads, do I want to dump most of that cushion into my student loans or should I invest in RE? And if I choose to invest in RE, would lenders even consider me since I have pre-existing debt from student loans over my head and most people fear the term "student loans"? It already has a negative connotation with it so I fear lenders would look right passed me.

I am really anxious to get in the game and I feel I have done sufficient enough research and work to prep myself for my first property. That is why I have come to you guys, the experts, because you are far more experienced in this arena than I am.

Please let me know your thoughts.

Thanks!

Mike

Michael B. · Answer

I disagree with most of the advice thus far. Pay off the student loans now as well as any other non-mortgage debt (car, credit card, etc) you have first. You have plenty of time to look for rental property later. A couple of thoughts:

1> Buying a rental property doesn't automatically mean that you will make money. Many people lose money on rentals. Don't lose sight of that fact. If you lose money on the rental that will push out your ability to pay off the loans.

2> Don't accept what you see on the internet (including here) as typical real estate success. People don't write about the rental that lost money month after month. The don't write about the flip that cost $100k and then ate up another $50k in repairs and was worth $120k when they finished. Making money in real estate requires work and luck and even then is hard.

3> Student loans aren't dischargeable in bankruptcy. Get over leveraged in investing and you come out the other end with no assets, but debts still in place. That can add a decade on your trek back to the middle class.

Many people's risk meter doesn't work when it comes to investing, especially in real estate. They assume that things will always go according to plan. They assume the furnace that was inspected and in good shape last month will be working next month. And carrying consumer debt adds to your risk when investing. It reduces your options when dealing with the unexpected.

So pay off your loans first. If you're anxious to begin investing then cut your lifestyle way back or get a weekend job. Attack the debt with fury. When you finish cleaning up that debt it will be a lot easier to borrow to invest, and you'll also better appreciate how debt needs to be handled carefully when investing.

Jason Smith · Answer

Michael, welcome to BP, I also have plenty of student loans, in excess of 70k...  My interest rate is over 7%.  Trust me when I say you want those gone.  I make a great salary, and they still weigh on my credit, and my ability to borrow Money.  I am lucky in the fact I have financial backers, but to get loans today, you need to put a good percentage down.  Unless you are going to live in the property, you will likely need at least 20% down, and in CT, even the Hartford area, that may not get you a house you want.  My advice is to pay off the student loans as fast as you can.  You are probably 23?  To be debt free at 25 if you can pay them off in two years as you said, puts you far above 90% of college grads your age.  Good luck!

Mike Rubin · Answer

Michael B. - Terrific response! That is exactly what I was looking for. My hunch was to rid myself of all debt first and you reassured my gut instinct. The part that convinced me the most was the fact that student loans are not forgiveable so if things go sour with my RE investing, and I have to declare bankruptcy, then I'll be left with nothing but student loan debt. Thank you very much for the informative response. You gave me everything I was looking for and more. I think I will continue with that route and continue to learn more about RE until I'm debt free.

Brian Levredge · Answer

As Bill mentioned, you probably need to assess your total debt:income and see where you stand first before doing anything else.  That's going to include credit cards, car payments, rent etc.  They will view you more favorably if you are going to purchase as an owner occupant (plus you can do lower down payment, etc.) than if you were to purchase as a non owner occupant.  There are plenty of other routes you can go as well.  You could look for owner financing, which will eliminate many of the concerns a bank will usually will have.  You could also look for a money/credit partner who is strong in both areas, with you doing all the dirty work.  You have many choices.  Try not to limit yourself to conventional thinking that a bank loan is the only way to go.  And I say all this as someone who is still paying off his student loans and has acquired a pretty decent size portfolio.

Bill Gulley · Answer

Mike, I suggest you begin with your own home, look for a good rental you are willing to live in and move up later. Your student loans are not a problem so long as you income allows you to qualify. I suggest you not take on more debt, new cars kill ratios for those starting out.
You should be able to land a deal with half your money and keep saving. Good luck

Mike Rubin · Answer

Prashant P. - If I made extra payments it would take me roughly 2 more years before I paid them off. That is a lot of time to sit back and not get started. I'm not getting any younger...

Raymond B. - Ideally, I would want a multi-family so that I could live rent free and continue to pay off my student loans. But am I not opposed to SFH's either. I moved back home with my parents, which helps me save a lot of money, and I would not mind sacrificing my freedom for the near future in order to save up more money.

Raymond B. · Answer

Mike Rubin,
Hello Mike, it is always nice to see another Ct., resident on this site.

I would suggest that you visit a Mortgage Broker to see if you can obtain a loan.

Are you trying to purchase a SF or a multi family for your first home?

Raymond

Prashant P. · Answer

I think you are going to get various answers for your questions with differing opinions.

There are several questions to ask yourself when considering taking on more debt.  Sure you will be generating income with a rental but you will also have additional risk if your property sits vacant or is damaged.

I would look at your total debt amount and see how long it will take for you to pay it off.  If you pay extra on the loan how long will it take to pay off.

Will you have to take out any new loans in the future besides investments.  For example a personal residence or car.

Personally, I started investing in real estate with student loans.  However, mine were not to substaintial and I my a financial plan for myself to see if I was able to pay for another loan.

Taylor Forconi · Answer

Hey Mike,

In my opinion I think you should get into real estate if that's what you want to do. Granted I don't quite yet have any experience yet but I do plan on starting to invest while having student loans. I feel that the sooner we're able to get started the better. I mean obviously a person needs to assess their situation and not over extend themselves, but from what you say it sounds like you are in a good position to jump in.

As I said though I don't quite yet have any experience, but that's just my thoughts on it! Hopefully this topic gets some more attention, I'd like to hear what others think as well. Good luck with everything!

Kwesi S. · Answer

Mike this is a great question and I hope it generates more responses since I am kind of in the same situation. I would like to use RE to help pay off my student loans a little quicker

Buying my first property while I have student loans; bad idea?

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