Should I pay down my debt before investing?

Question

Hello everyone.

I'm 24 years old and looking to get into the world of real estate investing.  I was born and raised in Queens, New York and I know just how expensive this market is.  I'm a Baruch College graduate and I currently work in the IT industry, as well as a licensed real estate agent.

I've been lurking through this board and reading as much as I can in regards to investing and I'd like to get the opinion of those that are much more experienced and knowledgable than I in regards to a choice that I'm currently attempting to make.

As I mentioned, I work in both the IT industry (12 hour night shifts, 3-4 days out of the week), and I put in full-time hours in the real estate office.  I've been able to do this by sacrificing quite a bit of sleep, as you can imagine.  The good thing is that I've been able to save up a decent chunk of change and I currently have about 20K so spend.  My dilemma lies in the fact that I currently have that amount in student debt.

Here are some personal stats that will allow you guys to get to know me better:

1) 24 years old
2) Residing in Jackson Heights, Queens
3) Licensed real estate agent for a year and a half with a few deals under my belt
4) 20K saved up
5) 20K student debt

My goals that I am shooting to attain by next September are:

Financing two or three co-op units in my neighborhood that will allow me to sublet immediately.  My experience and knowledge in the real estate industry has allowed me to discover what co-op buildings in the neighborhood will allow immediate subletting.  I know what boards are tough, what boards are lenient, the maintenance on these units, and what I can expect to obtain in monthly rent.

I'm hoping to be generating a small sum of about $1000 in monthly profit from all of these units altogether by September of '14.

My questions are as follows:

1) With 20k saved up, should I put all of that towards my student loan and pay it off in one shot to get it out of the way?
2) Other than birddogging and wholesaling, what are some other methods that people on this site used to build their initial investing capital?
3) With 20k, is being a private lender a viable option?  Would anyone on this site recommend that?

I thank you all in advance for taking the time out to read this lengthy email.  I also thank you all for any advice that you may be able to provide!

Account Closed · Answer

The analysis by Ned Carey is leaving out the risk factor. Paying down debt is like investing at the same rate of interest with NO RISK. Investing in anything else has some risk. Therefore the interest rate on investments should be significantly higher than debt interest to make it comparable. I would say unless the debt is a low rate long term fixed debt like a mortgage, its better to pay it off. After that save at least 6 months of living expenses in cash. Only after that start to invest.

Brandon Turner · Answer

Those are two great sites, Lucas S.! I use to advertise on Early Retirement Extreme and I just guest posted on MMM a few weeks ago! Good stuff!

Ned Carey · Answer

First - Paying down your debt is investing

If you are  borrowing at 10% interest, paying down that debt is like investing at 10%.

So now we talk about opportunity cost.   Lets say you student debt is at 6%. Paying it off has the same net effect on your net worth as investing in something that pays 6%.  So the question is "Can you get better returns on your money by investing in real estate?"

Rehabbing is one option but that has risk. Another is simply working and saving.  Sorry no magic answers here.

I don't know your market but I do Small deals all the time so borrowing $20K can make a deal happen for me. In general I would say 20K is not a lot to be a lender.

You can invest in tax liens with a modest amount of money but that takes specialized knowledge and your money can be tied up for a long time.

One option but I have no personal knowledge of it is lending sites like Prosper.com  Where people post requests and investors offer part or all of the money needed and  the site coordinates it.

The fact you have saved 20K says you are on the right track.

Good luck -Ned

Mike H. · Answer

No. I would completely disagree with the idea of paying off your student loan debt with the cash.

Why don't you put that cash to work for you so that your investments are making your student loan payments for you as your real estate is making you money more than one way.

1) Net profit from rental
2) Principal paydown
3) Appreciation - housing is appreciating again. The more you own, the more you'll make. 
4) Tax benefits (i.e. depreciation).

One of the biggest hurdles in investing is the financing. And the two of the three key things you need to qualify for financing are the income and the reserves (good credit being the other).

NY is always a bit of an oddball when talking about investing. Seem like the prices are a bit higher than most areas.

But if you could find a really good deal and maybe use a hard money lender, you might be able to get into a property with 10k or so and maybe make 300 to 400 a month. Again, I have no idea how NY is but thats about the numbers I'm seeing by me and am reading about from other investors on here.

How much are your student loan payments? And, just curious, but are you really paying 10% on those? That seems kinda high to me. I thought student loans were much cheaper since they're subsidized by the govt.

But lets say your rental profit is now paying your student loan payments. You are still able to profit even more from that real estate because you will be paying down the mortgage and the unit may be appreciating. Throw in the tax benefits of real estate and you're really giving up quite a bit by using that cash to pay off the student loan now instead of buying a property.

That same deal may be 10k or 20k more expensive by the time you're able to save another 20k so you can invest. Then what is it costing you?

Dawn Anastasi · Answer

Alexander Ospina and Ned Carey if you need more info on Prosper.com let me know, I have done it before.

Lucas S. · Answer

If you are looking for ways to get out of debt sooner and build investment cash check out Mr. Money Mustache at http://www.mrmoneymustache.com/ or some of the other many blogs on the topic.  Mr. MMM and Jacob at ERE http://earlyretirementextreme.com/ (note Jacob has sort of stoped posting many new posts, but there are tons of old ones to read) are my favorites.  They will definitly get you to think through your goals and motivations as well.

Carlos Santiago · Answer

Thank you all for the great responses.   I think that it does make sense to be free and clear of all debt before beginning the process of investing.  I hope to be able to regain the money I'll need to get started quickly!  Thanks again! Nik Parks Ned Carey ANISH TOLIA Lucas Smith Mary Joe

Nik Parks · Answer

Hey, Alexander Ospina! I'm going through a very similar thing. Though I don't have student loans, my wife has about $15k. I received very similar advice (it was before I knew about BP though). The interest rates are very low (about 3%) we we're getting into REI first.

Sounds like you're working your tail off for that down payment! I'm not working 12 hour shifts but I'm currently working 2 jobs in interactive design and I'm actively freelancing for the same reason. It's exhausting but it'll be worth it down the road.

Best of luck!

Lucas S. · Answer

Personally I would vote for being out of non-investment debt before trying to take on any investment debt.  Gives you more cash flow and security.

One big factor I don't think you mentioned would be your current living situation?  Can you invest that money and get a co-op that you can live in and reduce your monthly living expenses?

Mary Joe · Answer

What interest rate is your student loan?  I agree with what Ned says, paying off your student loan is like an immediate return on your investment, at whatever percentage your loan interest rate is.

However, I can also understand why you are anxious to get into the game especially for a market like NYC.

$20K in student loan is not a lot by any standard.

Personally, (I am sure many would disagree),  unless your student loan carries some insanely high interest rate,  I would get into the NYC real estate market first.

The market is heating up pretty fast already for Manhattan and Brooklyn,  I am sure Queens is not far behind.  I don't know how long it took you to save up $20K.    Say if you are to pay off your student loan now, you will miss the opportunity to invest in NYC real estate now when the prices are still somewhat reasonable,   by the time you have saved up another down payment, I am sure the prices of the properties you are interested in will be easily $20K higher than what they are now.

So I would invest now if it was up to me.

Should I pay down my debt before investing?

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