High DTI - Student Loan Debt and What to do?

Question

Hi All,

Have a question for the forum and looking for some suggestions or insight on our issue. We are eager to start the REI journey and especially looking at using the BRRRR method for our first deal.

I have a W2 job, and still about $85K in student loan debt. My wife is self-employed and we normally make about the same amount yearly. However, her income declined greatly in 2020 due to covid, and using her 2020 and 2019 tax returns our lenders have told us our current DTI is too high for pre-approval (at around 50%). We’ve tried several different lenders (about 5 in total) but all come back with a version of the same answer. Currently, we are looking at deals in the Midwest at prices not higher than 200k, and our normal income would be more than enough to cover these deals. Indeed, we could purchase some we’ve seen for cash but our goal is to use as little money as possible of our own and of course to recycle it over an over.

We are faced with a decision, as we have plenty saved for a down payment, along with money for repairs or capital expenditures and holding costs.  We could pay off my student loan in full right now, but it would deplete much of what we have saved for investing. We’re trying to figure if paying down the debt is the highest and best use of this money or if there is another option we are overlooking that keeps our money in hand and allows us to move forward with lenders where we can get cash out at the end of our deals.

We’ve already considered a co-signer for our deals but wanted to see what the forums have to say first. However, if the co-signer is the best option, has anyone had experience with compensating their co-signer? Thanks in advance!

Nathan Gesner · Answer

Read "Set For Life" by Scott Trench or "Total Money Makeover" by Dave Ramsey. You shouldn't start investing when you still carry debt. There is an old saying: he who is faithful with little will be faithful with much.

Get your personal financials straight so you are 100% debt free (except for your personal residence) and then start to invest. This will give you a solid foundation to build on.

Dan Krupa · Answer

@Ramon Vazquez depends on the loan product you pick. For our long term hours they are 20 or 25 year notes. 5 years fixed then become an ARM that locks back in for 5 years. Our flip loans are different. We are currently paying around 4.25% for these longer notes. What is nice is they start as a rehab loan, can be interest only for six months, then rolls automatically into a long term note once the renovation is complete. With one bank my loan org is only $350, appraisal is $300 and the interest rate is 4.25%. We have done business with that bank for a long time and hold a large sum with them, so you aren't going to get that off the bat, but these types of loans are available.

Devon Greenfield · Answer

Hello,

You may want to wait to fully pay off your student loans if they are Federally backed loans (non-private). Biden may cancel between $10,000 and $50,000 in the next couple months. It would suck to pay off the $80,000 then learn that a month later you would have only owed $30,000.

Michael Glist · Answer

As mentioned you can look into a commercial loan specifically a DSCR loan. That would allow you to qualify based on the properties ability to generate enough rental income to cover the properties expenses as opposed to qualifying based in you and your spouses income to cover the property expenses.

Rates will be slightly higher, but if you are looking for the ability to purchase now as opposed to waiting or having to payoff your student loans this would be a great option to get you started.

Lee Ripma · Answer

@Reid Beckers - checkout Commerical loans. That is all I get, RES loans are so painful. If you are doing BRRR then you’ll go in with cash or hard money and then instead of cashing out with a RES loan cash out with a Commerical loan.

Young Park · Answer

Hey @Reid Beckers!

I grinned reading your post because that's where I was about 2 years ago. I have high student loans (sad to say this, it's but more than yours) but decided to invest instead. To me, this was the right decision. There may be many people commenting on this post to either say pay it off or invest, but at the end of the day, it's YOUR decision on what's best for you and your family :)

As @Devon Greenfield said, if it's a federal loan, I wouldn't rush paying it off right away if that is going to be your plan. I'm sure you're aware of the current forbearance until 9/2021 and if no further extension or possible forgiveness, you can pay that off before the end of forbearance. Also, if it's a federal loan, you can choose a payment plan that can bring down your monthly payments (thus lowering your DTI).

I decided to carry on my student debt and start building my rental portfolio using the BRRRR strategy. It sounds like you're in a good financial situation to wipe out your debt, but for me, paying off debt first would have put me several years away from even start investing. Even though it's only been a few years, I'm glad I started investing because they have been appreciating in value and give me monthly cash flow (which can be used towards your student loans if you wanted). I'm using the BRRRR strategy from out-of-state in the Kansas City market because the numbers make much more sense than where I'm at (Hawaii).

I'm not a financial advisor or anything, but if you want to bounce off ideas, feel free to send me a DM!

Dan Krupa · Answer

There are some great commercial loans like others have stated. The underwriting for the individual is minimum compared to res loans. On a commercial loan they are underwriting the asset.  I love the banks we use in Kansas City. The fees are lower than res. Yes, the interest rates are higher but you get added protection of being under an LLC, no seasoning period, and normally we get our rehab funds rolled into our loan for our BRRRs.

Ryan Howell · Answer

I agree with @Nathan G. - I would pay off debt first.  That is what I did and I feel like the stress would have been significantly higher if I had started investing first.  If you're still eager to start, I would consider writing a check to pay off the loans, then put 5% down and house hack a duplex, etc.

Account Closed · Answer

@Reid Beckers I would suggest that you get on an income based repayment plan ASAP and begin to invest immediately. Your real estate losses reduce your income on paper and thus your student loan payments.

In other words, you’ll pay less toward your student loans and more toward your investments. Carry the cash reserves to make it sensible and get rolling! Time is your best asset in this game.

Ramon Vazquez · Answer

@Dan Krupa those are great terms!

High DTI - Student Loan Debt and What to do?

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