Pay off debt or invest?

Buying & Selling Real Estate
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Pay off debt or invest?

Nicole Heasley Beitenman
Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes
I read an article in Forbes about paying down student loan debt (https://www.forbes.com/sites/zackfriedman/2017/11/15/student-loans-repayment/), and it brought up a question I've had for a while: pay down debt first or invest? My thinking is that if people tried to pay off their debt entirely before investing, they're going to waste a lot of time. Not everyone has the ability to move in with mom and dad. Those loans could take years to pay off, and by then you're in your 30's (If you're lucky) and possibly starting a family. I'd advise anyone my age (26) to get a few rentals under their belt and use the profits to help pay the loans. Many people told me to pay off my loans before buying a house, but the rental money I get from my spare bedrooms makes saving and paying off debt so much easier. I'm just curious to see what others think.
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Caleb Heimsoth
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
8y
Like a lot of other things the answer is it depends on my opinion. Mostly on interest rate and debt amount. If you have 100k debt at 6.8 percent then you should pay that off or refinance. If you’ve got 30k at 4 percent then you can probably invest as you pay off the student debt.
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  • Dorothy ButalaPro Member
    Rental Property Investor · Erie, PA · Member since 2016 · 168 posts · 124 votes
    8y

    If you know what your student debt is, make the payments that are required, and use the rest of your income to buy property.  Yes, you could pay it all off, but then you are losing the time value of money.  As you start making money in your rentals you can start adding more to your bottom line student loan payments to accelerate the payoff, while building equity in an asset.  I just used 50k of my savings to purchase a large multi-family property, and I could have used that to pay off some debt, but then wouldn't have been able to get into the deal.  Better to be in the deal and let it pay for your debt, rather than have no debt and no money for a deal.  Just my opinion.  Looking forward to seeing what others recommend.

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  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    Like a lot of other things the answer is it depends on my opinion. Mostly on interest rate and debt amount. If you have 100k debt at 6.8 percent then you should pay that off or refinance. If you’ve got 30k at 4 percent then you can probably invest as you pay off the student debt.
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  • JD MartinBusiness Member
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    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    8y

    Depends on a lot of factors - interest rate of the debt, nature of the debt (dischargeable, for example), current income, income prospects, long-term goals, what you would do with the investment income, etc. 

    If I had very low-interest student loan debt, I would probably use excess funds to invest in real estate because a) the interest rate was already low, and b) at least for now, the interest is deductible - that makes the effective interest rate even lower than what it might be. By contrast, nothing beats the power of compounding, and if you start when you are young you are way, way ahead of anyone else. Besides that, from a purely financial point of view, any time you can earn a rate of interest greater than what you are paying, you should probably do that. 

    If your debt was high-rate credit cards or student loans, or you were likely going to make 8 bucks an hour the rest of your life, or if you were going to take any investment proceeds and blow them in Vegas, you'd be better off paying off the debt. 

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  • Joseph M.
    Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes
    8y
    I think one needs to consider the interest rates . If you have credit card debt at 20% or so of course that's a lot worse than a car loan at maybe 3% . Another thing is that too much debt would make it harder to get loans because it affects your debt to income ratio . Debt can ruin one (credit card consumer debt) or it can be used to create wealth .
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  • John Hickey
    Rental Property Investor · Chappaqua, NY · Member since 2015 · 1k+ posts · 947 votes
    8y
    If it was me interest rates would come into play. A bit. The most important factor however would be what my tolerance for risk was and my ability to find a smoking deal. If I find the right deals interest rates almost don’t matter. Almost. Depends on my ability to find deals.
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