Student Debt or Real Estate Investing???

Question

Hello All,

I have been plugging away at a large sum of student debt over 100k after attending Physical Therapy School for my Doctorate. I am working full time and paying over 2k a month to my student loans and have refinanced multiple times down to a 4.00% interest rate. I am really fired up about finances and want to get my student debt reduced as fast as possible. That being said I am even more intrigued by bigger pockets, and I want to start doing a house hacking strategy, to get me into real estate investing at the same time as reducing my living costs for rent with the proper deal. I am not yet looking for a house hack as I have been paying aggressively toward the student loan balance. I am wondering if it is a smart decision with this much student loans to begin investing in this manner. I also have a 6-8months of expenses emergency fund in a high yield savings account already.

Will the bank even finance me for a mortgage for a house hacking property with this much student loan debt?

Is an FHA loan a good route to go? is it true can you refinance out of the PMI after 20% equity is reached? Because this would be a nice route if that is the case as I would not have to save as large of a down payment while also trying to attack my student debt. ( I have heard a lot about it being great on bigger pockets, but then also some haters of the FHA due to you starting out with such low equity. Yet I am looking for a long-term hold property that cash flows so from what I know that should not be as large of a concern?)

Thank you so much everyone!!

I know that was a lot, would be happy with any feedback!

Zac

Erik W. · Answer

I would be cautious about adding any more debt to your life right know, especially since you don't really know if you want to be a land lord yet.  The only thing worse than being a reluctant land lord with rentals is being a reluctant land lord whose tenants live one wall over.

Why don't we start out with roommates?  Rent a house for $1200 (or whatever) and get yourself 3 roomies and charge them each $400 or whatever the total rent is divided by 3 and everyone splits the utilities. You can live for "Free" and keep paying down your debt and building up your investing war chest, all the while learning if you REALLY want to live with 3 other people expecting you to take care of everything.  The plus side here is you get a lot of OJT (on the job training) as a house hacker, but if you find out you hate it and it's horrible then you don't have to sell a house that's too expensive for you to support while achieving your goals.

You can house hack as a renter, as long as your land lord is okay with it.  Many of them are if you are responsible, have good income, and give them a beefy security deposit.  Do that for 18 - 24 months and see if you're cut out for it, and meanwhile stay focused on throwing $2K per month at that debt.  You'll be $36K - $48K further along by then and have a good knowledge of what it all means to be a house hacker.

Kenneth Reimer · Answer

@Zachary Kucharek There is obviously no right answer. What you may consider though, is the tax on the quality of your life. Real estate investing is an emotional roller coaster when you're new, and I'm not sure whether the extra stress of getting into deals is worth it. From my humble opinion, I would pay off all of your debt first. People will make the argument that you can make more than 4% on your money so it pencils to not pay off debt, but that also doesn't account for stress and hte fact that you made a promise to pay back your lender. Ethically, it seems like the right thing to do to just pay them back and be patient. That's just my personal opinion. If you decide to hunker down and continue paying debt, the upside is that you'll be that much more educated when you do pull the trigger on a deal. Hope this helps!

Zachary Kucharek · Answer

@Jaron Walling

Yeah! That would be fun i'm sure to have him freak out about ever taking out debt to go to college. Which I lived at home and worked during school and still came out with this much. Is just a consequence to going into a medical field requiring a doctorate at this point. However, I listen to his show and have read the books so I know that would be a very entertaining phone call for the listeners and not me. Haha, which is why I came to people here with questions, I certainly know Dave's Opionion. But Daves opinion is not for every person and situation... or everyone on this page would pay all cash for each and every investment.

Jaysen Medhurst · Answer

@Zachary Kucharek, since you have such a low rate on your student loans it makes more sense to put your money where it will grow. With any decent RE investment, you should be seeing total return of mid teens or better.

Your ability to get a mortgage will depend on many factors: income, DTI, credit score, etc. Talk to some local banks and see what you can get pre-qualified for.

Yes, you can refi out of a FHA loan when you have 20% equity and get drop the PMI. Another path is to look at what low-down payment options your local lenders offer. You may find a 3-5% down product that automatically drops PMI at 20%. No need to refi and pay those extra costs.

Tj Hines · Answer

@Zachary Kucharek

Will the bank even finance me for a mortgage for a house hacking property with this much student loan debt? (It will come to your debt to income ratio. Also they will look at bad debt vs good debt. I think there may be an opportunity for you there to explore the house hacking strategy further.)

Is an FHA loan a good route to go? (Yes it is especially for the house hacking strategy. The lender loves the idea of 2 incomes coming in from one source. This will help mitigate the risk for the lender)

is it true can you refinance out of the PMI after 20% equity is reached? (Not sure on this! I do know that they want to see the property performing for at least 6 months of positive cash flow. They will also take a look at any improvements that have been made to the property from the time you acquired it. This will help determine how much equity you were able to force in the property and how much of that equity they will lend against)

Jaron Walling · Answer

Someone should phone up Dave Ramsey and get his opinion. I'll grab the popcorn.

Jaysen Medhurst · Answer

@Zachary Kucharek, to be clear, I'm not talking about a FHA loan from a local lender. I'm talking about seeing what other low down-payment options are available that are not FHA. FHA is a mortgage that meets certain criteria and is backed by the government.

That being said, FHA can be a great choice, it's just important to know what all of your options are.

Zachary Kucharek · Answer

@Erik Whiting Hey Erik, Thank you so much for your thoughts! I love the devils advocate position giving me some things I definitely may not have thought of, I appreciate that.

I definitely wouldn't call myself a "reluctant land lord" as it is something I am quite serious about as part of my future! I know that is not how you are framing it, as I am asking if it makes sense and come with quite the student debt thanks to my career path!

I am trying to find the best way to enter the Real Estate Investing realm in my current situation, I am saving for a down payment and this feels to me currently like one of my best approaches. I really liked you advice about renting and having others cover my rental (like a rent based house hack) I have never thought of that or known it was an option. I plan to continue to pay the 2k per month at my student loans and save any extra I can toward a future down payment.

I have lived through several Roommates throughout different college experiences in dorms, apartments, and houses (However I certainly didn't know about real estate investing or house/rent hacking at that point) so I know I can definitely live with extra people and I was always the head of the lease and took the lead on all the issues as far as a renter needs to that is.

I the meantime I am working hard to build up a down payment while I continue to gain knowledge, decrease student loan debt, get an agent to search the MLS in my specifications and learn how to properly evaluate property.

Zachary Kucharek · Answer

@Jaysen Medhurst Thanks for your input, definitely had some stuff in there that I heard for the first time. I Really liked the point about FHA from a local lender, that may have a loan product that has the same FHA low down payment and has auto PMI drop at 20% Equity. I have heard people dispute the FHA Due to the low down payment (for reasons such as PMI and more ability to be underwater on a prop if market drops). What are your thoughts on the FHA loan? From my untrained eye, it definitely improves the ease of entry and return based on initial investment for my position currently.

Student Debt or Real Estate Investing???

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