50k Equity - Pay off debt or double down on rentals?

Question

I'm new to BP and real estate investing. I am 25 years old and currently have 1 rental and 1 primary. In the rental I have about 50k equity and have considered selling the rental to unlock equity to reinvest or completely pay off all my student loan debt. I am paying about 1k a month in student loan debt.  I cash flow roughly $400 from my rental property. Although I am cash flowing nicely, I am using the $400 to tackle the student loan debt rather than reinvesting.

The other option is to double down and take a how equity loan which I could probably squeeze 20-30k out of and pay down about half of my student loan debt or put 20% down on 1 or 2 more rental properties. I know this is a fan favorite on BP to retain the rentals and unlock the equity through a refi. I should preface your answers by saying I don't have any issues paying the 1k student loans a month. I haven't come under any financial stress by any means, its just annoying seeing interest money go down the drain every month :( Thoughts?

Account Closed · Answer

Pay off loans. If the house burns down, loans are still there. If the house goes vacant, loans are still there. If house needs new roof, loans are still there. Get the point? House can be an asset but can also be a risk. The loan never goes away. So pay it off first. I am constantly amazed at peoples ignorance of the risks in this business.

Steve K. · Answer

Kevin,

I used to be an advocate of paying off my mortgage on my primary residence. I've rethunk this!

Since investing in real estate last 5 years, I'm comfortable with leverage....I'd buy another rental.

"Interest payments going down the drain" is one way of looking at it; If you prepay that loan or mortgage to avoid that interest payment (at 3% or 4% APR???) you are losing out on the opportunity to earn 10% or 20% on the ROE of a great rental.

Think of it in reverse: let's say I own a rental property with great cash flow that's yielding 20% ROE over the next decade. I can choose to sell that rental and plop the proceeds down on my primary mortgage and/or student loan and earn 4% APR to avoid "interest down the drain". Sounds silly; you grow your net worth faster by investing at 20% APR instead of 4% APR.  But, the higher debt doesn't sound as appealing if you knew a recession was around the corner. So, as a real estate investor, decide for yourself if the risk/reward of higher leverage is right for you.

Alexander Felice · Answer

that cash flow will last for decades, the student loans will get paid off much quicker.

Selling it for 50k now would be trading long term wealth for short term cash.

Pay the student loan off as you can, hold on to and acquire more income producing assets.

Think long term

Steve K. · Answer

@Kevin Levesque ,

I acknowledge that there is a continuum of beliefs on everything from zero debt to 100% leverage. I wrote the following paragraph on another BRRRR thread recently

For buy and hold rentals, there is a continuum of perspectives. I know of one widow in Denver who put her life savings into a $225k rental duplex...paid cash, no loan/leverage. Has just one property and is thrilled that it cash flows and there is no mortgage payment. Thrilled that it has doubled in value in 7-8 years (Denver appreciation has been great) and she's averse to debt. She is truly a real estate investor....but on the conservative (not comfortable with debt) end of the continuum.

Others could have taken that same precious capital and invested it in 4 similar properties, with 25% down payments and 75% loans/leverage, and controlled $900k in property that doubled to $1.8M by now. They'd be wealthier, because they used 75% leverage. Admittedly, if a nationwide recession hit, and property values and/or rent dipped 15 or 20%, this person is subject to loosing 15-20% of $900k in properties, rather than the widow's 20% of $225k.

Then, if you use the BRRRRR method, the cash-out refinancing, once you have enough equity (usually through remodeling the property, but sometimes through market appreciation) allows you to ideally grow a portfolio of rentals with 100% financing....and zero of your precious equity left in the property.....I know of a BRRRR investor that turned $80k cash into 30 rental properties worth about $8million ($5million in loans, $3million in his equity) in 5 years....granted, he bought at the bottom of the 2006-08 recession and benefited....but much of it was the buy at a discount and remodel profit.

Then decide if the risk/reward is right for you.

You can say "look what I did with low leverage" (slower)....or "look what I did with maximum leverage" (faster). Good luck!

Kevin Levesque · Answer

Great advice all. I have decided to try to grow my business. I will continue making payments on student loans which are at a rate of 5.25% (@Andrew Chan) over the next 4 years.  I am receiving $400 cash flow and that is including paying PMI (I used house hacking - 5% down) I have decided to take a cash out refinance which will increase my mortgage but will also eliminate PMI payment. I'll take the proceeds of the cash out to purchase to invest in another rental. I am estimating my cashflow on the first property will reduce to $250 and I will seek another property I can cash flow a similar amount. Also I'll be flipping my primary residence which I close on this Friday and already have 30k in equity before move in! Purchase price 185k appraisal came in at 215 before rehab.

Account Closed Taking your advice my man! I think doubling down at this stage is the right move. Given the lowest interest rates in the past 30 years I think this is still a prime time to get into rentals. No doubt it would "feel good" to escape student loan debt. However, the 50 year old me will be glad I chose to double down while interest rates are low. Hell they may be back above 15% like the 80's at that time! P.s. Sending you a PM about the Nashville market. This is an area I am highly considering.

Steve K. · Answer

Account Closed , ....don't know if your "ignorant of the risks" comment was directed at me, but I applaud all REI to look at unknown future maintenance, vacancy, capital repair expenses, as well as the potential revenue. Then, smartly considering all, make an educated decision to invest or not, and whether to pay cash or use partial/full leverage. Keeping a cash reserve for the unexpected is smart. Not all BP posters that advocate leverage are jumping into it ignorantly.

Good luck on your strategies....truly wish you the best, whatever level of safety/risk/leverage you choose.

Account Closed · Answer

@Steve K. Not directed at you in particular. The math of paying off mortgage on primary home or rental is more complicated. The OP talks about student loan debt. Thats the worst kind of debt to hold. No BK protection and never goes away. Mortgage on a home with positive equity is a different risk proposition.

Landon Bates · Answer

This is awesome to just read through and learn from! Lots of knowledge in this forum.

50k Equity - Pay off debt or double down on rentals?

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