Classic debate: Pay down student loans or begin RE investment?

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Classic debate: Pay down student loans or begin RE investment?

Steve Walko
New Paltz, NY · Member since 2018 · 22 posts · 10 votes

Hi everyone,

I'm wondering whether my fiancé and I should begin to pay our debt down ASAP or begin investing in RE. I know there are intelligent arguments on both sides of this issue and that it depends on the details of our situation.

So here is our situation:

We both are therapists in private practice with incomes approximately between 60 and 70k per year at this point. I am 36 she is 29.

Between us, we have 120k in student debt. She has about 80, I have about 40. Interest rates are 6.5% for her and 6.8% for me.

While we do have a wedding coming up with some more expenses on that front, if you set that aside, we have the ability together to save probably 2k total on top of minimum payments of $800 minimum payments a month on the student loans, which means we can put approx 2800 towards student loans a month.

I feel pretty sure that using an FHA loan to buy a multifamily unit (most likely a duplex given what is around us) is a smart play. We currently pay 1450 in rent with everything included. If we could live for free in the unit and have the tenant pay off the mortgage, then we could add that 1450 to our monthly savings that we could put towards the debt. For simplicity, we'll call that $4200/month. Accounting for some unexpected expenses, we could probably pay off our debt in 3 years that way. OR we could get very aggressive in real estate.

What do you all think?! 

PS: I should add that we live in a smallish college town where a lot of people rent. 

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Michael Swan
Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
8y

Hi @Steve Walko,

You are not going to like my answer. Each of you get a part time job on the side and attack that debt faster. Don't invest in IRA or 401K and attack this debt and make it gone in the next 12-15 months. Get rid of car payments and live like NO ONE now so you can live like NO ONE ELSE later. Brown bag your lunch, streamline everything. Stop going out to eat more that one or two times a week too. The most we ever made W2 earnings for my family was $80,000 before taxes.

You are both so young.  Fast forward to 52 like I am now and you could have 122 front doors and $160,000 cash flow and rising every year.  If a lowly paid teacher can do this, anyone can.

"If you change the way you look at things, the things you look at change right before your eyes."

Swanny

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  • Roshan K.Pro Member
    Oklahoma City, OK · Member since 2017 · 258 posts · 215 votes
    8y
    Originally posted by @Steve Walko:

    @Roshan K.

    Any recommendations?

     Do you have a national body for your work? IE For dentists it's American Dental Association. Something like that. Through them they will have a partnership with some bank that will refinance for a lower rate. If not, a local bank maybe?

    1Reply
  • Ihe O.
    Investor · Laurel, MD · Member since 2016 · 395 posts · 191 votes
    8y

    You would need to gross at least 10% on the real estate to break even on paying down the loan, then apply a risk premium (the risk that you lose money) to that % to see if it is worth it.

    0Reply
  • Amy Beth
    Rental Property Investor · Edison, NJ · Member since 2016 · 753 posts · 565 votes
    8y
    I would suggest you both take on a few more clients but not so many that you become overwhelmed to pay off debt faster. Another option could be to raise your rates if your appointment slots are in demand. Also be sure you are both living on a budget that is tight. Considering the interest rates and the amount of your combined loans I would focus hard on paying off the debts and then invest in real estate.
    0Reply
  • Steve Walko
    OP
    New Paltz, NY · Member since 2018 · 22 posts · 10 votes
    8y
    Originally posted by @Ihe O.:

    You would need to gross at least 10% on the real estate to break even on paying down the loan, then apply a risk premium (the risk that you lose money) to that % to see if it is worth it.

    I think that's a good way to look at it, but shouldn't it only need to be 7% THEN apply a risk premium?

    1Reply
  • Steve Walko
    OP
    New Paltz, NY · Member since 2018 · 22 posts · 10 votes
    8y
    Originally posted by @Amy Beth:

    I would suggest you both take on a few more clients but not so many that you become overwhelmed to pay off debt faster. Another option could be to raise your rates if your appointment slots are in demand. Also be sure you are both living on a budget that is tight. Considering the interest rates and the amount of your combined loans I would focus hard on paying off the debts and then invest in real estate.

    Definitely sound advice. I have been focusing on ways to increase my revenue this year. I think I'll clear 60k in gross income, but may be able to get close to 70.

    0Reply
  • Ihe O.
    Investor · Laurel, MD · Member since 2016 · 395 posts · 191 votes
    8y
    Originally posted by @Steve Walko:
    Originally posted by @Ihe O.:

    You would need to gross at least 10% on the real estate to break even on paying down the loan, then apply a risk premium (the risk that you lose money) to that % to see if it is worth it.

    I think that's a good way to look at it, but shouldn't it only need to be 7% THEN apply a risk premium?

    The 7% has to be net of taxes.

    1Reply
  • Steve Walko
    OP
    New Paltz, NY · Member since 2018 · 22 posts · 10 votes
    8y
    Originally posted by @Ihe O.:
    Originally posted by @Steve Walko:
    Originally posted by @Ihe O.:

    You would need to gross at least 10% on the real estate to break even on paying down the loan, then apply a risk premium (the risk that you lose money) to that % to see if it is worth it.

    I think that's a good way to look at it, but shouldn't it only need to be 7% THEN apply a risk premium?

    The 7% has to be net of taxes.

    Do you have a good estimate for what % should be knocked off the gross ROI to get the net of taxes ROI?

    0Reply
  • Ihe O.
    Investor · Laurel, MD · Member since 2016 · 395 posts · 191 votes
    8y
    Originally posted by @Steve Walko:
    Originally posted by @Ihe O.:
    Originally posted by @Steve Walko:
    Originally posted by @Ihe O.:

    You would need to gross at least 10% on the real estate to break even on paying down the loan, then apply a risk premium (the risk that you lose money) to that % to see if it is worth it.

    I think that's a good way to look at it, but shouldn't it only need to be 7% THEN apply a risk premium?

    The 7% has to be net of taxes.

    Do you have a good estimate for what % should be knocked off the gross ROI to get the net of taxes ROI?

    That was why my original post said 10% and not 7 and that is probably on the conservative side.

    0Reply
  • Lance Robinson
    Investor · Scottsdale, AZ · Member since 2015 · 130 posts · 102 votes
    8y

    @Steve Walko I think you have your mind up in real estate, but if I can help you with this, PLEASE pay off the student loan debt first. You have to get more serious and want it. If you have a big enough WHY (Buying real estate, being debt free, not having to work but wanting to work) and that truly drives you, then you will find the ability to work your A** off and get these paid off within 18-24months MAX.

    Once these are paid off and you learn to take control of your money, you will be in a much better position to invest in RE. Trust me, I've had the goods and the bads of RE. When a bad happens, boy is it bad...And when murphys trikes and you have an $800/month student loan debt hanging around your neck, it is not good. Trust me.

    The problem is that sometimes you have months where your rents don't cover your mortgage, that's more commont he less properties you have. I had huge expenses last month and had to eat about $6K (I own over 30 units) of mortgages.

    You're in a place with high risk and it's not good to add more risk to that. I think risk adjusted is on student loans AND on RE, I think your returns would have to be so high that your risk would be even higher on RE to "justify" it and that's a recipe for disaster. 100% pay off the debt first. If you want RE that bad, then work your butt off and get them paid off so you can do that quicker. If you are mosing around to it and worried about working too much, then you don't really want it bad enough. I'm open to chat any time if you want to shoot me a message as well by the way.

    Lance

    0Reply
  • Steve Walko
    OP
    New Paltz, NY · Member since 2018 · 22 posts · 10 votes
    8y

    @Lance Robinson

    Thanks so much for the response. While I think some in this thread have read me as already being committed to investing in RE before paying off the debt. I do think house hacking a duplex makes total sense. What I do with the savings is the question - debt pay down or RE investment. And at the moment, I'm actually leaning towards paying down the debt. Do you see a problem with the house hack idea?

    1Reply
  • Lance Robinson
    Investor · Scottsdale, AZ · Member since 2015 · 130 posts · 102 votes
    8y
    Originally posted by @Steve Walko:

    @Lance Robinson

    Thanks so much for the response. While I think some in this thread have read me as already being committed to investing in RE before paying off the debt. I do think house hacking a duplex makes total sense. What I do with the savings is the question - debt pay down or RE investment. And at the moment, I'm actually leaning towards paying down the debt. Do you see a problem with the house hack idea?

     I think doing the house hack would be OK, that would be the only thing I did. The problem is the psychology behind it. After you do the house hack, why would you stop there? If it goes well, then you won't understand the true risk of it. If it goes bad, then you're screwed.

    0Reply
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