Question about paying off student loan versus investing

[Alfredo Chavira]

Hello, I am faced with a decision and would like some advice. I currently have a full time dependable job and about $13,000 saved up. I am wondering if I should put all of my extra income (amount of money left after all monthly expenses are taken care of, around $700 a month) in to making that number larger so I can reach the 20% down on a property in the range of $80,000 to $90,000 and create passive income, OR should I first aggressively pay off my student loans with my extra income which are at $20,000 and a 5-6% interest and then invest when I'm debt free.  

I feel like I'm at a crossroads here. My minimum payment on the loans is $152 so I can either attack that loan amount so I don't have that hanging over my head for the next decade or I can jump in to the REI game soon since I almost have a down payment saved up. Arghh!!

[David Dachtera]

Originally posted by @Chris Mason:

Anywhere but BP, you'd be reminded that your guaranteed rate of return on paying down any fixed rate debt is exactly equal to the interest rate on said debt. If your student loans are at 6%, pay them off unless you've got some nearly guaranteed ROI elsewhere at slightly greater than 6%, or speculative ROI waaaay above 6% (risk premium). If you have some at 3% and some at 8%, split them up when you're thinking about it -- maybe paying off the 8% ASAP but holding onto the 3% because it's such cheap money, for example.

However in the world of real estate investing folks seem to like leveraging as much as possible. "Speculative ROI waaaay above 6%" is what folks like to bet on in this universe. And it works out great for many!

But there is also the option of being conservative and paying your debt down for that guaranteed ROI. Food for thought, just throwing it out there because I'm not sure any of our wheelers and dealers here will. :)

And keep in mind that you may OR MAY NOT be a wheeler and dealer. Maybe some folks can take a chunk of change and get a virtually guaranteed 10% out of it, but maybe (be honest with yourself) you aren't at that level yet.

The difficult part of that balancing act is ROI vs income.

Paying down (not off) debt has a perceived ROI, but does not increase income. If you still have that albatross around your neck, what is the net short term gain?

Compare that to increasing your income, either rental income (long term) or flip/rehab income (near term lump sum).

A personal choice ...

David J Dachtera

"Success is not a destination. Failure is not an event. Success is a process, failure is a choice."
- DJ Benedict