Critique My Plan! - yet another student loan discussion

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Critique My Plan! - yet another student loan discussion

Ryan Johnston
Flipper/Rehabber · Tampa, FL · Member since 2016 · 111 posts · 38 votes

Hey everyone! 

Without boring you with numbers and a long story I'll just jump into things. 

I just graduated college and started working a salary job at a large general contractor in Chicago. I accumulated quite a bit of college debt the last 5 years and I need to get rid of that. I'd like you guys to critique my plan, throw some ideas, share your opinions/feelings.

So I have $78,000 in loans sitting at 6.7%. Still in grace period till January 2018.

I make about $60,000 (~$40k after tax) at this job I just started and I get some bonuses throughout the year.

I have about $3,000 saved up.

Currently living at my parents with a monthly expense of around $905/mo (oh the joy of living at home), but soon I'll be living closer to my work because my long commute. Then my monthly living expense will be about $1,600/mo until I start paying off loans which will put me up at $2,200/mo.

Now my plan is to save up around $10,000 which will give me some leeway into my first investment. I am very good with construction and very connected in the contractor world. I plan on getting funding (no idea how yet. I'll take any ideas from you guys) to flip my first property. So subsequently that will be $10k down with around $70k financed to flip a $50-$60 property (numbers allowing). Then the plan is to profit from this, and do the same exact thing. Take 10k from the last transaction to fund another flip. I estimate that I'll have around $5-$10k (hopefully a conservative estimate) of profit which I will use to pay off my loans quickly. Then after I get my stupid loans paid off I'll be able to flip for capital to fund my buy and hold strategy and my full time flipping career.

I hope this is clear enough for you guys to comment on. If it isn't please ask some questions. I'm looking for a plan clarification here. If you see any problems that I need to consider please let me know. It seems clear to me but that could be because I made it.

Thank you for reading this far and I'll take your considerations to heart.

Ryan

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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
9y

OK. Congrats on graduating college and getting a job! The first step to becoming a real estate mogul.

If you expect to make $5-10k per flip, you would probably be better served putting those accumulated dollars to retiring that student debt. You may be in grace period but unless they are federally subsidized loans, they are accumulating interest. Even with some tax advantage you're going to make a pretty good guaranteed return getting rid of those loans pronto, rather than gambling on $5-10k per flip. The people I know that flip expect to make $20k+ and personally I won't do one for less than $25k clear - too much work and tax hit for such a low amount of money. Your $10k of profit is going to be taxed right around 25%+ for your bracket (I don't know what Chicago's tax rates are), and that is a lot of "ifs" for such a small profit.

So my advice: punch the money towards the debt like a madman. Forget about flipping. The markets are already hot and prices are high. Stay at home (if you can), suffer the commute, pay the debt down in 2 years, and then go to town. 

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y

    OK. Congrats on graduating college and getting a job! The first step to becoming a real estate mogul.

    If you expect to make $5-10k per flip, you would probably be better served putting those accumulated dollars to retiring that student debt. You may be in grace period but unless they are federally subsidized loans, they are accumulating interest. Even with some tax advantage you're going to make a pretty good guaranteed return getting rid of those loans pronto, rather than gambling on $5-10k per flip. The people I know that flip expect to make $20k+ and personally I won't do one for less than $25k clear - too much work and tax hit for such a low amount of money. Your $10k of profit is going to be taxed right around 25%+ for your bracket (I don't know what Chicago's tax rates are), and that is a lot of "ifs" for such a small profit.

    So my advice: punch the money towards the debt like a madman. Forget about flipping. The markets are already hot and prices are high. Stay at home (if you can), suffer the commute, pay the debt down in 2 years, and then go to town. 

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  • Ashley Benning
    Woodland Hills, CA · Member since 2016 · 98 posts · 40 votes
    9y

    I think I agree with JD; the return on the flips that you are predicting, $10k, doesn't seem enough of an ROI. If that's what you are considering, it might be more prudent to knock out the debt first. But if your heart is in flipping, you could "go big or go home" and perhaps look for more lucrative flip opportunities that may require a bit more work, but would pay off better. In that instance, you could potentially pay off that debt sooner with a few big flips.

    Maybe think of it this way:

    Paying off debt is a 6.7% ROI for you. What can you make flipping? :)

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  • Trevor Ewen
    Rental Property Investor · Weehawken, NJ · Member since 2014 · 1k+ posts · 704 votes
    9y

    @Ryan Johnston

    I may be on the more conservative end, but I would start with the debt. We're in a bit of a bullish market with real estate at the moment. Since deal-flow is tough for even the most experienced, I would happily take a guaranteed 6.7% (your interest rate) over the uncertainty of fighting off retail buyers. Check this out today from Bloomberg:

    https://www.bloomberg.com/news/articles/2017-06-06/these-charts-drill-down-into-the-data-on-u-s-home-construction

    Some of those homeowners are over-borrowing. Some of them are flippers that have not hedged their downside.

    Regardless. I recommend focusing on the education and your guaranteed return on the student loans. If we have another slowdown or correction, it'll be a much more attractive time to weigh the pros and cons. Even if we don't, there's always more opportunity for those who have enough wits and patience to find the right kind of opportunity.

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  • Ryan Johnston
    OP
    Flipper/Rehabber · Tampa, FL · Member since 2016 · 111 posts · 38 votes
    9y

    @JD Martin yes they are still accumulating interest. Letting them sit while making minimum payments does make me very uncomfortable. If I can expect 15k-20k per flip would it be worth it? I was being very conservative with my numbers since I'm a newbie and can expect to make mistakes while I get my investing legs. And as a note, I don't think I can stay at home and commute much longer. Today the train I take came derailed and I spent a total of 5.5 hours getting to and from work today. I think that time is better spent networking or something else enjoyable (take a look at @Scott Trench 's new book "Set for Life" if you wanna see some of my rationale on that subject).

    @Ashley Benning I love the advice of going big or going home. I already planned on doing that, hence the risk I'm taking with flipping houses to pay off my loans and expedite my way to financial freedom. Like I said to Jd, if I raise my conservative numbers from 10k to 15k-20k would it then be worth it?

    @Trevor Ewen I really like the stance you take on the overall market. Along with architecture, I've been studying the market all throughout college. Watching it go from the bottom in 2012 to where its at now has been a crazy ride to say the least. I like to think I could get a flip in and take advantage of the prices if I can find the right deal. My market seems to have a few here and there which are priced right. As for focusing on the education statement you made - I don't know if this is going to help much. I've read just about every single real estate book I can find online along with every BP blog and podcast for like 2 years (I spent a lot of time at a computer thanks to my architecture major) I'm at the 'analysis paralysis' point and it's almost making me anxious! haha I understand that patience is key when it comes to these things and to the Oracle of Omaha "be fearful when others are greedy..." I do see your point of the 6.7% ROI. I never really looked at it that way. That is really helpful insight.

    I think I'm going to continue to save until I have my emergency fund, then save until I have some money for when the markets dip again, and in the meantime I'll aggressively pay down these overpriced student loans by paying the minimum and paying extra on the principle every month. You guys are awesome and this is why I turn to the BiggerPockets community when I have questions like this. I can get answers from someone in New York, Tennessee, and California with hardly any effort at all! Thanks for your help guys!

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  • Ian Tudor
    Specialist · Charlotte, NC · Member since 2013 · 260 posts · 245 votes
    9y

    @Ryan Johnston - You're in the prime of your life. You can take a risk and be alright in the long run. I don't think you should take the conservative road at this stage in life. At the same time, this isn't an invitation to be reckless. 

    $78,000 is a considerable amount of debt. This shouldn't be ignored. Continue to pay down your debt. But if you feel like you can make make more than 6.7% on your money, go for it. It's a capital allocation decision. My business partner has over $60,000 in student loans and we've done over $2M in deals in the past year. Don't let it be an excuse. Several of those deals, we were able to make money without putting any into a deal. 

    Instead of potentially putting yourself in more debt with a failed flip, look into wholesaling or other ways to make money in real estate. Another way is to look into commercial properties and flip a property under contract for a finder's fee. There are a lot of options. But if you want it, don't shy away. 

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