Breaking out into the SFR world as a young busy attorney saddled with student loans?

Question

Hello BiggerPockets!

I'm a 26 y/o second-year busy corporate lawyer in Charlotte, NC with a goal to invest in at least 10 cash-flowing buy/hold SFR properties in the next 5 years.  I'd like to net at least $200 per SFR property.  If I see an opportunity to invest in more, I'm all for it.  My wife and I have about $70k in student loans and are eager to pay it off, but we're also eager to invest in real estate.

I have a six-figure+ salary, but most of it goes towards aggressively paying down student loans, which will be paid off in the next 1.5 years.  Meanwhile, I am educating myself on investing in SFRs so that once I'm debt-free, I can begin freely acquiring SFRs.

My question is, should I begin investing in SFRs now and only make minimum monthly student loan payments?  Or should I continue to aggressively pay down my student loans (currently at 6.5% interest rate) and then begin investing in SFRs once I'm debt-free?

I hesitate to jump into the SFR world saddled with 70k worth of student loans, and am already living on a tight budget to pay those loans off.  Thus, I'm considering jumping into the wholesaling world while I pay my loans off to get experience in finding good deals.

My unfair advantage in real estate is that I've had 10 years turn-key construction experience, my older brother is a contractor here in Charlotte, and my other older brother is a real estate agent in Charlotte.

Any comments/advice/experience would be greatly appreciated!  Thanks and looking forward to contributing!

Anatoly

Tony S. · Answer

All - Thanks for all the feedback and different perspectives!  There is much to learn.  Even though I could jump in the investment world now, I'm going to pay my loans down first while educating myself on finding the best deals possible.

Clay Smith · Answer

Do I pay off student loans first?  All depends on your tolerance for risk.  Having loans due monthly can impose more risk on your business model.  For instance, job loss could crash your real estate empire.  On the other hand, having loan payments is pretty much exactly what you get when investing in real estate.  Why would anyone sink 100k into a home, own it outright and let it earn $500 or less a month?  I can earn $667 per month at 8% annual in the stock market.  Even better, my private money investors averaged a 13.2% return this year.  How would you categorize yourself?

• Lower Risk:  I use my cash and buy investment 
• Medium Risk: I buy homes using 20-30% cash and finance the rest.  You can generally do this with about 8-10 SFR's with any given lender.
• Higher Risk: I get loans for 100% of my cost to control the property.

First off, I recommend you brush-up on some articles about COC ROI and decide how you will approach investing.  Personally I am all about leveraging credit and assets.  I operate in the higher risk category.  This just means I have to keep more cash reserves onhand or liquid to deal with loss of revenue.

• First read this The Ultimate Analysis: Cash on Cash Return vs. Overall Return by @Michael Blank
• Second read this The Ultimate Guide to Analyzing Rental Properties (+ Free PDF!) by @Brandon Turner

Personally, I believe it is all about controlling the property more so than owning the property.  If I ever had more than 40k in any given house I would cash out refi at todays mortgage rates and buy another SFR.

Of course, I am mindful enough to make sure I have enough cash or liquid assets on hand at all times.  Enough to cover insurance claims, vacancy, move out renovations, and attorney fees (10-20K).  I also keep some deep lines of unsecured credit cards in reserve.

Quick Tip: If you keep your loans, consider consolidating your loans to a 25 year term loan.  This will improve your LTV ratio for lenders and get you approve to borrow higher sums of money.

Beau Blinder · Answer

Pay off your loans, no doubt about it. Any type of investing, including real estate, carries risk. Paying off your loans is the most risk-free way to put more money in your pocket at the end of the day.

Account Closed · Answer

Both student loan interest and mortgage interest are tax deductible, but if I remember right isn't there a bigger credit for student loans on taxes somehow? An education credit of some sort? Maybe that was just while I was in school, I can't remember and I paid off my loans about 8 years ago.

If not, I personally would probably start investing now and hold off on paying back the student loans.  That way tenants start paying off your mortgages sooner than later. If you psychologically are okay with the debt, it makes more sense to stretch out payments on SL as long as possible. (I had a hard time with the psychological part - I wanted them gone, but it was probably not financially wise because I had a 2.8% interest rate.)

The only other aspect to consider would be if you ever declared bankruptcy. SLs are not dischargable in bankruptcy (unless the law has changed in the past few years).

No legal advice.

Nik S. · Answer

@Anatoly S. Kelly M.

I was in a similar boat but I just went with my gut feelings. I can agree with Kelly that the psychological aspect of carrying DEBT is the HARDEST weight on the shoulders at times.

Here's my situation:

I'm 26, own my own business have an income that's six-figure+. I have about half the amount of debt you have @ 5.5% interest... At this time, I am unmarried and live in my mothers home. Saving was never the problem and paying of the debt could have been managed within the year easily....

I can proudly say I just purchased a 47 unit Apartment complex.

Does my cash on cash return exceed my debt interest of 5.5%, YES.

Do I still have debt, YES, even more so but tenants are paying my mortgage!

Am I making more $, YES.

-----

I plan to continue to invest in my own home next year as well as other properties.

Within, 5 years I plan to exit a property of mine and cash in. At that point, if I still have student loan debt, I will pay the remainder off.

My take on it is if you pay a little more than the minimum but still save MORE $ (downpayment) for the RIGHT deal to come across...INVEST... if it's a good deal, the same money you could use to pay aggressively towards your debt can be applied to an INCOME property where your Cash on Cash (COC) return exceeds your interests rate. Then at that point, you can take your returns from your INCOME property to help facilitate larger student loan debt payments if need be. I am not taking that route as I am paying my minimum payment. I can make MORE money with my money than simply clearing one debt...

Everyone's goals and scenarios are all different & can't necessarily be treated the same.

No Legal Advice

Elizabeth Colegrove · Answer

Welcome to Biggerpocket!

Everyone has a different opinion. We got started at 23 and 25 with no students loans but very little cash as we were brand new in our careers.  We also have very busy careers and don't have alot of time. Therefore instead of hiring someone else to help us. I have gotten much better at managing everything in as efficient of a manner as possible.

We also buy more hands off properties. While we do not meet the 1%, 2% or 50% rules we have done very well when you evaluate on cash on cash manner. I also love leverage, this way my tenants are covering the entire "cost" and we are paying as little as possible.

Our goals are for long term cash flow to allow us to retire at 42 and 44. So all of our investing is for the long term.

Definitly check out the blogs,podcast and forums. Another great source of information is individual blogs found in peoples signatures. Many of us including myself right about our niche. The one thing we all agree about is investing in Real Estate beyond us we have many different style and modes of investing. My blog/website is about long distance self management, landlording, investing in class A investments, investing in a transient lifestyle, etc.

Dmitriy Fomichenko · Answer

Welcome to BP community @Anatoly S.  It is a great place to meet new friends and learn about various aspects of real estate and more.

Wishing you the best!

Jack Knochel · Answer

Hey Anatoly,

Lets say your payment is $200 a month for your loans(this is just to make it easy match) and you pay more each month to pay it off like your saying, that's taking all that money out of your pocket, now lets say you invest in a SFH and it cash flows $200 a month, now take that and pay your loan payment, now you are using that money to pay your loan off, not your income money.  I know investors that when they want a new car or something else, they go find the next cash flowing rental to pay for it before buying it, this way they are not taking any cash from what they already have coming in.   Later

Paul Choate · Answer

Also a lawyer but my loans are at 3%. I will never pay my loans off until I can't make 4% on my money on my own. That's just me. So far my returns are much much higher.

If you are only talking 2 years and you can not tolerate debt, then by all means pay them off. I am a bankruptcy attorney and I love Dave Ramsey but I will be in my 50's before I start making enough money to live on following his program. Someone said in a blog post the other day that the only mistake you can never correct in real estate is not starting sooner. I firmly believe that and wish I had started out of high school.

It is a balance. You need to decide how you want to live your life. You already have a good idea what you can do based on your experience and connections. I can tell you from the other side that debt is scary and will keep you up at night. Yet for me, it has also made possible the things I could only dream about on my own. This is business debt, not personal debt. I think that distinction makes all the difference.

Wilson Churchill · Answer

If your student loan rate is 6.5%, then you need to receive a rate of return on the SFR investments that exceeds 6.5% to make the decision to invest. Of course returns can be calculated in any number of ways.

I can get a rate of return from investments higher than any debt I incur, so I always invest and make minimum payments, other than paying down a line of credit temporarily until enough cash is available for another investment.

Breaking out into the SFR world as a young busy attorney saddled with student loans?

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