Student Debt or Real Estate Investing???

Question

Hello All,

I have been plugging away at a large sum of student debt over 100k after attending Physical Therapy School for my Doctorate. I am working full time and paying over 2k a month to my student loans and have refinanced multiple times down to a 4.00% interest rate. I am really fired up about finances and want to get my student debt reduced as fast as possible. That being said I am even more intrigued by bigger pockets, and I want to start doing a house hacking strategy, to get me into real estate investing at the same time as reducing my living costs for rent with the proper deal. I am not yet looking for a house hack as I have been paying aggressively toward the student loan balance. I am wondering if it is a smart decision with this much student loans to begin investing in this manner. I also have a 6-8months of expenses emergency fund in a high yield savings account already.

Will the bank even finance me for a mortgage for a house hacking property with this much student loan debt?

Is an FHA loan a good route to go? is it true can you refinance out of the PMI after 20% equity is reached? Because this would be a nice route if that is the case as I would not have to save as large of a down payment while also trying to attack my student debt. ( I have heard a lot about it being great on bigger pockets, but then also some haters of the FHA due to you starting out with such low equity. Yet I am looking for a long-term hold property that cash flows so from what I know that should not be as large of a concern?)

Thank you so much everyone!!

I know that was a lot, would be happy with any feedback!

Zac

Account Closed · Answer

Definitely work with an agent that is familiar with real estate investments. I preferred to stay in a B class area because I was comfortable, it was close to work/school, and the tenant base was solid. I spent a lot of weekends/nights doing value add projects, much of which I learned from friends/family/youtube/etc so that I could refinance the home out of FHA and/or sell/rent it for more later down the road. Money was tight obviously with paying down debt and basic living expenses so it was very very slow at the beginning. Be picky with the tenant! When money and time are scarce, you don't have time for tenant troubles. I'm a big fan of spreading around my investments and I think you're off to a great start. I wasn't investing in a 401K at first or really putting anything into a rainy day fund (stupid, I know) but now a days, I'm able to spread it around-mostly investing in real estate. Its never too late to get started. I recognize that I was lucky enough to meet someone that got my blood rushing into real estate and my future retirement but you're still young too! Good luck to you!

Anthoney Hanks · Answer

@Zachary Kucharek Welcome to BiggerPockets! Truly nice to meet you. Good luck going forward! 😁

I think you are on the right track. Talk to a good lender about what you have as options.

In your strategy, look into a multi unit strategy. Until recently I did not know you could do that type of loan. Also, check out FHA 203 loan. You can buy something that needs work and roll in renovation cost. You then start with newly renovated property.

Good luck going forward!!

Brad Bellstedt · Answer

Hello Zachary!

Paying down that student loan debt is very important for sure and may become an issue when you complete your mortgage application (due to your debt to income ratio) but if you can get approved and achieve a better rate of return than 4% on your property, it sounds like you're in the clear. Your knowledge of FHA looks to be right on point. It's a 3.5% down so it's a low cost of entry but, like you said, that also means less equity. You are also correct about refinancing out of PMI at 20%. The only other downside about using an FHA loan is that the property will need to qualify per the FHA standards. So only on 4 or less units and for FHA it is supposed to be your primary residence but it sounds like that's the plan already.

I know of people in the past who have bought duplexes or large single family residences then rented out rooms that have worked this strategy successfully in the past. In fact, the guy who bought the SFR and rented the rooms bought his with a VA loan ($0 down) back in 2012, rented out the rooms which paid his mortgage every month, and now has bought the house next door and rents the first house for nearly double the mortgage payment.

Because you are putting less down, and financing more of the purchase price (which means you are also paying interest on that money) your numbers won't look as good as they would with a larger down payment but it's not a HUGE amount. Roughly speaking, every $10,000 of financed money costs about $65/month, depending on your interest rate. How long do you plan to live there? If you buy at retail, you may not be able to cover the entire cost of the mortgage from the rental income at first but the longer you stay there, the more rents will go up and eventually you occupying a space there will be costing you potential rent money. (when you can rent if for more than what you are saving)

Account Closed · Answer

@Zachary Kucharek The bank will approve you depending on your debt to income ratio so if you make enough go pay those student loans (minimum payment) and afford a mortgage, you'll be fine. I actually started house hacking with an FHA loan in a similar situation. I was up to my head in debt (not just a measly 3.75% student loans but also with credit card debt at like 25-27% interest). House hacking helped me live rent free (I didn't have the luxury of going back to my parents) and after I moved out, it was a great steady extra income from rent. Since, I have been able to invest in more real estate, buy, sell, etc and eliminate my debt. I lived like crap for a couple years, dont get me wrong but this took me a solid 3.5 years to be free or hard debt (i still have mortgages and a car payment) which is literally no time and great when you're only 24 in my opinion.

Frank Geiger · Answer

I think your head is in the right place. House hacking is an awesome way to pay down your student loans. If you are living for free, you can devote an extra $500-$1000 a month on your student loans. Or you can keep paying the minimums and start growing your portfolio. Only you can do the math and see if that makes sense.

The first step is to see if you qualify for a mortgage. With a PHD in a health field and the way you're thinking, I am sure you will be financially free in no time.

Zachary Kucharek · Answer

@Suny Capezzuto

Suny, thanks for your reply... Yes I'd say you are making very great progress. Progress is progress, but you are firing on all fronts I envy that. Keep up the good work.

It is awesome to get a view into someone that has a similar path to where I am currently looking. I have a little later of a start due to having graduate school, starting work later. I can definitely pay my student loans while still investing 15% into ROTH 401k which my current minimum is quite high, due to my refi amount to lower the interest the most.

I am planning to soon start consolidating some of my non tax advantaged investment accounts toward my down payment and place that in an online high yield savings account. And then starting to allocate more funds each month to this down-payment after I get my parent plus loans paid off in near future.

What are some tips you have for picking out a house hack in my situation. I'd love to hear about what worked well and what didn't!

Thanks again.

Zachary Kucharek · Answer

@Anthoney Hanks thanks for your insight Anthony. I have read a few of your comments on other topics I have been reading on the forum, so you must be quite active! Would love to connect and learn more.

I have not yet heard of the FHA 203 loan option. That is very interesting, even if there were some minor updates to make this would greatly decrease the amount of initial payment, as long as after I added this to the loan the numbers on the deal still made sense!

Thanks again.

Brad Bellstedt · Answer

Anytime! I've run the numbers on many SFR and MFH units and the multis almost alway show a better return on paper. Stay diligent when you purchase. Like they say "you make your money on the buy." Good luck!

Zachary Kucharek · Answer

@Brad Bellstedt Thank you for the response, a lot of food for thought in there!! I would plan on staying there obviously for at least a year as the FHA requires that, then depending on my finances, experience, further knowledge gained, and market I may look into doing another House hack and renting the unit I lived in for that year. And yes the amount down will depend on if I go for a duplex or a tri/quad and the correlating purchase price and what I have saved at that time.

You make a really good point on the mortgage price and interest paid on all that is not equity, I have never looked at it through that exact lens, I like it. And as far as getting a SFH and renting out rooms, I am totally in for that... however the girlfriend I don't think would be as keen on the idea haha! Therefore my current target is du/tri/quadplex, If I can find anything that is!

I suppose am going to keep plugging away at the student loans at that rate of 4.00% which I have worked hard to get it down to, and start to save slowly for the down payment. I have a market picked out and will have to get a good realtor that understands the house hack MFH approach and have them start combing the MLS. Because I have to believe, if I don't make a bad deal purchase that I could get more than 4.00% return on the investment while also reducing living costs if not eliminating them based on the deal.

Thanks so much Brad for your input. I love to learn.

Student Debt or Real Estate Investing???

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