Student loans???

Question

Hey all! I'm a new investor and I have a question for you. My wife has student loans we are paying on, and with the purchase of our first house, i'm wondering if I should work towards getting out of student loan debt before purchasing another house?? Is it better to tackle all that BEFORE jumping into anymore real estate?? ball park estimate is around 30G for loans @ 400 per/mo. currently. Any thoughts from the professional side of the house?? Thanks!

Andres Verney · Answer

Congrats on paying loan down. Good question.It depends on what type of deals you're investing in, your income and your thoughts about debt (good vs bad). Hopefully your wife's investment in her degree is paying off and it was a good debt that is yielding an ROI. $400 to me seems like a car payment and very manageable to me. Leveraging debt at low interest to generate cash flow or large sums of money is good. Personally I like focusing on deals that generate cash flow so that they can pay my debts and keep giving me passive monthly income long after the debt is paid off. At the current rate of $400/mo, it will take you about 6 years to pay off this debt. How many deals could you do and how much money can you make in 6 years? Can you get a deal that can yield you more than $400 per month net income?Hope this helps.Andres

Bill Regan · Answer

$400 per month isn't too bad. Perhaps a different way to look at it is how many investments would you need to pay the loan for you. Then once those properties pay the loan off you'll have an extra $400/month in cash flow! Use assets to pay for debts.

Jonathan Blum · Answer

What is the opportunity cost of that money? If you could use that money to make more money, and that would accelerate paying off the student loans, do that. If you can't use your money to make more money, or not make more than its costing you, keep doing what you're doing. Its all about crunching the numbers. When I was in college, I actually got student loans (3.9%) to cover my "cost of living" and used that money to pay off private financing (8%) from a Real Estate investment which was a higher interest rate. I'm still paying these student loans, and will keep them until I can borrow money at a lower rate than 3.9% to pay them off.

Evelyn Roper · Answer

Without knowing much of your financials, it is hard to know if investing right now is a good option for you. Have you sufficiently trimmed your monthly spending and allocated the extra money to savings? Are you able to pay the $400 without much struggle? Are you able to keep a comfortable savings balance and add to it each month? Maybe consider those things and see how much money you can dedicate to investments each month and go from there. I would also make sure that with the $400 payment, it is divided between the two balances so the lower interest rate debt gets the minimum monthly payment and the higher interest rate debt gets everything left over. You may feel like you are making better progress that way since you'll be knocking that down and saving a significant amount in interest. Then when the higher interest debt is paid off, keep dedicating that $400 entirely toward the lower interest debt. That said, I have student loans as well and we just recently purchased our first investment property. We can manage both payments and are planning for the cash flow to help with paying down our liabilities.

Corbin E. · Answer

I'll be in this situation soon enough as well and plan to go after a property to assist with the payments. Anything you can get after debt service on the property can reduce your out of pocket expenses to cover your loans. You can also evaluate your current interest rate on the cumulative student loan debt you have relative to the returns you can obtain 100% of the time through the given deal. i.e. compare the yield on the investment property to the interest rate on your loans. Can you outperform the rate on your student loans through your real estate investments?

Ryan Sajdera · Answer

Thanks for the replies! I really appreciate the input! Damien, the interest rates vary from 3 to 6.5%. At 400 per month I'm putting 80 more dollars toward the principle. I feel like I haven't made any progress since January though. I have that 400 comfortably penciled in the budget as we currently do not have car payments etc. i just know how long it takes to save up enough money to put a down payment on that one special property, which is why I am kinda thinking I should invest in another property and use that cash flow to accelerate the payments.

Damien C. · Answer

If the payments are too high to handle with relative ease, pay it off, I would think, right? Or maybe make a dent in it and refi, if that's possible. What's the interest rate, if I may ask?I tend to aggressively pay off (a) debt with high interest (example: credit cards!), (b) products with variable rates and (c) loans for non-income producing assets/ liabilities (depending on the terms).If you can swing the student loan payments, and the rate and terms aren't too crazy, I would imagine securing a nice income property with a low fixed-rate mortgage might be a good way to go.Since the principal on my student debt, for example, is on the low side with a manageable interest rate, I just make the monthly payment and focus my resources on other endeavors--the primary endeavor, at the moment, being rental real estate acquisition.

Andrew Rymer · Answer

Paying off debts and loans is always good! just take care that with a new loan it won't be too much to pay off per month. If you have everything under control then why not!