Student Loans or Buy my next property?

Question

Hi all. I am a 26-year-old in the Tampa Bay area. I am unmarried, very frugal (only spend on investing, necessities/essentials, and travel), and I recently bought a house worth approx $320,000 at a 5% interest rate (with $5k in equity already) - I used an FHA loan as I plan to live there for a year, refinance into conventional, and then move on to my next investment.

For my next investment, I am unsure of which is wisest considering the following: I currently owe $85k on student loans, my salary is $85k/year (not including EOY bonus), I have approximately $52k invested (stocks, index funds and CD's), no credit card debt, and no car debt. I am thinking of either investing in a 2bd/2ba apartment/condo near tampa/st.pete's downtown and then renting the current property I reside in (in the suburbs), or investing in a townhouse/apartment in Gainesville Florida - which is a college town, and then renting it out to students at a premium. I've done the math and both seem like they are realistic investments to continue scaling and growing my portfolio.

I am concerned that with the amount I owe in student loans, I won't be able to finance my next property due to my debt-to-income ratio unless I pay a buttload off my SL debt during 2024. Should I focus on paying off my SL debt fast or on piling up cash to invest in one of the two options I provided instead? By rule of thumb paying off your debt is always the best choice, however, at an interest rate of 3.76%-5.05% for my SL's it seems like with the above rental options I can outpace that SL interest with rental properties' cash flow and pay off my SL's after having deferred them for a year.

I am also unsure if for my next investment, I should be financing via conventional 20% or through DSCR, any insights on the latter? I want to avoid putting large bulks of cash down as much as possible, but that will be tough considering how resilient Florida real estate has been lately.

Raymond J. Rodrigues · Answer

Hi @Gabriel Martinez, refinancing your FHA loan into conventional may not make sense given that you have a low interest rate and very little equity, which will result in you having a higher interest rate and still not getting rid of your mortgage insurance. In your case if you do not wish to deploy a lot of capital, utilize 5% down payment on a conventional loan and purchase another primary. Conventional & FHA recently changed their guidelines on student loans. If you are on an income based repayment plan and your payment is $1, $1 will be used towards your monthly debt service, not 1% or .5% of the balance. If you are not on an income based repayment plan, then different guidelines will apply. If you need solid guidance, feel free to reach out to me.

If you need a solid investor/realtor on your team in the Tampa Bay Area, reach out to @Josh Green.

I hope this info helps!

Colleen F. · Answer

@Gabriel Martinez  You recently bought a house and it is FHA.  Why don't you start by renting rooms in your own home so you can see what it is like be a landlord.   Living in your home at least 2 of 5 years will benefit you tax wise if your life path changes. There will be costs that come up regarding home ownership that you may not have predicted.   What do you have for just plain savings because you likely need 20% down on an investment property. I don't advise that you use your investments for this.  Wait at least a year to see what your numbers look like for your current home costs before moving on.

Why are you deferring your student loans? do they accrue interest during that time?  Look at your payoff time frame and total amount. I would set a reasonable time frame to pay those loans and dedicated income to do it. Unless you are working in the public sector and expect loan forgiveness I wouldn't want to drag education payments out for 25 years. Keep in mind not every investment you make will be successful.

Austin Clarence · Answer

Hi Gabriel-The good news is Conventional is not as strict as FHA loans are for student loans. With FHA it requires 1% of the balance into the DTI equation. Conventional is .5% typically.

OR with a DSCR loan none of your personal income or debt is even evaluated. Please let me know if you have any other questions

Alecia Loveless · Answer

@Gabriel Martinez Hi Gabriel. I like the suggestion of talking to a broker, either an independent one or through a smaller independent type bank to see what your options are regarding your DTI status and obtaining the next loan.

If that’s not an option then I’d look towards creative financing where your DTI doesn’t matter. Or possibly consider a duplex near the campus where you could do a DSCR loan and qualify using the income from the property.

Michael Haynes · Answer

Hello Gabriel Martinez in Tampa. Your doing good. Do you know the IRS rule for Sale of your Residence? IRS publicaton 523 says you can live in your Home for 2 out of 5 years to Sell for up to $250,000 Tax-free. If you Sell your Home in one year you lose all this for a later Sale. If you had Homesteaded it in Florida, you also get $50,000 taken off your property Assesement for Property Taxes. Your Property Tax for a Home cannot go up more than 2% a year in Florida and I saw that Tallahasse wants to raise all Property Taxes by 12%? You say you have a Student Loan with outstanding Debt. You should do David Ramsey's "7 Baby Steps" and get out of All Debt. One of the reasons is that we all run out of Money to Finance the next property. That is when you have to get a Partner or study Creative Financing.

Joseph Stern · Answer

Investing in real estate gives you the ability to add to your net worth faster and have the option to pay off the student loans through the possibility of appreciation or forced appreciation. If someone takes out 100k in loans to go to college, and during college they purchase a property via owner finance with low money down, hold it for 5 years, then sell. There is a good chance in a market like Tampa that in 5 years you would be able to pay off a very large chunk of that loan. I make this example because if people simply invested in 1-2 deals, it would save them so much money and time since they wouldn't have to throw a chunk of their paycheck every week at paying off their loan. They can have the strategy to buy 1-2 properties dedicated as collateral to help pay off their loans one day. Some may say risky, but if you execute it correctly, a few real estate deals can pay for your college tuition. So I would suggest growing the portfolio, you don't want the debt to become unmanageable but you seem savvy so I would figure out a way to grow the portfolio.

John Karg · Answer

Hi Gabriel,

I agree you'll get better than a 3.76%-5.05% return on another RE investment, so I personally would go that route. A conventional loan has better terms/rate than DSCR, so if you can qualify for it based on your DTI, it's the no brainer. If not however, you can still do DSCR which doesn't look at your personal income or DTI. Feel free to reach out if you have any questions or want to go through things in greater detail.

John

Obed Calixte · Answer

You mention that you plan to reside in your current home for one year and then move on to your next investment   but also mention investing in a townhome/condo in either TPA or Gville.

Are you planning to make the next purchase your new primary? Or is your plan to rent out both properties and live elsewhere?

If you are going to move out your current property and then move into the next property as your new primary, you can use 5% conventional loan.

Christian Ehlers · Answer

Hey Gabriel that's a great question. The first thing I would do is talk with a mortgage broker that can help show you what all of your options would be for different loan products, which will of course vary the down payments and other requirements of the loan.

Given that the interest rate on the student loans is lower IF you can beat this with say 10-12% Cash on Cash return AND have plenty of reserves set aside for emergencies on either property, then I would lean towards the invest in real estate route and use your income from your job to pay down the student loans after that. With Real estate still expecting to go up in value for the forseeable future I'd bet on this benefiting you more in the longrun vs paying off the debt.

Ultimately it depends on your finances and your risk tolerance, the less risky bet is to just pay it off.