Should I Pay Off My Student Loan or Invest in Real Estate?

by | BiggerPockets.com

Over the years, many people have asked me this very question: should I pay off my student loans or take that money to invest in real estate?

This is a great question that really has no “right” or “wrong” answer. Ultimately, it depends on your financial goals and financial situation.

In the video below, I share my thoughts on this very important topic. I also discuss some important things to consider as you navigate this situation to determine what is best for you.

Pay Off Student Loans? Or Invest in Real Estate?

From those in college, to those fresh out, to those in their 40s, a lot of folks in America are dealing with student loans. They’re also wrestling with the decision about whether to focus on paying them off or start investing.

If this sounds like you (or someone you know who should watch this video), here’s what to think about:

1. Your Credit

The first thing you want to consider is your credit score. Your student loans can pull down your credit, especially if you’ve missed any payments. So check your credit.

Is your score super low? Do you only have bad debt? If you can’t show a good payment history, it’s likely dragging down your score. Make regular payments and show you’re a good debt payer.

Alternatively, maybe you just don’t have any credit at all. If that’s the case, go get some good debt, like a small credit card, to prove you can make on-time payments, and build up your credit score.

You need to be focused on having decent credit before buying real estate. Otherwise, you won’t be able to get a bankable loan. Talk to a banker to check your status or get more advice.

Related: How to Build Credit From Scratch

2. Return on Investment

Look at the return on investment (ROI) on an investment property versus what it costs for debt. (I learned how to do this playing Robert Kiyosaki’s cash flow game.)

Say I buy a piece of real estate that returns 15 percent. That 15 percent beats the ROI I get if I pay off my student loan at 6 percent. And I could even take the cash flow from my rental property and maintain my student loan with it.

So if I’ve got $20,000 I could use to pay off my student loan, maybe I’d be better off taking that money and buying a rental property with it (as long as I can qualify for a loan). I’d be coming out ahead in the long run—by a lot.

3. House Hacking

This is what I did. I bought a 3-bedroom/1.5-bath for my first rental property.

I got it for $150,000. My mortgage payment was $940. I bought it on a 3 percent down FHA-backed mortgage and laid down $4,500, plus closing costs. So all in, it was maybe $8,000 or $9,000.

Then I rented two bedrooms to friends for $500/month. They also each paid a third of the bills.

So I was living for free (and actually making $60/month), plus I had a pretty good job. In two years, I was able to pay off all my student loans and my credit cards.

Therefore, I highly recommend that you take the ROI equation and parlay it up with a house hack. Then you can take what income you’re earning and save yourself a housing expense while simultaneously drilling down on your debt.

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What do you think? What are the pros and cons to both options?

Let me know in the comment section below!

 

About Author

Matt Faircloth

Matt Faircloth, Co-founder & President of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, New Jersey, is a developer and owner of commercial and residential property with a mission to “transform lives through real estate." Matt, along with his wife Liz, started investing in real estate in 2004 with the purchase of a duplex outside of Philadelphia with a $30,000 private loan. They founded DeRosa Group in 2005 and have since grown the company to owning and managing over 370 units of residential and commercial assets throughout the east coast. DeRosa has completed over $30 million in real estate transactions involving private capital including fix and flips, single family home rentals, mixed use buildings, apartment buildings, office buildings, and tax lien investments. Matt Faircloth is the author of Raising Private Capital, has been featured on the BiggerPockets Podcast, and regularly contributes to BiggerPockets’s Facebook Live sessions and educational webinars.

4 Comments

  1. Brandon Moore

    Me and my wife have a combined student loan debt total of around 9k and our credit scores are good. We are actually planning to continue making the payments on those while making investments that have a higher ROI than what we pay on our loans. Great post!

  2. Bryan Konopacki

    So, Question about your example:
    Your first rental property was actually your first home? Also, the $940 mortgage payment you owed every month, did that include the additional PMI for the FHA loan, and the property tax and homeowners insurance? Im trying to wrap my head around why it seems that a lot of people who talk about their deals, don’t disclose all of the financials. I mean you said that if you find a place that returns 15% it can cover your student loan of 6% but what about the cost of the loan? The Interest rate, doesn’t that cut into your profits? Thank you!

  3. Justin Merod

    Looking back, had I been more keen to seek out ways to make income and more knowledgeable in ways to apply that extra income, I very likely would have done some REI investments and used that cash to pay off my loans quicker, all while gaining other perks of being a homeowner. Granted I paid off my 50k student loan debt in 4 years due to being the “roadwarrior” i have become, and i was very proud to have done so, but it did come at a physical and mental price for me. But, now, i am entirely debt free (no car loan, bike loan, student loan, cc debt,) and i save every dang penny i can in order to now get into the REI space!!

  4. Charles Curren

    No mention of risk in your article? Your particular house-hacking method results in relatively low risk, but buying stand alone investment properties and depending on them remaining rented while in debt of any kind has an element of risk that should not be disregarded.

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