Beginner investing: Pay off student loans or buy property?

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Beginner investing: Pay off student loans or buy property?

Ally Garcia
North Hollywood, CA · Member since 2016 · 10 posts · 0 votes

I am 28yrs old in LA working in marketing.

Right now I have about $20k in a high yield online savings and money market, and not exactly sure which I should focus on more - paying off student loans, saving to buy a house, or buy a smaller property like a condo now while interest rates are low.

So far I have been following a PIP plan:

P - Preparing for the unexpected by having an emergency fund 3-4 months of worth of living expenses (part of my $20k) and the proper insurance

I - Investing for the future by contributing 6% of my salary to 401k Roth after-tax (however unfortunately with no match)

P - And my only debt to pay off is my low interest rate student loans ($35k at 6.08% interest rate). I have no other debt! At the current rate I am paying it off I will be done in about 7-8 years (and I am also looking into refinancing for a better deal to find possible better options).

I also have a good high credit score so I want to take that to my advantage as well. I want to invest more in my future but I don't know which way to focus:

1. Paying off student loans more aggressively, most of my savings

2. Invest in a more diverse portfolio like Betterment, Wealthfront, or RealtyShares

3. Save more for a house and still pay my student loans but at a lower amount

4. OR take advantage the historic low interest housing rates and purchase a small condo before they rise (which will be around the election). As of now after my emergency fund, I have about 3-4% down of $450k (another part of my $20k), which I know is not ideal but I would want to take advantage of the low interest rates, plus I would be living with my boyfriend and brother who would be helping me pay it off/splitting it 3 ways.

If I do go this route and purchase something in 6 months which would the most cost effective way:

- Get a FHA with as little as 3.5% down, however it would hurt me that I could never cancel mortgage insurance, however at least it would be a tax-deductible expense when you itemize deductions on Schedule A.

- A conventional loan (also tax deductible) and try to take advantage of being able to cancel it with Automatic termination when my mortgage balance reaches 78% of the original value of the property (no appraisal) or Final termination when I reach the midpoint of my loan when it's interest-only product, have a balloon payment, or were given forbearance by my lender.

- Or avoid mortgage insurance altogether while putting no money down by utilizing a combo loan. If you keep I first loan at 80% LTV or less, and add a second loan of 20% or less, I can still obtain 100% financing without paying PMI. Along with that, I'll most likely snag a lower blended mortgage rate by splitting the loan up.

- I can look into the Bank of America No Fee Mortgage, a so-called no cost loan that doesn’t require mortgage insurance, presumably even if the loan exceeds 80% loan-to-value. The TD Right Step mortgage also allows a three percent down payment with no mortgage insurance required. However, these programs typically have the mortgage insurance built into the interest rate, so it’s not really free. Most homeowners these day opt for a second mortgage instead of doing one loan to avoid high interest rates and private mortgage insurance. The only real downside is the associated fees with a second mortgage, and the two separate payments.

So there are options to make it work if jumping on real estate is the best way to use my savings. Also, since I would be a first time home buyer I would work all the bells and whistles that come with it - including no closing costs. So I do not plan on paying that at all (I know of a lender that has done this for other family members who were firs time buyers). So should I get pre-approved now just to see where I stand so I can have a more realistic idea or no since it effects my credit?

I want to invest more in my future and I think now is a great opportunity for this since interest rates are the lowest it has been, but I'm not sure if jumping into real estate now is the way to go - or pay off student loans aggressively and get them out of the way or keep saving or invest in other systems. Looking for some serious direction.

Thanks again,

Ally

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Leland Barrow
Investor · San Marcos, TX · Member since 2015 · 272 posts · 360 votes
10y
I am also a Dave Ramsey advocate. Paying debt while trying to build wealth is difficult. Deliver pizza, eat rice and beans, and throw every dollar at the student loans. I live a debt free life except for business debt and I would not do it any differently. The most important part is not just learning how to budget but mastering budgeting. You could knock out the student loans in 1-2 years if you FOCUS on them. Why pay all of that interest and waste 3-4 years of that income. After those are done then go nuts on saving for a down payment on a property. House hacking is a great start. You could be in your early thirties with no debt except business debt and really saving for business opportunities. By 40 you could have 1000 properties. Personal debt is bad, business debt is fine if used wisely. While building your portfolio find a primary residence and pay it off. A wise man said that wealth starts when passive income equals monthly expenses. Attacking that simple equation from both sides leads to quicker success. A lot of advice will be to borrow, borrow, borrow...that is dangerous advice.
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  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    10y
    kind of scary for 3 people to be paying your primary, the issue is, what if you don't get along, and as you know, money doesn't care about relationships. A wise investor keeps everything separate and always expects the worst.
    1Reply
  • Ally Garcia
    OP
    North Hollywood, CA · Member since 2016 · 10 posts · 0 votes
    10y

    @Manolo D.

    They would just be roommates paying me for rent. Only I would be on the title. They will not be helping me with down payment, tenants.

    0Reply
  • Account Closed
    Entrepreneur · Frisco, TX · Member since 2015 · 88 posts · 44 votes
    10y

    I would highly advise not spreading yourself too thin. The 20k in savings in an awesome start! I would focus all your efforts on getting your savings up and the personal debt down as much as possible. Counting on two other people just to afford your primary residence is too risky. 

    Give yourself higher goals. First off, you have a job. Excellent. Even if you work 40-50 hours a week, you can certainly get a part-time job (ex. retail, banking, Uber, anything really). Do you have any rooms you can rent out on AirBnB? Maybe even downsize your current living space/find a cheaper place to live. This is to pay down the student loan as much as possible. With hard work, you could potentially pay off your student loan in one year.

    For current monthly expenses, make sure you are putting everything on a credit card so that you can track every expense in one place while earning rewards. Barclaycard's Arrival Plus earn 2X on all expenses.

    As far as when to pull the trigger on REI, I would wait until your student loan is under 10k.

    You need to set yourself up for success. Too much personal debt and too little income with too many expenses, after an unexpected ER visit or job loss, is an accident waiting to happen. 

    0Reply
  • Derek Daun
    Investor · Sacramento, CA · Member since 2012 · 289 posts · 151 votes
    10y

    I wouldn't consider 6.8% cheap. 

    My student loans are about ~2%, (graduated mid 2000s) and as such I decided to not pay them off and use the money for other things (like RE investing).  Although I am considering paying them off next year for hedging/cash flow reasons.

    My wife still has some loans at about your rate, and we did actually postpone paying them off to use the money for purchasing our current house hack. The caveat was that we only postponed paying them off about two years.  I personally consider 6.8% to be too high of a rate to leave on the books. 

    In a way you can think of it as a hard money loan to yourself. With that mindset, that's actually a dang good rate, assuming you can pay it off shortly. 

    0Reply
  • James Danchus
    Saint Peters, MO · Member since 2016 · 193 posts · 37 votes
    10y

    I think you are being pretty aggressive with your student loans. I can tell you for sure, though, if I wait until I've paid down my student loans to get into REI, it will never happen. My student loan situation isn't good.

    It sounds as if you might be over-analyzing this a little much. JMO      

    0Reply
  • Marco G.
    Investor · Dallas, TX · Member since 2015 · 446 posts · 197 votes
    10y
    Ally Garcia Welcome Ally. Send me a message, I recently refinanced my student loans with a non-bank lender and would be happy to share (I'm on mobile app right now). If you'll be paid off in 7-8 yrs at that interest rate, and you have good credit I'm sure you'd qualify for a better rate than you're paying currently. That may help a bit. But consider that any higher required payment will impact your DTI. Doubt that'll be an issue given your lack of other debt, though.
    1Reply
  • Josh Evans
    Investor · Vancouver, British Columbia · Member since 2015 · 11 posts · 4 votes
    10y

    I wouldn't consider 6.1% interest cheap either and I'd work on paying off that 35k prior to investing in RE. Although it isn't a significant amount of debt, that interest rate is likely much higher than you'll ever see in your high yield savings account so you're spinning your wheels IMO.

    0Reply
  • Mike Hanneman
    Investor · Coeur d'Alene, ID · Member since 2016 · 551 posts · 218 votes
    10y

    I think you need to refi your student loans to a better rate. Way too high ffor someone with good credit. Student loan debt would be better debt to have as you can at least deduct the interest. Don't let student loan debt be what stops/delays you from getting into REI. The sooner you get into REI the better.

    0Reply
  • Austin DavisPro Member
    Investor · Cedar Rapids, IA · Member since 2014 · 205 posts · 80 votes
    10y
    I would go Dave Ramsey and attack your student loans with "Giselle intensity" and the think about house hacking. If you buy a house to house hack, make sure you don't pay market value (especially in CA) as you could easily be underwater if there is a turn in the market. If you really attack the debt, it won't take long. It would definitely be a beautiful thing to have your only debt be a good investment property.
    1Reply
  • Leland Barrow
    Investor · San Marcos, TX · Member since 2015 · 272 posts · 360 votes
    10y
    I am also a Dave Ramsey advocate. Paying debt while trying to build wealth is difficult. Deliver pizza, eat rice and beans, and throw every dollar at the student loans. I live a debt free life except for business debt and I would not do it any differently. The most important part is not just learning how to budget but mastering budgeting. You could knock out the student loans in 1-2 years if you FOCUS on them. Why pay all of that interest and waste 3-4 years of that income. After those are done then go nuts on saving for a down payment on a property. House hacking is a great start. You could be in your early thirties with no debt except business debt and really saving for business opportunities. By 40 you could have 1000 properties. Personal debt is bad, business debt is fine if used wisely. While building your portfolio find a primary residence and pay it off. A wise man said that wealth starts when passive income equals monthly expenses. Attacking that simple equation from both sides leads to quicker success. A lot of advice will be to borrow, borrow, borrow...that is dangerous advice.
    4Reply
  • Patrick Keely
    San Angelo, TX · Member since 2016 · 12 posts · 2 votes
    10y
    Ally since there are some mentioning Dave Ramsey I will thrown in some of his points. -You don't have to pay your loans back at their rate. Double, triple up on them - Saying that you don't mind paying high interest because you'll deduct it is not smart either. In a 25% bracket you'll send the bank $10k just so you can save $2500 on taxes. Still an outgo of $7500 - Dave also suggests to stop ALL investing until all loans paid off. I believe if you went crazy you could have your loans paid off in a year. You would be able to build your emergency fund back up and then look into buying a house with 0 debt. Not a bad place to be. You are fairly young I'm assuming. Work on getting your income up over the next 12-18 months. With the above you will be debt free and ready to invest in RE in no time.
    1Reply
  • Aaron Sauceda
    Austin, TX · Member since 2016 · 31 posts · 5 votes
    10y

    Hi Ally,

    Thanks for posting this -- I think you've hit on the million dollar question here. I'm actually in a very similar position as you, and I'm always interested to hear what people think. I also live in SoCal and have a chunk of savings I'd like to invest in RE (albeit a little less than you have), but also have student loans (~$12k @ 4.75%). 

    I think the advice here is all great; I can't responsibly argue against paying down 6% debt. However, I would like to play devil's advocate. I think it's common to have a negative view around personal debt and to want to pay it "as fast as possible," but it really all depends on your investment options and their corresponding risk-adjusted returns.

    Someone mentioned it already, but regardless of which direction you take, I think priority #1 should be to refinance your student loan debt for a lower interest rate. I had loans from the government at over 6%, and refinanced with SoFi to consolidate them at a lower rate. There are several ways and lender options to refinance, so feel free to reach out if you'd like to discuss. The downside is you lose protections that go along with government loans (such as forbearance), but I was willing to take that risk given my perceived job security, income, and relatively low balance. 

    Now, if you're able to refinance at, say, 4.75-5% or lower like I was, then I do think it becomes interesting: the real question becomes, you have a guaranteed return of 4.75-5% when paying off your student loans. Can you earn a higher risk-adjusted return elsewhere, whether that's in the stock market or via real estate? If so, how much higher? 

    I'm currently grappling with the same thing. I can use my savings to be completely debt free, earning 4.75% on that money. Or I can invest it. I'm currently earning 6% YTD on my money in the stock market, so I'm sure it's a worse risk-adjusted return. But could I earn a return in RE that's materially higher than 4.75%? For me, given the amount of hard work and risk involved in RE (especially for a newbie) relative to simply clicking a "pay" button for a 4.75% return, materially better would mean around 10-15% ROI. That's what we need to figure out. If we can, then IMO, it makes more sense to make the minimum student loan payments and invest our remaining capital.

    1Reply
  • Lance Robinson
    Investor · Scottsdale, AZ · Member since 2015 · 130 posts · 102 votes
    10y

    @Ally Garcia

    Here's what I would do:

    1) stop putting money in to your roth. You want to do RE and don't get a match so it's worthless.

    2) Refinance your Student Loan to a lower interest rate

    3) Save up 3-6 months Emergency Fund. (Murphy's law, what can go wrong, will! Especially when buying a property and having no money in case something goes wrong.) Depending on job security go closer to 3 or 6.

    4) Then I would aggressively save up a down payment to purchase a property with a conventional 5% loan for a SFR or condo and a 3.5% FHA loan for a 2-4 unit "house hack."

    Remember that you can refinance out of your properties when the LTV gets favorable to drop the MI. I would consider how long you will be in the property and go 1 of 2 routes.

    1) if short term and you want it to be a rental, it probably won't cash flow unless it's a multi-family, especially not in LA with an FHA loan with MI on it. So I would rapidly try to pay it down to get that LTV to a point where you can refinance it, then move out and rent it out.

    2) If you will be there long term, then save rapidly for the next one and let your money and savings snowball.

    Remember to celebrate the little victories and the harder you work now, the better it will pay off later. Feel free to shoot me a message if you want to talk more. Good luck!

    1Reply
  • Adam K.
    Investor · Brooklyn, NY · Member since 2015 · 127 posts · 57 votes
    10y

    @Ally Garcia

    I'd ignore any advice that tells you to pay off your debt because "debt is bad" or whatever...a mortgage is debt, too. And in the grand scheme of things, $35K isn't much when you're going to likely have a mortgage that is considerably bigger. Definitely refi it to a lower rate if you can. But I would not worry about paying it off quicker or anything.

    If you can purchase a condo to house hack and you think your return is higher than 5% (when taking into consideration your current rent payment if you didn't buy, tax benefits, etc) or whatever you refi into, then that's the right move. Only you know the full scope of your financial picture.

    It's also about how risk-averse you are, which, again, only you know.

    Ultimately, and what I did, with a lot of student loan debt (but a small amount compared to a mortgage), is just essentially treat the loan debt as part of the mortgage. So if you get a $400K mortgage, treat it as if it's $435K and see how the numbers play out...

    1Reply
  • Account Closed
    Rental Property Investor · Portland, OR · Member since 2015 · 338 posts · 332 votes
    10y

    I'm not sure what the point of getting a condo to live in is if what you want to do is be an investor. FHA house hack a 4 plex and pay your student loans off on time. Don't worry about ahead of time. You can make extra payments if you want but in REI, cash is king.

    Yes to refinancing the student loans to a lower rate. Also, if your 4plex appreciates, you can use a HELOC to pay student debt, then write those payments off your taxes.

    But a condo to live in? It's kind of like buying a car. It's probably not going to bring you cash flow while you're there, even with roommates, and after you move it still may not. At least with a plex, you're hedging against economic downturn and depreciation because the rents should cover the mortgage, if you buy right. Then you'll have even more income to pay off your student loans.

    There are blog posts here about considering the SFR you live in as an investment, and how that's misguided. You can search for them on the site.

    1Reply
  • Lance Robinson
    Investor · Scottsdale, AZ · Member since 2015 · 130 posts · 102 votes
    10y

    @Ally Garcia

    I definitely agree with @Account Closed's advice. This definitely depends on the market and financial picture, but ALWAYS go multi-family if you can.

    0Reply
  • Adam K.
    Investor · Brooklyn, NY · Member since 2015 · 127 posts · 57 votes
    10y

    @Ally Garcia @Account Closed

    As noted, multi-family is obviously preferable in general, but that's not realistic with $20K in L.A. Here in Brooklyn and NYC good luck getting an FHA loan anywhere and good luck getting a multifamily of any size with 20K. You have to adapt to your market and house-hacking a condo in L.A. could work out well in the right situation. And if you can do it with an FHA loan, you have a chance to make a killing off appreciation with so little capital invested.

    I am currently house-hacking a condo (conventionally financed) and it's gone swimmingly thus far -- my cash flow is probably comparable to multi-families in other markets and I bought luckily before some hyper-appreciation in my neighborhood.

    Again, listening to one-size-fits-all advice is a mistake. Only you know your financial and personal situations and that goes a LONG way in making the right decision here.

    1Reply
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