Student Loan Debt - Enough to Buy a House!
Rental Property Investor · Andover, MA · Member since 2017 · 126 posts · 67 votes
Hey Everyone,
It's no secret that Americans owe over $1 trillion in student loan debt, spreading out over millions of borrows. I'm curious to hear how other successful real estate investors who were once faced with the same challenge were able to overcome the massive debt barrier?
Looking forward to the responses!
Dan
Hi @Daniel Ortiz. I didn't... I pay the minimum on my student loans and invest the extra. Why spend a ton of money paying off something at 5.something% when I can invest and make 10%-25% on that same money?
Now that I have added a number of units under me I feel more comfortable looking at paying those down. Mostly because I disagree with the entire higher education cost, loan-till-you-die, can never bankrupt, no underwriting necessary philosophy that our government uses to give itself its #1 asset on its balance sheet. I'd rather cut their interest income and vote with my money.
Hi @Daniel Ortiz. I didn't... I pay the minimum on my student loans and invest the extra. Why spend a ton of money paying off something at 5.something% when I can invest and make 10%-25% on that same money?
Now that I have added a number of units under me I feel more comfortable looking at paying those down. Mostly because I disagree with the entire higher education cost, loan-till-you-die, can never bankrupt, no underwriting necessary philosophy that our government uses to give itself its #1 asset on its balance sheet. I'd rather cut their interest income and vote with my money.
@Daniel Ortiz I never seemed to get far ahead in the money game, but investing was what I really wanted, and real estate was my focus. When I got my Master's degree I did not need much in the way of student loans but I knew I wanted to invest once it was complete. I knowingly pulled the maximum loans in order to build my investing capital. Hey, they don't underwrite, right? :) Even with that I still didn't have enough income/capital, so I made my family house-hack a 3-unit with me. That really amped the cash flow by reducing our house payments to $100/month for a family of 3. We did that for a year, I worked tons of overtime, and with that we were able to buy a couple more properties and then look to getting our "real" home that we live in today.
I found that getting rid of all of the pre-conceived notions of "I've earned this lifestyle" was what allowed me to really focus, and that made it even juicier when we bought our new primary... it wasn't a small step up, it was like flying to the moon!
@Daniel Ortiz a non-owner occupied unit costs 20% down payment plus any expenses to get it to standard. In my market, that would have meant having around $100,000 to put into the property. Using FHA I was able to spend a total of $25,000 for that same property, but we had to live in it for a year. The per-door value of SFR just isn't there in this market and I didn't like any of the 4-unit places. I would have considered a duplex, but didn't find one. Anything more than 4 doors is commercial and I wasn't comfortable with it at the time.
@Bryan O. - that makes sense. Do you mind explaining the financials of the house hack (purchase price & how much each unit rented for) in addition to describing your personal experience with the advantages/disadvantages of using an FHA loan were?
I wouldn't say that I'm a successful real estate investor but when I graduated college in 2013 I had about $75k in student loan debt. At the time, I knew that I wanted to start investing in real estate but I wanted to be in a good financial situation before investing. For the last 4 years, I socked all the extra money I had towards paying down my student loans. Now I have less than $14k in student loan debt and I don't have to make a minimum payment until about September/October of 2018. I feel as if now I'm in a very comfortable spot where I can start my REI journey and not feel over burdened by all the debt.
Although yes, I missed out on potential investment opportunities I feel like it was the best decision for me. Since I couldn't invest, I made sure that I used the time to really learn about all avenues of REI.
Hi @Daniel Ortiz,
@Bryan O. has some good advice about house hacking, and putting all the extra money toward your student loan debt (if that's your highest priority).
Here's an article I often recommend, a case study of how one investor did his first real estate deal as a house hack:
https://www.biggerpockets.com/renewsblog/newbie-ho...
As mentioned above, it really helps to stay disciplined and not succumb to lifestyle inflation, even as you start earning more money, and saving money on your housing bill.
Best of luck, and feel free to PM me any time.
Hi @Daniel Ortiz.
Purchase price: $375,000
Down payment: $12,500
Repairs: $12,500 (This number is almost half of the prediction because I could do most of the work myself while living there)
Rents: $1,000, $920, $1450 (slightly under market now)
PITI: $2200
FHA advantages: Low down payment (3.5%), low interest (3.5%)
FHA disadvantages: Not seller friendly, must owner occupy for 1 year, no way to remove PMI without a full refinance, cannot go over appraisal, sometimes slower (I did not have this issue, but hear is all the time in the forum)
The seller wanted top dollar for his property, but no investor would get the returns they wanted with so much money down and then the repairs. I was able to offer the higher amount because with so little down my returns are very high.
@Christopher Giannino's strategy is another way to approach it from a more risk averse direction. If I were to come into the deal at the top of the market (like I did with my first property) and then rents softened, I may not have been able to afford to move out. That could have posed a very large problem given that my wife agreed under duress with the carrot being that she could have the extra nice house if she just waited for a little while longer.
In hindsight, I should have made them do another! The cash on cash returns from the property, plus the $600/month principal someone else is giving me, plus the tax savings, plus the appreciation is about 10x the returns I would have had by paying down the student loans. That's a hell of a snowball to start rolling down a hill.
Hi @Christopher Giannino. It was not my first investment, but I almost lived for free. It cost around $250/month to cover the last bit of debt service and the utilities. We were in the unit that rents for $1450. The other 2 units were rented and paid for almost everything.
It was a good experience in general, minus the drug dealer sitting on the corner. My daughter was able to learn about fixing various things in the house and it was a perfect opportunity to teach her about assets vs. liabilities. She is 8 now and on her way to being an amazing entrepreneur/investor... and we moved before she got involved in the drugs.
I've seen people wearing this button at a couple of REIA meetings ...
"I'm broke, and I have the degree to prove it!"
@Christopher Giannino - Thanks for your feedback. I can definitely relate with the student loans, however I'm curious to know what made you wait 4 years given the wide range of "low/no money down" options? Was it a level of comfort thing? I only ask because I'm facing the same challenge you did 4 years ago - but I'm not sure which path to take. I don't think the brute force method of working my tail of to pay down as much of my students loans as possible to put myself in a better debt position is feasible. At this rate - that favorable position will not happen for me until a very long time from now. Which also drives me toward the real estate investing path in the first place. I think of this opportunity as a way to get me to that better debt position.
@G. Brian Davis - The student loans are definitely one of my highest priorities. I appreciate you passing the article along...I will be sure to check it out! I'll be sure to reach out, same goes for you.
@Bryan O. - Nice work! I appreciate the FHA feedback to. I'm gravitating to the lower down payment options so FHA is something I'm keeping in my sights.
Did you work full time while acting as a landlord? It sounds like since you were pretty handy you didn't feel the need to hire any property management. Is that a correct assumption?
@Daniel Ortiz My decisions were based on a couple of things... First, my loans were all at 8% interest. Also, being that I had a significant amount of debt in my name I had a high DTI ratio. Maybe I was a little naive but my initial thoughts coming out of college was just to pay them all off ASAP because 1. the interest rates on the loans were very high and 2. I needed to improve my DTI ratio in order for lenders to allow me to take on additional debt such as a mortgage.
Additionally, it's kind of a comfort level thing for me.. I hate "unnecessary" debt such as car loans, student loans, credit card debt, etc so I wanted to get rid of it ASAP and not have it "hang over me." Now that I'm a reasonable place with my debt, I figure its a good time to start investing and have the cash flow pay off the rest of my debt. At the end of the day, I'm very conservative with my financials. I probably could of started leveraging my money before year 4 but I just wanted to set myself up for success and I thought that this was the best way to do so.
My son after graduating had a huge student debt burden. His intent was to invest in real estate and he was of the opinion that to move forward with minimum risk using maximum leverage the student debt had to go. He was right, carrying bad debt of any sort will restrict your investing and be a unnecessary burden when investing time are tough. He spent 3 years putting every penny into paying off all debts. As a result 3 years after that he has accelerated his investing far beyond what he could have done carrying the debt. In hind site he lost no real investment time and placed himself in the best possible financial position for the future.
Bad debt is bad debt, you carry it at your own peril.
@Christopher Giannino - Perfectly understandable, just wanted to see what your inner motivation was to pay down the student loan debt first. Clearly you are in a good spot though and were able to forecast that you would be able to pay down your student loans within a reasonable timeframe.
Based on what you went through, what do you think you would have done if you weren't able to forecast paying your debt down within 4 years (well majority of it anyways)? If you knew that there was no way you could pay down your debt for another 10-20 years, would you have done something differently? Or would you have continued with the brute force approach of just pay it down as quickly as possible?
@Thomas S. - I guess my question goes toward you as well. Sounds like your son made our great, just like @Christopher Giannino did. What advice would you give to someone operating more in that financial redline stage where the massive student loans leaves your income and expenses too close together, not allowing you to save enough to make decent impacts on paying down the student loans within a reasonable amount of time.
@Daniel Ortiz The first thing I would do is look into refinancing and/or consolidating your loans at the lowest interest rate possible. After that, make sure you stay current and pay the minimum on those loans every single month.
Then I would focus on decreasing your spending habits. If you're renting a place get a room mate to help reduce your rent. Make your own coffee instead of going to DD or Starbucks everyday. Bring lunch most days and only allow yourself to go out to lunch one day a week. Consider using public transportation to get to work (assuming its cheaper to do so.) A bunch of "little things" can add up quickly which will then allow you to save more.
If you're talking about the investing side of things.. a very common method is a house hack. You can buy a 2-4 multi-family and live in one unit and rent out the others. By doing so, you can live for free or (hopefully) extremely cheap which allow for you to automatically start saving money. If you house hack, rent out the unit/s that will bring in the most amount of rent. Live in the outdated unit and once again get a room mate or two.
@Christopher Giannino - do you think if you knew you couldn't pay down any type of significant portion of your student loans within the next 10-20 years that you would have leaned toward house hacking your way out of student debt? Or would you have tried something different?
I'm completely on the same page as you when it comes to buckling down and saving where you can. Each of those money saving options you listed i practice. I'm just curious how those who didn't see themselves as being able to pay down massive student loan debt within a reasonable timeframe were able to accomplish the feat.
Hey @Daniel Ortiz!
I am a complete newbie and at this point, not an actual investor, though I am in the process of my first investment.
I have massive debt (>$300,000). It is my goal to be debt free by 2018 so at this point I am throwing tons of money at it. Paying down my debt does not make the most financial sense but emotionally for me it does. My debt is a like a noose around my neck and keeps me from choosing certain jobs and living in certain areas and I cannot be financially independent until it is gone. I am aware of the Public Loan Forgiveness program and I'm signed up but don't want to have debt around for another 10 years (I have drunk the Dave Ramsey kool-aid).
As a nod to reason I have decided to househack to save at least my rent or cut down the expense significantly, and since I'm getting an FHA loan, the amount to get into something is not that high compared to my debt. I'm debating on allowing the proceeds from my rental to go towards my loans or towards more investments...decisions, decisions.
I listen to a ton of debt podcast and constantly surround myself with information about wealth. I live on a fairly tight budget and work a lot of overtime. I figure the years immediately into my career I have to literally pay my dues, so that's what I'm doing. I find it encouraging to track my net worth and see it getting closer to 0.
Good luck!
I'm in college now facing what would equate to a down payment on an fha loan for a triplex in my market in debt by the time I graduate. Student loan debt can be crippling. It is the fastest way to get young people to start running the rat race though.
@Josh Day - that program seems to provide the ultimate opportunity in your position. If I would you I would definitely leverage that. Unfortunately for me I do not qualify.
@Katrice Brooks - I'm a newbie too so no worries! Sounds like we can relate on a lot of stuff. I can definitely agree with your outlook of substantial debt being an emotional burden. However I'm trying to educate and think through what will make the most sense financially. I'm not one to give into everyone telling me "oh, you'll be paying those off until you die - it's normal". I'm trying to say heck no, it's just a problem that needs to be analyzed in order to determine the optimal path. Real estate seems to offer multiple paths which really struck my interest.
@Nicholas Patrick - yup, I'm right there with ya. I'm a 2016 grad and I must agree, although the debt sucks it's also lit a fire inside that has made me determined to solve this challenge.
@Daniel Ortiz I'm sorry you do not qualify for the program, it really is perfect for my situation. Before I found out about this program, I planned on refinancing my student loans using Sofi or something like that to decrease interest rate from 7% to around 2%. Maybe this could be an option for you so that you could invest your money in real estate and not have to worry as much about the high interest rates of student loans.
@Daniel Ortiz if I absolutely knew that I couldn't pay off my student loans (or a significant portion of them) I would definitely try and leverage myself to the best of my abilities. I would consider moving back home with my parents to start building a real estate portfolio that would allow the cash flow to help pay down my debt. If that was not an option, I would consider a house hack using a FHA loan to get me into a place. Depending on how handy you are, you can also consider using the BRRRR strategy.
Maybe consider picking up a side job for a year or two. Maybe consider a full time job where your pay is based on productivity so you can earn more. Maybe look into getting a job where you can and will get paid to work overtime. Maybe start investing "passively" through S&P500 funds that will mimic the stock market trends so you can grow your savings (this would be more of a long term play and just make sure the fund has low expense ratio.)
At the end of the day, I would "suffer" and do everything in my power now while I was young to set myself up so that in 5 or 10 years I would be way ahead of the game.
Hello everyone!
I am a newbie with sickening student loan debt as well. This thread has definitely helped me! I would say it all depends on your goals and where you want to be. I am going to start with a house hack, especially being that I am in the Public Service Loan Forgiveness Program and have been for the last 4 years. I love my FT job and couldn't see myself leaving anytime soon, or leaving the field that is. (which also works for the loan forgiveness program) win-win. If you are passionate about something and it is within the public sector or nonprofit field, I would go for it. Get a FT job (for at least 10 years) and still do real estate.
Happy Investing! Thanks for sharing!
Jasmine