Wipe Out Student Loans or Save for Later Real Estate Buys?

25 Replies

I've seen some threads about paying down student loans vs. investing in real estate. Usually great material; par for the course here. However, I haven't come across one discussing my situation. So I thought I'd start one. If nothing else, it may help those in a similar situation at some point.

Prior threads have weighed the pros & cons of paying off a student loan (or a high-interest debt like car loans) in the short- to medium-term, vs. using that money to buy real estate. The question of time comes up, of course. How long until the student loan is paid off? How aggressive should you be? 

Here's my snag. I've saved enough that I could pay off my student loan balance NOW.

This came from several years of saving my income, and paying down the student loan at standard payment level. Wasn't a huge loan anyway.

I rent in a shared house, own an older car, and use a work-issued phone, so my expenses aren't too high. Job's not going anywhere. I own no property right now. The student loan is the only debt I have.

I could press a button and wipe it out (and still have about 3 months' expenses left in the bank). This would of course risk my ability to handle a crisis, leave me with fewer liquid assets, and negate my ability to buy real estate for a while.

Thing is, I wasn't planning to anyway. I have decided not to buy real estate in my immediate area (San Francisco Bay Area) due to the ridiculous pricing here. My income's OK, but not enough to sustain mortgages here if I have vacancies. The numbers I see just don't work. 

I plan to move out of the area in a couple years, and THEN begin investing. Or try note investing.

My question is: should I do this? Or just keep saving, pay the loan down over time, and buy real estate in a year or two?

Thanks everyone.

Updated over 3 years ago

Should have included this originally...the student loan is currently at 6.125% fixed interest.

I'm one of those that believes student loans should be paid off as soon as possible.  They are generally not forgivable and there are very few ways to get rid of them other than paying them off.  Not paying interest is a great thing.

It sounds like your job is secure and you can bank cash regularly for your emergency fund.  Since you don't have debt other than this and you don't plan to invest for a couple of years, it would make sense to get rid of them entirely and be completely debt free.  Then you can save aggressively for down the road.

In a couple of years, you will have saved up enough money again to invest and the market will likely be a bit different and possibly more favorable to you.

@Chris Williams There are two answers. One is practical. The other is emotional. 

1) Practical - buy using Subject To in Phoenix or a similar market where you can receive your investment back at closing and cash flow for years on the same property. Rinse & Repeat. Once far enough ahead financially, pay off student loans. (This means not needing to use a bank for RE Investing.)

2) Emotional - I once had an engineer approach me. He wanted to try being a real estate investor. So, I consulted for him, located a property for him, bought it "Subject To",  took him step by step on how to do a fix & flip and we made a ton of money on the deal. He was stressed *every* month through the process because he had a mortgage. He constantly worried about missing his mortgage. Normally, I am sympathetic to this concern. In his case, he was single, had no kids, had a great income and a steady job and his mortgage was $178 a month. I spend more on gas in a week than he spent on his mortgage. He could have written a check and paid off his mortgage entirely. 

He couldn't see the house for the sub-division, to torture an old saying. As I said, we made a ton of money but the stress was too great for him and he never did another property. I had the deal structured so his down side loss at most would be a few thousand dollars and the upside was multiple tens of thousands of dollars each. He walked away with so much money, he figured it was all luck and couldn't be duplicated. To his surprise over the years, I've done these again and again and again and again.

The point being, if it stresses you out to spend money to make money, invent something and sell that instead of doing real estate. 

If your passion is to find the "right deal", making a lot of money, meeting great people, getting out from behind a desk, having a day to call your own and being able to travel or be with the family when you want to be, then real estate can provide that for you. The key will be to get over the emotional need to always have *safety*. Real estate is a **calculated** risk. If I don't know the outcome before I buy the property, I won't do the deal. But, I don't spend seven ways to sunday worrying about every possible thing that can go wrong. I've seen it all and there is always a way to turn things around and move on to the next one. Time & money go together. Sometimes I just have to wait to get my money out of the project but I always do get it. It is all part of my business plan in the section called "what if". ;-)

@Account Closed Brought up very good points.

As a college student with debt I can relate to the feeling. My advice would be to look at the numbers. Figure out where you think you can find the best return. Meaning, if you are paying an interest rate of 11% on your college debt and in your market you think you can get a return of 5% on real estate, obviously pay off your student loans. That's how I look at it at least! Anyone have any other thoughts, I could be missing something?

Best of luck to you!

Chris:

I am going to assume that your student loans are "federal" student loans vs.private student loans...

I would definitely continue to accumulate savings in preparation for investing.  

If you've got a goodly amount of capital, it is easier to build it.  Capital attracts capital.

Further, if you fall into hard times or something goes wrong, you can get all sorts of deferments with student loans that you can't with other forms of debt.

Or, you can take the middle path.  Continue to accumulate savings BUT pay double monthly payments on your student loan debt going forward.

Good luck!

Paying down your debt is a guaranteed return. Debt is like a negative bond. Paying it off is mathematically equivalent to buying a zero risk bond at the % of the debt you paid off.  

If your debt is 3-4%, I might comsider paying more slowly and investing. If your debt is 5% or greater, youll be hard pressed to find any 0 risk return investment anywhere that can bring the same returns as paying down your debt. 

Money saved is money earned. 

Appreciate all the responses so far. Especially Ken's; your perspective is well-articulated.

Robert, you're correct, these are federal loans. They're sitting at 6.125% fixed, which is part of the reason I'm considering wiping out the loan.

@Chris Williams - as others noted above.. any interest >5% and I would pay it off as soon as possible.  If you happen to have govt loans (e.g. 2-4%) and you owe $20K on those, then perhaps keeping the debt a little longer is better so you can acquire real estate for the goal of having more money, to pay down your debts faster over the years to come. 

For me, for every house I flip to rent.. once I refi, if there's extra cash on the table I pay down student loan debt.  Mine has been wiped out for years (thanks to real estate investments) and my wife's is the next goal (we just paid down another $30K recently after another flip to rent project).  

I'm all about paying yourself first.. and that includes eliminating debt. 

Many may not agree with this but I would put the loans on a 25 year type of program (graduated or interest only or the plan that looks at your income) for about 4 years and buy dirt cheap investment properties for less than $40,000 all in (so 30k purchase price or lower and 10k to rehab or less) and rent the properties for north of $675 a month. Think it isn't possible? I just did it. In about 4-6 years buying 1 property a year with rent saving (you may have to borrow from a credit union/someone to help with the next two-three purchases) you will have enough snowball rent coming in to buy 1 or even two a year, pretty soon you'll have money you don't know what to do with so switch to paying the loans to full term and aggressively get rid of the debt. Good luck!

I am enrolled in the public service loan forgiveness program. At 10 years of making income driven payments my loans get wiped out. In a situation like that I wouldn't pay them off. If you don't qualify, I would probably just knock them out. Get rid of the bad debt so you can take on more good debt.

It really depends if you think you can make more than 6.125% percent from real estate or other investing you should do that. For example, if you are given the opportunity to take a 5% interest rate loan on a car or pay it in cash you should probably take a loan because on average the S&P grows roughly 7% accounting for inflation; investing in real estate, however, has potential for a much higher rate of return. 

@Chris Williams I never had student loans, i finished both bachelors and masters without bad debts. Good debts I have a ton, where I borrow money to make money. Even my car/truck makes money almost every mile it goes to somewhere.

Originally posted by @Jonathan R. :

Many may not agree with this but I would put the loans on a 25 year type of program (graduated or interest only or the plan that looks at your income) for about 4 years and buy dirt cheap investment properties for less than $40,000 all in (so 30k purchase price or lower and 10k to rehab or less) and rent the properties for north of $675 a month. Think it isn't possible? I just did it. In about 4-6 years buying 1 property a year with rent saving (you may have to borrow from a credit union/someone to help with the next two-three purchases) you will have enough snowball rent coming in to buy 1 or even two a year, pretty soon you'll have money you don't know what to do with so switch to paying the loans to full term and aggressively get rid of the debt. Good luck!

 
This seems like a risky situation for someone who is A) OOS (No 40k houses are anywhere near the Bay Area) B) Someone who likely doesn't have the resources/team to manage this kind of asset.

This will likely be hands on type management and you'll need to be local/know the area.

Based on what you put in your post I would pay off the loan. The question to me is always opportunity costs, i.e. what else would I be doing with the money if I did/did not do X. In your case, if you don't do X (pay off the student loan), you will be doing nothing with the money. Alternatively, you can earn a guaranteed 6% return for the next several years (the interest you would have paid on the loan), which makes sense in my book. 

Not sure how much your loan is but what about splitting it up? Would it be possible to do a OOS investment and pay off a good chunk of the loan. Then you could roll your cash flow or even entire rent checks into the student loan if you could afford the mortgage. 

Used to be I would only pay things off at interest of 10%+ like credit cards.

Now that I've been out of consumer debt a while and am further along, anything at or above 6% gets focused on and punched in the face.  3 mortgages down so far!

How much is the balance @Chris Williams ?  Less than half your annual income?  Pay them off.  

Student loans are a little different than regular debt in that they can be forgiven in cases of death or disability.  They can also be paid off by employers in fields of need.  Are you in an occupation that has loan forgiveness after x years of service?  2 of my sister-in-laws have that - a teacher and physical therapist.

One nasty thing about student loans is how they look on your credit report.  My wife and I were down to $7500 when I paid ours off because they were adding like 12+ pages to our credit report and nobody could figure out how much we had.  Tougher to get loans that way back in the day!  

Congrats on saving what you have so far.  Paying off debt is never a dumb decision.  Buying crap you don't need is!

I say pay off the student loan if you still will have three months emergency. That'll free you up to save more without that monthly payment. Then get a side hustle to supplement your income. My wife and I smashed all our debt (except for primary residence). Now we have a lot of freedom with where we put our money. Sometimes you have to bust your a$$ today to relax on it tomorrow.

@Chris Williams Have you looked into financing options from places such as SoFi or other players that sometimes can offer better rates than what you currently have given it's at 6.25%? I'm all about risk and all of my loans besides the minimum payment are outstanding because I would rather invest and build assets than pay down but at 6.25% may be worth paying down a chunk given where you are located. Since you don't plan on moving for a while you'll essentially be burning money at a 6.25% rate per year until you move into an area you are able to afford to invest in given the Bay area is insane. That means if it's 1 - 2 years out you'd need some pretty great returns, especially if you factor in the time value of money, to offset the benefit you'd be getting from paying off those loans.

Regardless of what you do.. Best of luck!

Pay off the debt since that has zero risk. Even if you could get double digit returns in RE (tougher to do in this market now) that has much higher risk than paying off student loan debt. 

@Chris Williams

If I put myself in your shoes I would right away say get rid of that debt first. I can kind of relate to your story. I have a significant annuity ($20,000) from my workers union that I'm debating on using for a live in flip, or buy, fix, and rent, refi, repeat. (BRRRRRRRR). However, I have some credit card debt that is costing me a lot per paycheck (bi-weekly) because I am paying off my debts with balloon payments. I owe about $13,000 in credit card debt. 

I found some useful insight in Scott Trench's book, Set for Life. It put me in perspective. Even though I work out the numbers in my monthly budget, the amount of money I could save per paycheck will be amazing; if it was not going towards my credit cards.

I feel once your debt is not dragging you down anymore, your mind becomes more clear and your saving becomes exponential. This is also related to living a frugal life for the first few years. Also with all that money saved, the time you would be worrying about paying your debts, you can now use that time to decide which aspect of real estate investing you would like to pursue. 

My ultimate goal is to pay off my debts right now and begin saving for properties I can fix, buy and hold for rental income. This goal also keeps me motivated every day to get this debt paid off as fast as possible. I'm 28 years old now and engaged. I wish I thought this way before I charged up those credit cards. But you can't dwell in the past, only improve the future. Good Luck hope that short story was helpful.

@Chris Williams if I could offer you a tax free investment that would give you a guaranteed return of over 6% with NO RISK, would that be of interest to you?

Thanks to everybody who posted. I'll put responses in this post so I don't clog up everybody's alerts.

@Ken Min: I didn't actually know what "Subject To" meant until you posted it. Now I do. Very useful piece of advice.

@Jonathan Roper: If I could find deals like that around here, I'd have bought eight by now! Unfortunately, as Matt said, no such deals exist anywhere near me. The Bay Area is utterly obscene with RE pricing. Even a mortgage broker friend agreed, advising me not to buy anywhere in the region. Now, I also know guys who do deals and make money here, which is great for them. I just don't have the numbers for it.

@Matt Katsaris: I'm glad to look at OOS investments. Just not sure where I want to do that yet. I have friends in a couple of markets purportedly growing, but all of them tell me not to invest there. More research and education required.

@Steve Vaughan: The balance now is about 35% of annual income. I've paid on it a little over 10 years to get there. My savings took some serious hits in the past couple years (Dad died, had to help Mom get a new place). Otherwise the loan balance would be about 10% of my income and we wouldn't have this thread.

@John Spina jr: Sounds like you have solid goals in front of you. I've got a few years on you, but mine aren't so different. Hope you stick to it and come out in great shape later on.

@Joe Splitrock: Nice way to make a point.

I have a review coming up at work. Once that's past (I assume no problems), I will pay the loan off. Then divert those payments (plus a little more) into a separate account for real estate saving. By the time I leave the Bay Area, I hope to have enough in there to easily jump in!