Pay Off Student Loans or Invest in Real Estate?

16 Replies

Hello BP!

I am a recent college grad, and have been lucky enough to graduate with a relatively low amount of debt compared to the average grad. I have been actively paying off my debt each month, and at this time, I have about $16K left to pay.

Over the past couple months I have become more and more serious about investing in real estate. I've spent a majority of my free time educating myself about the process by reading books, forum posts, listening to podcasts, etc. So far, I have set my first goal of purchasing a residential MFR property in 2018 in the Metro Detroit market.

My question here is - would you pay off the rest of your student debt before investing in a rental property?

Let me know!

Hey Brandon,

It depends on many factors including the interest rate (and type) of the debt and how much cash reserve you have. In general, I'd recommend making sure that you've secured one income stream (typically your W-2 job starting out) and building up some cash for emergencies before investing.

Hey Brandon,

I'm currently still in college and own a few rental properties in the Metro Detroit area. I owe about 7k in student loans thats to be paid over 10 years. I would recommend making sure you have consistent cash flow (job) and reserves. I usually pay a 100/month on student loans which is over my minimum payment to help pay it off sooner. If your financial situation allows you I would budget for both saving for you MFR and debt paydown

@Keyonte Summers Hey Keyonte - you own a few rentals and are still in college? That's impressive! I'd love to hear your strategy/game plan on investing while in school and with debt.

As of today, I have about $16K left in debt. I do have a secure, full time job that I have been at for about 2.5 years. I am also paying off my loan well above the minimum payment.

Originally posted by @Brandon Jurczyszyn :

@Keyonte Summers Hey Keyonte - you own a few rentals and are still in college? That's impressive! I'd love to hear your strategy/game plan on investing while in school and with debt.

As of today, I have about $16K left in debt. I do have a secure, full time job that I have been at for about 2.5 years. I am also paying off my loan well above the minimum payment.

Yes, I purchased my first home in 2014 I just turned 22. I am far from a success story as I had to learn to budget well. Since you have a full-time job I would focus on reducing an bad debt (credit cards, medical bills, small loans,). At the small amount of student loans you have you should be ok applying for a mortgage. Make sure you credit score looks good and your financial paper work is in order. I took any bonuses, tax refunds and saved them for my next property of paid my mortgage down. I own one home free and clear rented that out and bought another, after having a tenant in for a year I got a HELOC and bought cash to purchase more rentals. Its like the BRRRR strategy but I used a HELOC because the flexibility. If you need any help planning, or possibly want to partner up on a deal in the future let me know and we can talk thing through.

@Brandon Jurczyszyn - I've been out of school for 10 years now and still owe over 20k in student loan debt. My interest rates are so low though in comparison to the return on capital I get with my real estate investments it just doesn't make any sense for me to pay them off. When the balance on one of my loans gets below $1000 I usually write a check to pay it off...but otherwise...they'll be there for awhile. 

That having been said...if I ever decide to quite my full-time job and live off my passive real estate income, I'll pay off all my outstanding debts first in order minimize the amount of of cash needed to live off.

At your age and at this early stage of your career I’d be aggressive. Buy a MFR of 4 units or less as your primary residence and house hack. This assumes you qualify based on income and credit. If cash is an issue consider FHA loan. Some costs are higher but out of pocket to close may be much less. Once you get in the property you should be able to pay off your student loan quickly.

@Brandon Jurczyszyn

Hi Brandon,

Tough question to answer. If you feel terrific getting the loan off your back, then pay it off and you will never think of it ever again.  Your focus will never be on that debt again. That is priceless.

If you find a terrific deal that cash flows and helps pay off the debt quicker while you build equity, that may be the right path. I think either choice is a great plan.

You seem to have a very good handle on your finances and are focused on what you want to accomplish, two keys to becoming a successful investor.  Work on your financial and mental game first, before investing.

Good Luck

Gino

@Brandon Jurczyszyn Voice in the wilderness here.  

A mature market is not good time for speculation and new entry without caution.  Returns are being pinched.  And you're hearing some very experienced folks slowly selling off to get into cash for the next correction.  I'm not talking about tomorrow but it will come. 

Student loans don't disappear (unless you get into one of the special forgiveness programs).  They affect your borrowing capability tremendously.  And they're no bargain interest wise.  Pay the student loans off.  Get in a strong cash and lendability position and be ready to buy cheaply from someone who entered into a late market without enough staying power.

@Keyonte Summers

Thanks for tips on saving up going forward. Outside of student loans I essentially have no debt. I'm 22 right now, so it seems like we are a similar spot to start off.

That's awesome to hear that you own a house free and clear, and I like the tweak on the BRRRR strategy with the HELOC, that seems like a move worthy of being on the BP podcast!

Being in college full-time (I'm assuming?) do you landlord yourself or have you hired a property manager?

@Gino Barbaro

Hi Gino!

Thanks for the reply and advice.

I agree, I think both options would feel great - especially finding a great deal! Your last comment resonates with me particularly, and seems to be a point many people make on the BP podcast; you need to have a solid grasp for your own finances as well as a good understanding of what you're getting into with investing.

It's definitely a lot to think about, but I strongly feel the effort is worth it. Thanks again!

With $16K left if you currently are working a FT job, I would get a 2-4 Unit.  Live in a unit, rent out the rest.  Eliminate your housing cost, pocket some money, and pay off your loan faster.  Prices are a little high right now, but maybe buy a fixer, thats you can get slightly devalued. Put it like this, if you park $10K into the asset, and its cashflowing nice, who cares if there is a correction. You are trying to get in the game.  Obviously don't overpay, but everyday your money isn't growing its losing value.  So have it in the stock market, RE, business venture, etc.

Once you have a few properties and a couple hundred thousand then start trying to mitigate risk.  Right now all you owe is Uncle Sam $16K.  If you get hit by a bus tomorrow he is out the money.  Might as well invest what you have.

Originally posted by @Brandon Jurczyszyn :

@Keyonte Summers

Thanks for tips on saving up going forward. Outside of student loans I essentially have no debt. I'm 22 right now, so it seems like we are a similar spot to start off.

That's awesome to hear that you own a house free and clear, and I like the tweak on the BRRRR strategy with the HELOC, that seems like a move worthy of being on the BP podcast! Being in college full-time (I'm assuming?) do you landlord yourself or have you hired a property manager?

 Correct again I am full-time in school and I landlord myself but when I run my numbers I still factor in the PM cost just incase I decide to hire one in the future. You are in the prime position to start investing ever though of house hacking? 

@Brandon Jurczyszyn   Find the people you want to model yourself after and ask what they would do?  Considering that student loans are a tax writeoff, and so is investing in real estate, it does not make sense to give up any power you have of compounding and making your money work for you.  Millionaire real estate investors focus on leverage not debt payoff.  Unless your student loan interest rate is out of control that is only situation I'd consider, and if that were the case I would seek refinancing before considering paying it off.  With 16k left you can make that off of one flip.

@Keyonte Summers Factoring for a PM regardless sounds like the smartest way to do it. How much do you set aside just in case you decide to hire? Depends on the property/deal I would assume?

As for house hacking, yep that is exactly what I am looking to do. Everything I've read on it makes it pretty clear it's perfect for starting out. I'm just working on establishing a budget and a target market right now.

@Casity Kao thanks for the response Casity! It sounds like the general response from this post is to just continue paying them off over time.

I see you’re from Grand Rapids, do you have property in the area? I’ve heard positive things about investing there - would love to hear your story!

Originally posted by @Brandon Jurczyszyn :

@Keyonte Summers Factoring for a PM regardless sounds like the smartest way to do it. How much do you set aside just in case you decide to hire? Depends on the property/deal I would assume?

As for house hacking, yep that is exactly what I am looking to do. Everything I've read on it makes it pretty clear it's perfect for starting out. I'm just working on establishing a budget and a target market right now.

I always set aside 10% of gross rent on each house for PM even if you manage it yourself you can always set in reserves or cash flow at the end of the year.

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