Pay Off Student Loans or Invest in Real Estate?

Question

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!

James Masotti · Answer

@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.

Christian Hutchinson · Answer

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.

Keyonte Summers · Answer

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

Dan F. · Answer

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.

Keyonte Summers · Answer

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.

Brandon Jurczyszyn · Answer

@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 · Answer

@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 · Answer

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?

Pay Off Student Loans or Invest in Real Estate?

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