Pay Student Loans or Invest

15 Replies

Hello everyone, 

So I just graduated as a pharmacist last year and like most health professionals I graduated with massive debt. I've set my mind to be aggressive in paying my debt (4-5k a month), which would allow me to clear my name in 2-3 years, however, it's psychologically and physically draining. I feel like I'm running in place. I can certainly tough it out another couple years and pay off my debt, but I wanted some advice on whether investing on rental properties is a smarter option. Some facts about me that may apply:

1. My student loans run at 5% or less

2. I'm just beginning to learn about real estate

3. Because of my lack of experience, house hacking is probably the only viable option for me

4. I live in metro Detroit, so far I haven't encountered very good deals. I'm not sure if it's the area I live, the economy/market, my house hunting abilities or a combination of all three

Thank you in advance for your thoughts!

@Adnan M. That's a tough question that a lot of people are trying to figure out. There really isn't a straight answer because it depends on how you are wired. For some people, the burden of the loan debt can be incredibly powerful and take a major toll on you. Based on the numbers you provided (5% or less interest rate), it would likely be in your best interest to start investing sooner rather than later as you can make your money work for you better by investing it.

Considering your experience level, my suggestion would be to build up capital to invest over the next year while still paying down your student loans (though maybe siphoning some of that 4-5k/month toward investment capital) so you can take some time to learn the fundamentals, network with other investors, find your market and niche, and have the capital ready to put to work in a year or so.  

House hacking is a great option, but it certainly isn't the ONLY viable option for you.  Figure out your goals, then work backwards on how to get there. Best of luck. 

@Adnan M.

What's to prevent you from doing both? Your Debt to income ratio will really be the driving factor in your ability to get your hands on the cheapest financing options (FHA at 3.5% down or conventional). If you are able to borrow, then house hacking may be the best way to pay off your student loan the fastest. By that I mean if you eliminate your housing expense by taking on a roommate or roommates in a house you buy. This will free up extra capital to pay off your loans faster or reinvest.

In the meantime, there is nothing stopping you from analyzing a few properties a day. That way you can recognize an awesome deal when you come across it.

I don’t think this is an either or decision. As with anything, optimal might be somewhere in the middle.

@Scott Passman It is difficult to figure out and you're right, it's all about my own personal tolerance which I'm learning more about as time goes on. In terms of other possible options outside of house hacking, what other suggestions might be risk averse for a newbie? I feel like wholesaling requires a lot of experience and time both of which I don't have, and the same with flipping. 

@David Kramer You make a great point. Rent is my biggest expense and I feel guilty with every payment I make because I know it can go toward an investment. It's just an issue of finding the right deal that fits the criteria of what I learned on the podcasts. I guess I'll just keep analyzing properties until I see the right one. 

Thank you both for the great advice

@Adnan M. Every situation is definitely unique. In the meantime, even while renting there are ways to cut back on the housing expense. I’m in a similar boat - my wife is finishing up Veterinary school and I have been making payments on her loans while in college while still getting my second rental under contract last week.

Some people will disagree with that and tell you to pay off consumer debt completely before investing. And that very well might be best for some people. But like you said, you don’t want to completely burn yourself out slugging that out over the next 2-3 years and then just be STARTING your RE education and deal searching.

Invest first...then have your investment profits/cash flow pay off the student loans.  After the SL is paid off, you still have that investment profit/cash flow coming.  So, use it to pay off another debt, and so on...

If you pay off the SL first, that money only lived once, then died.  If you invest first, that money can live to infinity.

This is a personal decision that only you can make. Consider your future goals and where you see yourself in 5,10,15, and even 30 years from now. All of us tend to consider the short term and don't truly realize how long we have to live, invest, etc.. Personally, I decided to buy real estate young and slowly pay down my student loan debt over time. With the amount of money I've invested I could have nearly paid off all of my student loans (similar to you around 5-5.5% interest on SL debt). However, I choose to think that if my cash flow covers my loan payments and generates a higher annual cash on cash return than interest on SL debt I'm ahead. Not to mention any appreciation and tenants paying down my mortgages.

In your situation you may be better served by clearing your debt first being as though you are in a field that has a well above average pay-scale. Learn about investing in RE in the meantime but more importantly become an expert in the market you are looking to invest in. Meet other investors in your area. If you have the ability to pay down SL to the tune of 4-5k per month after paying down your debt in 2-3 years it will take you no time to obtain the capital necessary to invest. 

Best of luck!

Adnan, first and foremost, congratulations on graduating and starting your professional career.  Many of my clients are medical doctors and they also come with large student loan debt - which is really an investment you made in you and your future (the best kind of investment!) . My recommendation is this:  give yourself a break.  Make the regular payment, save some of your earnings for your real estate investment future, and live a little.  The economy is expected to continue to slow this year and next - and with it will come reduced prices.  You'll need 25% down to buy as an investor - or you can buy yourself a home for 3% down and stop paying rent.  The good news is you have options and time on your side.  You've worked hard to get your degree;  being a successful investor takes a great deal of knowledge.  Take your time to learn and wait for the right opportunity.    

I started investing with quite a bit of student loan debt. I agree with @Joe Villeneuve , opportunity cost, if you can get a higher return in real estate you should do that. Once you pay extra money to the student loans, it’s gone. If you are worried, you might try and start out as a cash buyer, sounds like you make great money. Detroit has plenty of inexpensive real estate. I buy around the 30k or so range. But buy where you’re comfortable. Grab a couple paid off properties and then your tenants are the ones paying down your student loan balance, that’s what I did. I hold enough in assets to pay off the student loans now two years later, but why do that? I’ll keep paying the minimum and buy more real estate. The student loan money is there, I just have it on the monopoly board.

@Adnan M. Long-term buy and hold is pretty risk averse. When you combine cash flow, appreciation, tax benefits and the loan paydown you get from tenants and extrapolate that over 5, 10, 20 years the compound effect is amazing. The key is to know your numbers and fundamentals and don't just buy a property for the sake of getting something.

Other than house hacking, if you want to get involved with real estate sooner rather than later but feel limited by time constraints, lack of knowledge etc., turnkey is another option to look into to get started and build up some experience.  You could also look to connect with others in your area to partner up on a deal.  If you can put 4-5k/month into loans you obviously make good money so you could bring money to a deal with a partner who is more experienced and go about it that way.  Lots of options to start putting your money to work. 

@Adnan M. ,

I house hack in Dearborn, 3.5% FHA, Duplex, I do not live for free. I think podcast and others say live for free not realistic very hard to do BUT I do live cheap. I pay like $300 a month in rent.

I bought a free and clear property in Detroit. Cash flow about $550 a month. 

Now I am going to pay off all this debt with my job and rental income. But I will still have my properties. 

The answer is very simple: Do both.

Right now aggressively pay down debt as your learning real estate, maybe $3000 a month into debt and $1k into savings. Save maybe $10,000 in 10 months ( if you need a lender and agent I got you lol, my friends will make it easy and cost less for you). Now you are doing both, right!

You do not have to listen to the gurus that say house hacking you have to live for free. If you pay only a couple hundred dollars a month to your mortgage I don't think you will complain. Let's say right now you are paying $1200 a month in rent. You house hack you rent payment is $1200 but your tenants pay $800 of it. Now you only pay $400 a month compared to $1200 a month. You put that $800 a month from house hacking in savings. 3 years of saving just on rent you have $28,800 now you buy a house in Detroit all cash in a nice area and it is free and clear. Now you cash flow $500 a month. You have two properties, and during those 3 years, you probably come close to paying off the debt if you stay on that $3k a month to the loans.

That is a 4-year plan with real estate involved (2 properties) and maybe no debt. Right now you would pay off the debt in 2-3 years but no real estate. 

To me its a no brainer if the cash flow can cover most if not all the payments..

Even if you house hack you are at benefiting from reduced living expenses which you can put towards the payments as well 

Here are some crazy numbers just to give you an idea of how powerful your income is using @Jamiel Strickland ’s example. Let’s say you defer or forbear your student loans for those same 4 years or put them on a graduated 25 year plan to pay minimally while you build up your cashflow and portfolio. After year one of saving $4800 a month you can buy 2 properties cashflowing $500 a month net so $12,000 in cashflow at the end of year 2 (since it took you a year to save). By the end of year two you buy two more properties at $28,800 a peice with just saving your income of $4800 a month for a year. By the end of year three you use your cashflow from year two of $12,000 and cashflow from year three of $24,000 (since you have 4 properties now) to buy one out of your $36,000 in total cashflow to begin year 4 (you still have $7200 in the bank). In year 4 you buy two properties (you have 7 properties now-with 5 cashflowing that year) from saving your income of $4800 a month. So, to begin year 5 you can buy another property ($30,000 in cashflow + $7,200 in the bank= $37,200-$28,800= $8400 still in the bank). So, to start year 5 you have 8 properties netting you $4,000 a month, you have $230,400 in total assets and $8400 in the bank. 

These numbers may seem too good to be true, they aren’t, this can be done, I’m doing it right now. My above numbers are ignoring appreciation, and rent increases even. Not to mention I think you can do better than $500 a month net cashflow per unit after you buy a couple. The last property I bought for 19k with a 10k rehab rents for $795, so closer to $650 a month net. This dream is possible. Play monopoly, pay the student loans off when you are at a pivot point in scaling and are swimming in your cashflow and can’t get your money on the board fast enough. Just my .02. Good luck in your decision.

@Adnan M.   Have you looked into the Government Student Loan Forgiveness Program for Pharmacists? Paying a percentage of your loans for 10 years and then having the balance forgiven would be the first step I would look into. Then determine how much is left to invest in real estate. 

@Adnan M. There are about a billion threads on this. Pay off student debt. Then invest. 99 percent of the time that’s your best option

Originally posted by @Adnan M. :

My wife is a pharmacist as well.  She is still paying her student loans... after 8 years we are almost done with them.  5% is a good rate, we've had subsidiary loans less than 5%, but these are already paid off.  Non-subsidiary loans runs about 6.8 to 8%.  We still have about $18K to go through, paying them off this year.  If you are a PharmD and RPh, you are or will make enough not to worry about student loans.  Piggy bank the most you can and have enough to get started, then keep doing it, you will learn a lot in the process. 

Sometimes as REI you may have to pay rent. It's OK. Just don't do it very long. I use it as a transition form some properties to another.

Pharmacist are in very high demand on any state, you have the doors open.  I have to say we became investors way before my wife even had a single student loan paid off.