Student loans OR Four-Plex? (Dave Ramsey or BP?)

24 Replies

Hi everyone!

So My fiance and I bought a SFH in an A class neighborhood with a VA loan and little down last year when the market was "hot". Needless to say, almost immediately we realized what just happened.

We then read RDPD and the BP recommended books. Additionally, we often listen to Dave Ramsey. While we are not eating on beans and rice now, we are curious what people's thoughts are on "Starting Out" while having student debt.

We currently have a plan in place that we are following to get out of SFH and into four-plex to house hack then do our debt snowball.

Would love to hear if anyone else had similar stories or their PO.

Mike

@Michael Hanks I have read Dave Ramsey's book, and a lot of my friends have gone through the financial peace program. It is a good program for those who are really bad at managing money or who are sunk in debt. I personally wish that I had not wasted time paying off student debt. I could have easily paid off student debt at one of the refinances or sales of properties over the years, and it would have been way less work than scrimping and saving when my income was lower. 

I would take the good parts of the Ramsey program (don't buy junk on credit, avoid new cars when you are starting out, etc) and focus on making very smart investments in real estate. You will eventually be able to pay off the debt by using income from properties, appreciation you capture through refinances or sales, etc.

I think as John pointed out, it depends on your level of financial discipline. In the short-term, paying off your student loans is nice but, by invested in the right assets now, that money you use to pay them off will better serve you in the long-term.

Hi Michael,

I think you need to look at the interest rate of your student loans. Are they low 3% or 8%? If its 8% you need to ask yourself can you get a better return than 8% if you invested with ZERO Risk? I think sometimes people forget when you invest in RE that there is a risk. Just because you buy a 4unit doesn't guarantee success. If you are not properly leveraged or have too much debt it can put you into an awkward position and make irrational decisions.

For me, this is about risk and debt to income ratio.  What will your debt to income ratio be if you bought the 4 unit?  If you are at 45% with the rent income then don't do it you are way over-leveraged.

It depends on what % interest your student loans are at. 

Can you get a better return on your money than what interest you are paying on your student loans?

My wife and I are in a similar situation where she is studying to be a Nurse Practitioner, and will incur student debt throughout her education. Part of me just wants to pay it off in full, another part of me wants to purchase more property/stocks. 

At the end of the day, I think it would be smart as a first time landlord to go into REI with minimal debt and some reserves in case the deal turns sour.

@ Frank Wong - To your point of back-end D/I ratio, where we are now with our SFH with no rental we are at 29% back-end with front end 18%. (I think I did that right?)

Would you be able to guide me how I would calculate the D/I ratio with a four-plex? (still new at this)

Combined Income after taxes, before mortgage - 10,500

Mortgage - (2,320)

Loans (student/car etc) - (3,850)

Student Loans for Me: 6% or less (Veteran Caps applied) 

Student Loans fiance: 7%

Thanks everyone else for comments! It was great hearing your thoughts as they align with what I've read and heard regarding investing first then re-evaluate!

Mike

Originally posted by @Frank Wong :

@ Frank Wong - To your point of back-end D/I ratio, where we are now with our SFH with no rental we are at 29% back-end with front end 18%. (I think I did that right?)

Would you be able to guide me how I would calculate the D/I ratio with a four-plex? (still new at this)

Combined Income after taxes, before mortgage - 10,500

Mortgage - (2,320)

Loans (student/car etc) - (3,850)

Student Loans for Me: 6% or less (Veteran Caps applied)

Student Loans fiance: 7%

Thanks everyone else for comments! It was great hearing your thoughts as they align with what I've read and heard regarding investing first then re-evaluate!

Originally posted by @Michael Hanks :

Hi everyone!

So My fiance and I bought a SFH in an A class neighborhood with a VA loan and little down last year when the market was "hot". Needless to say, almost immediately we realized what just happened.

We then read RDPD and the BP recommended books. Additionally, we often listen to Dave Ramsey. While we are not eating on beans and rice now, we are curious what people's thoughts are on "Starting Out" while having student debt.

We currently have a plan in place that we are following to get out of SFH and into four-plex to house hack then do our debt snowball.

Would love to hear if anyone else had similar stories or their PO.

Mike

 Eliminating or reducing debt is great. But let's put things in perspective. There is good debt & there is bad debt. A 30 year loan on a 4 flex is the best debt one can get. I'd never pass on the opportunity to pick one of those up if you're debt to income ratio is high enough to get the loan you should go for it.

Dave Ramsey is training wheels. It's great to start out, but after you get the hang of it you want to go faster. Student loan debt is probably at about 5-6% I imagine. Or you can start making 15-20% gains in real estate. Nothing takes precedence before paying off credit card debt. But then you have to start doing some real thinking. Opportunity cost. Heck, I still have a car loan. 2.5%, bought used and saved $20k over buying new. But I'm not paying off that 2.5% loan early. As a matter of fact, if anybody wants to loan me a million bucks at 2.5% I'll take it!! Lol. 

@Michael Hanks pay off student debt. Especially at 7 percent. That’s a guaranteed return of 7 percent. You’ll never get that guarantee in rental property.

Pay off the debt. Why would you take more debt before paying off other debt? If one of you loses your job, you could easily be screwed.

The problem with taking advice from those on here that invested with student loan debt is that it has not come back to bite them...yet.

It is financially unwise to begin investing with the intent to use it to pay off bad debt based primarily on the fact that most investors starting out will fail. Your bad debt is a albitros that will pull you under when the road gets rough, and it will get rough. This usually leaves them much deeper in debt and far worse off. They are not on here to advise.  

@Thomas S. But Thomas if you pay down your student loans ahead of time you'll be letting all your money sit as dead equity in your student loans. Best to invest that money somewhere else and earn a higher return.

Please note this is sarcasm lol

@Michael Hanks

Personally I would get a four unit and use the rental income to help pay down the student debt . Let the tenants pay for your schooling . However I do see the value in both options though . Caleb makes a good point here but so does James wise .

I think @Caleb Heimsoth and @Thomas S. have a point you should think through. I invest in real estate with student debt but I’m a cash buyer. All my stuff is owned outright and can be sold to pay off the loans if I ever get in trouble (job loss, wage garnishment etc). Securing debt on a property as a beginner with outstanding student loans puts a level of risk even a passionate go big or go home real estate investor like me would be concerned with. I’d try to be a cash buyer if you can till you know the game. Perhaps that means partnering with family or friends on a less expensive deal. You have to find an insane deal though that returns well above the 7%.

@Michael Hanks unless your student loan payments are big pmts in relation to your income then no. If your in growth mode your going to acquire debt. Keep your cash available to do more deals.

I have read all of Dave Ramsey’s books I love what he does, there is a huge need for financial education in this country, but it’s very beginner level finance.

@Michael Hanks Hey Mike first off, thanks for your service. My biggest question is, assuming the other three units are rented in your four plex what would be left over for you to pay? Obviously you should have reserves in place to cover vacancies but if your able to save yourself $300-$1000 a month that money could go towards paying off your student debt much faster.

The second question is, do you have equity in your current home? If you sold it and used just 3.5% down on the fourplex you could use that equity to pay your debt off in full. The only debt you would then have would be the rental.

I think it’s silly to delay investing for several years simply because you have student debt, so long as your not paying outrageous rates on it.

@Michael Hanks btw I should add my wife and I found ourselves in your position several months back. We decided that selling our primary residence to pay off debt and then house hack would be a huge step in the right direction. We’re currently in escrow on a duplex and have sold our home.

@Michael Hanks . I would pay off your student loans and have your fiancée pay off her student loans. Once you are married then it is your debt together. I would not pay off a partners debt.

Once you knock out these loans together, I would then invest in a multiplex but only with legal documents drawn up in the event of a break up unless you plan to marry first. Right now she is your business partner so I would draw up legal papers with a lawyer’s help before investing further together.

@Michael Hanks I'm in the same boat myself. Our student loan payments are low enough that we are just planning to wait and use the money we save for a househack. I think it just depends on the interest rate and how much money a month you have to pay towards it. If it is too much, then you may set yourself up for disaster if something bad does go wrong. You should recognize the risks, but don't let that hold you back! Good luck whatever you decide to do!

Originally posted by @Michael Hanks :

Hi everyone!

So My fiance and I bought a SFH in an A class neighborhood with a VA loan and little down last year when the market was "hot". Needless to say, almost immediately we realized what just happened.

We then read RDPD and the BP recommended books. Additionally, we often listen to Dave Ramsey. While we are not eating on beans and rice now, we are curious what people's thoughts are on "Starting Out" while having student debt.

We currently have a plan in place that we are following to get out of SFH and into four-plex to house hack then do our debt snowball.

Would love to hear if anyone else had similar stories or their PO.

Mike

 I think Dave Ramsey offers great advice for a lot of people who are poor with managing money, i.e. constantly buying junk they can't afford. That might not be you though, and so you have to take his advice with an eye to your specific finances. 

I had law school student loan debt, which is now paid off, BUT I was finishing school right after the last crash, and if I knew anything about real estate back then, I would have absolutely started investing as early as I could, even with student loan debt. The long-term growth and cash flow or real estate is too attractive not to.

I think maybe you could start out, as you said, house hacking, or with a small investment (like a single family rental in a lower cost town, after putting a team in place to manage it), and keep working on student debt. As you pay down the loans, you'll have more ability to invest. However, if possible, getting started sooner than later is a good idea, so I would say that having some loans should not be an absolute bar to doing deals. 

@Michael Hanks , I was FIRMLY in the pay-off-your-debt-before-investing camp until I recorded episode 35 of the BiggerPockets Money podcast with @Craig Curelop . He invested instead of paying down debt, and now his investments ARE paying down his debt. He explained it in a very easy to follow manner that changed my mind. www.biggerpockets.com/moneyshow35 or on any podcast app.

@Michael Hanks You can choose yo pay it down or choose to let others pay your debt down.

Dave is practical and he is inspirational with his discipline. The common sense he teaches is not so common.

It is a great place to understand the discipline it takes and from there grows the question, "How can we?"

Unlocking leverage on our end was a great way to start, to build a future portfolio that considers risk and reward.

Financial peace really is possible and figuring how to do it has been the greatest experience to date.

I choose the chance to financial freedom and can't imagine not making that choice.

All the best!