Lancaster, PA · Member since 2019 · 15 posts · 3 votes
Hello everyone,
I am a newbie here and am really excited to start diving into real estate investing! I am looking to start using the BRRRR method. I already have capital available for when i am ready to make my first deal. I wanted to know if my student loans will have a big impact on my ability to get the cash out refinances for my rental properties. I currently have $100,000 in student loan debt and my credit is good.
I still have a lot of research to do and have a lot to learn. Any input would be greatly appreciated!
@Chandler Colyer weigh your risk appetite, focus on your goals (set them ASAP if you don't have them), and figure out what's the best way to get there. If your DTI is at 25%, financing won't be a problem. So the decision comes down to getting out of debt vs getting invested in RE. Can you get a return on your property greater than the interest on your debt? If so, it may be worth it (with risk due to significant debt). If not, absolutely pay down your debt instead.
The good news is, you can do both. While nothing happens without action, action is better taken if well informed. Maybe the best choice is to spend the next year or 2 working, saving all you can, learning, and developing a network. This slow path may not get you what you want right now, but may be like a snowball and accelerate your growth in the future.
As they say, opinions are like ***holes. Plenty of people will tell you to invest now, an equal amount will tell you pay off debt now. Each person has their own bias based on their experience and risk appetite. Weigh all the options and figure out which one works best for you, but to do that there’s nothing more important than working towards a goal.
chandler - good question ..student loans are a bit tricky for lenders ...depending on the loan program and the status of your loans ...the payment used for qualifying can range a great deal .....are you student loans deferred ? or are you in an income based repayment program or is the payment on your loans fully amortized ?
@Chandler Colyer. The biggest issue you would have is your DTI ratio. You could have 100j in debt but if you make 1M a year In income, it's not a problem. If you have 100k in debt and make 40-50k a year then you may have some issues
@Caleb Heimsoth Thank you for your input. So im assuming many investors do not have student loan debt, or do they just have it payed off? Maybe a better plan of action for me as of right now would be to try and look for flip deals. I wanted to start buying and holding properties to start building long term wealth.
@Caleb Heimsoth Thank you for your input. So im assuming many investors do not have student loan debt, or do they just have it payed off? Maybe a better plan of action for me as of right now would be to try and look for flip deals. I wanted to start buying and holding properties to start building long term wealth.
I don’t think a flip is what you need right now. Just answer this question and I can provide useful advice. Roughly speaking, what is your current Debt to income ratio?
Take all your monthly debt payments (credit card, car loan, mortgage, student debt etc) and divide that total by your gross monthly income.
@Dave Skow Thank you for your input. I am currently still in college so my loans are deffered. I will not have to start paying on my loans for another year and a half. I didnt know if this would allow me to start investing now before i reach the end of my deferment.
@Caleb Heimsoth I really appreciate your advice. I was also thinking that but I didn't know if i would be able to get a cash out refinance since my loans are still in deferment.
@Caleb Heimsoth I really appreciate your advice. I was also thinking that but I didn't know if i would be able to get a cash out refinance since my loans are still in deferment.
Do you own any property? If not, what exactly would you be refinancing to get the cash out of?
caleb - if deferred -most lenders / loan programs will use 1% of the loan amt for qualifying purposes ..so if 100K of loans ..then 1K will be included in your debt/ income ratio
@Chandler Colyer weigh your risk appetite, focus on your goals (set them ASAP if you don't have them), and figure out what's the best way to get there. If your DTI is at 25%, financing won't be a problem. So the decision comes down to getting out of debt vs getting invested in RE. Can you get a return on your property greater than the interest on your debt? If so, it may be worth it (with risk due to significant debt). If not, absolutely pay down your debt instead.
The good news is, you can do both. While nothing happens without action, action is better taken if well informed. Maybe the best choice is to spend the next year or 2 working, saving all you can, learning, and developing a network. This slow path may not get you what you want right now, but may be like a snowball and accelerate your growth in the future.
As they say, opinions are like ***holes. Plenty of people will tell you to invest now, an equal amount will tell you pay off debt now. Each person has their own bias based on their experience and risk appetite. Weigh all the options and figure out which one works best for you, but to do that there’s nothing more important than working towards a goal.
@Patrick Menefee Thank you for the insight. My main goal is to build wealth through RE for the long term. With that being said i wouldn’t have a problem waiting a bit longer until I am in a better position to invest.
@Chandler Colyer building wealth through RE is a fantastic goal, but i want to challenge you. What does that mean for you? Is wealth $100k in equity? $1M? $5k/yr cash flow? What EXACTLY does wealth mean for you?
Figure out your number above...when do you want it? 5 years? 10? 30? What’s the timeframe?
I strongly encourage you to not make a single move until you answer each of these questions. “From x to y by when” is an incredible formula for success...it also means you’ve figured out x, y, and when
@Chandler Colyer I like @Patrick Menefee's advice... Without goals you cannot create action. Better yet, without goals thought out, written down, and reviewed daily action becomes pointless. With written goals set, you now have something to measure against and identify where you are going or a plan on how to get there. Otherwise, you will only be spinning your wheels. Answering Patrick's questions first will help you begin to get a feel for where you want to go. Create the plan and then look at your options.
Your debt ratio is good at 25%. What it tells me is you don't have a lot of consumer debt. Regardless of your income; you are managing your debts well based on the income you are earning. You can calculate the increase in your debt ratio adding the 1% of the student loan balance your debt ratio (credit debt/gross income). A borrower's debt ratio needs to stay below 45% when looking to purchase a home. When you are looking to purchase an investment property you can use the 75% projected rental income to offset the new mortgage payment. With this in mind, you can buy when you are ready.
Once you know where your debt ratio is and it's under the 45% buying a rental property comes down to how much money do you have saved for down payment and building a reserve account in case you were to run into a financial problem. As a general rule, investment properties require 20% down and 6 months reserves; $1,000 monthly payment requires $6,000 cash reserves in your checking account.
The other possibility is you could also take Scott Trench's advice in his book "Set for Life" and consider buying a home to live in using limited down and rent rooms out to your friends or others to offset the cost of your housing expense. Or look at a duplex, triplex, fourplex using FHA lending guidelines to buy the home. The opportunity here is less money down because it is a home you are going to live in.
There are many ways to start investing in real estate, this is why you want to start with your goals so you can begin making decisions on what your next point of action needs to be. It will be the best use of your time to start there and then continue gathering more information so you are making good decisions that will build cash flow or wealth.
Feel free to message me if you would like to talk in more depth about your goals and how to create your own strategy. I am always available.
I couldn't articulate @Tim Roberts comments better if i tried. The one thing i would add is watch out for timing...you said your loans are deferred for a year and a half, which may be what leads to your 25% DTI. When that ends, your DTI may skyrocket which makes getting a loan difficult.
Luckily, if you've heard anything Tim and I have said, it all goes back to your goals! Are you concerned about that debt? If so, then work on getting your future DTI below 45% by the time the deferment ends so you can invest. If not, invest before then to generate cash flow to help pay down your debt after the deferment comes due. To me, that makes goal #1 to generate cash flow, goal #2 to use that cash flow and all additional savings to pay own debt to loosen your future DTI.
The good news is, there are so many options! The bad news is, you have a lot to decide! So as we talked about, hopefully this all proves that EVERYTHING comes back to your goals. Set them, follow them, and let them guide you
Continue to ask questions... it's where each of us started and this community is built to help. I know I am looking forward to reading more forums and learning myself.
So you have debt, not untenable. If you have a job and w-2 and forward progression is what the lenders look for.
What do you have for a down payment and whats your gross income.
PA is a decent area to buy something because the lower price point.
Find a fixer, find a creative deal, partner up. See how much you can qualify for via FHA and buy 2-4 units those rents help you qualify. Find a fixer and do a HML [ just make sure you can get out with the refi on the other end. ]
$100k in debt is only about $600 per month. Get a second job to offset that. Whatever.
@Chandler Colyer I've got about 40k left in student loans. Some of my loans have an interest rate of almost 6% and I am trying to pay them off to eliminate the monthly payments and reduce my DTI. However, I've got one loan that is about 10k and the rate is barely above 2%. I'm planning on just letting that one run it's course with the payment plan since I can get a much better ROI on that 10k by using it as a down payment on a house, or as money I could use to rehab a house. Once all my other loans are paid off, for me at least, that 10k loan won't make much of an impact on my DTI.
@Chandler Colyer. That is a lot of debt for someone whom is still in school. Can you work crazy hours so that you don’t have to take out so many loans next year. I would focus on paying down the loans a lot before investing in real estate. And if you have money saved use that to pay for your education next year instead of taking on more loans.
@Patrick Menefee @Tim Roberts I will have to start there then with my goals. I know in 10-20 years I do not want to be working a 9-5 job. I wanted to start with a few SFH and then move onto MF. Thank you for being available and helping out a newbie like me lol. This is a great community.