Starting Out With Existing Debt

3 Replies

Hello all. New here from Phoenix, AZ. I am new to the game and have been reading / listening / absorbing as much information I can about beginning a journey in real estate investing. Before truly moving onto that journey, over the course of the past couple years, I have been on a very strict debt free journey. Just over a couple years ago, I was in a massive amount of debt, mainly student loans (almost 100k) and as of today, I have about 24k left to go and plan to be 100% debt free by August 2020. As I get closer and close to this goal, my mind is thinking about 'what's next?' which is what got me more and more interested in REI. My goal is to start out with a SFH REI, as this seems to fit my situation both logistically and financially when I am ready. Which leads me to my question with this post. Since I am still currently on a path to become debt free, along with trying to save as much money as possible (I have about 10k in savings), should I just stick with this 'grind' for the time being and continue to educate myself in REI? I will admit that I am now extremely gun-shy of taking out loans, since I put myself in a very bad situation with student loans; however, I do not plan on letting that fear takeover with REI. The thought of taking out more loans while trying to get out of one now is a bit overwhelming, but I also do not want to 'spin my wheels' and not take action.

So, what are your thoughts on diving into REI with existing debt?

Thank you!

You are definitely on the right path! IMHO, your question completely depends on the type of debt you have (and are considering taking on). If you had credit card debt, I would tell you to put EVERYTHING toward that before you put one cent into REI. Student loans, on the other hand, are very stable with manageable interest rates. So I wouldn't let a manageable amount of student loans stop you from REI.

Next question: what type of debt are you taking out? Conventional loans, like student loans, are relatively stable with a manageable interest rates. This is a reasonable option. Hard money loans can be far more unstable, have higher interest rates, and you're usually on a time crunch to refi to a conventional loan ASAP. All that can be really stressful - especially if you're already trying to get out of debt. So whatever financing you are considering for investment, be sure it is manageable for your particular situation, and will not feel overwhelming as you continue to pay off student loans. 

Final thought: you didn't mention whether you own a personal residence. If you are renting now, I would absolutely advise you to get a conventional loan for a primary residence. The interest is manageable, the rate is steady, and you can start building equity that will be a HUGE help in your future REI. Right now the Phoenix market has some of the most aggressive appreciation in the country. The sooner you own a PR, the sooner you can build equity that way (instead of paying rent to someone else).

Happy to answer any specific questions you have about all this!

All of my outstanding/existing debt are federal student loans, (24k principle, with an average 6% interest rate). I have zero credit card debt or any outstanding debt outside of my student loans! I also have an 826 credit score so I know I could get a decent interest rate on a loan. I am currently renting and have never been a home owner previously. I honestly never felt like I could afford a PR until I got out of my debt situation and did not want to take on anymore debt until then; however, your recommendation on owning instead of renting a PR is intriguing to me. My initial plan (outside of just sticking with renting for the time being as I dig myself out of debt), given my situation, was to 'house hack', as I could build equity and have the mortgage payed down by the tenants (and in turn ramp up my student loan payments and cash flow for other REIs). OR, continue to rent and buy a SFH to rent out as an investment. What are your thoughts?

Thank you!

@Ryan Bourque if used properly, then debt is nothing to be afraid of! It's really just someone else's money that you're leveraging for your own advantage. Student loan debt is necessary so you can go to college, get the degree, and hopefully get a higher paying job (and more career opportunities) than would otherwise have been available. It sounds like your current situation and rapid loan paydown is proof of you successfully executing that strategy. 

Mortgage debt is actually less "scary" than student loans because it can be wiped out (in a worst case scenario). If your current job and financial situation are stable, then I don't see any reason why you shouldn't purchase a primary residence and stop throwing money away on rent. 

The only issue may be the amount of money you have saved up for down payment. You can put as little as 3.5% down with an FHA loan, but that does not include all of the extra fees and closings costs (probably an additional 2.5%+ of the loan amount). My recommendation would be to continue saving for a few months until you have enough money for a 5% down conventional payment + additional funds for closing costs and moving expenses.