Student loans or investment property

171 Replies

Together my husband and I have almost $200k in student loans with a significant portion of them being at 6% interest. 53k of that is at 6.8% and 7.2%. We currently live and work in Oregon and are interested in getting into the world of real estate investing. We had been renting our house in Utah, however we didn’t have much of a plan or a good team in place and recently sold it. Not for as much as we had hoped after sitting on the market for more than a few months and a big remodel after some awful tenants but still ended up with a fair amount of cash. We are trying to decide if we should use the money for a down payment on a single family home to use as a rental closer to where we can manage it ourselves or put it toward our student loans. We have no other high interest debt, have a reasonable mortgage on our home in Oregon with a fair amount of equity, 1 car payment with zero % interest and a 4 month safety net in place. Any feedback would be greatly appreciated.

@Ashley Gish

Some of the more financially savvy people on here may disagree but it’s my understanding that you want to pay down high interest debt as soon as you can before you start investing in anything, perhaps with the exception of an employer matched 401k. (Don’t wanna miss out on that free money.) And even then it may still be more prudent to attack those student loans as hard as you can because they’ll only get bigger. Typically you want to start by paying off the debt with the highest interest rate. Once you’ve paid that off, you then take the payment you use to make on that and apply it to the payment you’ve been making on the next highest rate and so on. You’ve probably heard of this before but it’s sometimes called the debt snowball. Dave Ramsey talks about it a lot. You could also look into consolidating all your student loans into one payment and possibly getting a better rate. Like I said, maybe it’s possible and/or smart to invest and pay off student loans but for us we wanted to pay ours off as soon as possible so we didn’t invest in anything until we did. Best of luck.

I would call up Dave Ramsey, have a chat, then report back what you find. I'll bring some popcorn for everyone. You have $200k in loans but needed a new car? I'm assuming that because they offer 0% interest on new cars. Most vehicles depreciate the moment you drive it off the lot. It's very clear what you need to do but I don't think this forum post is going to change anything. 

@Ashley Gish

No problem. And if you want a more data driven answer versus an opinion just do a web search for "student loan vs investment calculator" or "debt investment calculator". I found several calculators that could help you make your decision, although, most of the sites I looked at still recommend you talk with a financial professional.  I know real estate is a different animal than the stock market (which is what a lot of the calculators are using to compare to your student loans), however, you could likely find out average yearly rates of return for real estate in the area you're looking to buy in and use those numbers in the calculator instead. The thing to keep in mind with the comparison though is paying off debt is a guaranteed savings in interest while all investment is speculative so rates of return may not pan out the way you hope.

When I was in your situation 

I did both . Paid down my loans and got a mortgage. 

Worked out very well . 

@Ashley Gish

I find it amazing that someone could rack up 200k in student loan debt. I hope your lawyer or doctor job will allow you to pay off the loans quickly. Someone who takes out 200k in loans doesn’t have a lot of financial sense unless the return in investment is high. Pay off the loans and get control of your finances. You have no business investing in real estate until you hmget your finances in order.

@Ashley Gish I feel your pain. We don’t have that much but still had what feels like a lot of student loan debt when we began investing. We began with a different strategy (wholesaling) to bring in the income to pay off our debts. My hope is to pay off the loans in a few years vs. 15 that’s left. Real estate rentals have a lot of costs associated- like you mentioned repairs, and make-readys when tenants leave. One rental isn’t going to help much; from what I understand it takes several units to break even sometimes (even with everyone’s 1% rule). I wish more than anything that I had no student loan debt- it’s the only debt that’s never. Ever. Forgiven. So for 30 years I basically have the equivalent of an extra mortgage payment each month; yes WE those of us who took out student loans need extra income streams. The fact that student loans are Never forgiven, it’s a broken system. Not until you die (who made these rules I’d like to see them go back to the drawing table). At least in Real Estate you have the option of foreclosure or even bankruptcy - that makes it a bit less risky than student loan debt. Someone’s probably going to take that the wrong way, I refer you back to Trumo and other millionaires who’ve used that system. Final thought can you get creative and Can you do both? Best of luck!

@Rhonda McDaniel thanks Rhonda! I really appreciate your thoughts. Yes I pursued a very expensive career in medicine thinking it was the “right” thing to do. Between that and my husbands graduate degree, we definitely have an additional mortgage to pay each month but with nothing to gain and as you know it’s incredibly stressful. I have a great job that I really enjoy but have been trying to get creative with how to get things paid down more quickly. Wholesaling might be a perfect place to start, i will definitely look into it. Thanks again!

@Ashley Gish

$200k is a lot of debt so your scenario is a bit different than mine but I was just in a similar spot as you. My wife had around $50k of debt left to payoff of her school loan and was really wanting to pay off the remaining balance with the profits we made off of another investment we were involved in. I had a better idea and convinced her to jump on board. I told her I would take over her school loan and make all payments on the balance if she gave me the cash. We refinanced her loan to a lower rate of around 4% and my wife wrote me a check for the balance of the school loan. Basically I got $50k to invest at the cost of 4%. I hate bad debt and I hate paying interest on bad debt however this was Cheap money for me to invest and I hope to put it towards something that will make much more than 4%. I will pay the minimum balance on this loan to keep the cheap money. Probably many different opinions on this topic. 

@Ashley Gish

Only know what is truly right for you. However, you asked for opinions. Can you refi that debt to have a better interest rate? Sofi and earnest both have good rate (no affiliation). What will your return monthly be on that 200k if you invest it? Can you get that to be more than just the interest you’ll pay on the student loan debt? I still have some loans that I haven’t paid off. Why? Because I can get a higher return on the money than 3% and 5% which is the interest rate I’m paying. However, it’s really one of those what will make you sleep well at night (emotional) questions rather than a logical question. I like getting the RE tax benefits now, I can handle the monthly payments on the debt easily. Is either of you going for the 10 year loan forgiveness for public service? If so you can lock in your payments at 10% of your income and keep your AGI down through RE passive losses.

Ouch, those are some harsh comments and ouch those are some harsh interest rates.  Unless mommy and daddy are paying for it, that's the reality of going into medicine guys, hundreds of thousands in debt, so give Ashley a break.

I was all ready to tell you to invest until I read the rates you are paying on the student loans.  My student loan is %2.75 so I'm paying it down as slow as possible because I know I can do better than that investing or paying down my 5% mortgages.  I would put serious time into getting your student loans refinanced.  I'm not even joking when I say to make it a top life priority.  Spend an hour or two per day doing internet research and making phone calls until you succeed.  Your next move will depend on what rate you are able to get down to.  The real estate and stock market are both due for a correction (in my personal crystal ball for what that's worth) so I wouldn't be too worried about missing out if you end up doing some debt pay down for the next year or two. 

Do you own the home you are currently living in?  If not then it could make sense to buy something with two units and live in one if you find a great deal and you get the student loans down to a much better rate. 

@Ashley Gish

Hey Ashley. I don't have a lot of experience yet but have been reading a lot on here in the last few months. You know you need a place to live so I would look at the numbers. I am not sure what you qualify for but maybe you can get into a situation where you buy a place & then the rent the other side or other units. This may take care of most or all of your housing expenses which would in turn allow you to funnel all of that saved money onto your debt.

With that much debt, I would be first looking to house hack, and if that can't work I would be finding as low of a rental as feasibly possible. Since you probably don't have a lot of control of your earnings right now, I would focus on your spending and cut it down as hard as you can. Someone can make 500k per year but save nothing due to foolish spending, so I always look at spending first. So yeah, look into house hacking first, and then spending as well.

Originally posted by @Marcus Johnson :

@Ashley Gish

I find it amazing that someone could rack up 200k in student loan debt. I hope your lawyer or doctor job will allow you to pay off the loans quickly. Someone who takes out 200k in loans doesn’t have a lot of financial sense unless the return in investment is high. Pay off the loans and get control of your finances. You have no business investing in real estate until you hmget your finances in order.

Super helpful and not judgmental at all. Are you a college dropout or something? No reason to have a chip on your shoulder. 

@Ashley Gish Me & my wife have close to that in student debt as well (mostly her). Rates around 4-5%. Now people have different philosophies on paying it off or not. I don't believe in just paying it off unless I can't beat that return. I regularly beat it, so I don't pay it off even though I have the capability to pay it off in a single check. 

You can do both, you can go do a house hack or something with a low downpayment, while putting extra $ towards your loan.

@Syed H. I love the idea of house hacking. We currently have my mother living with us so a bit limited on options. But we live in an area with vacationers so just started renting the house out on Airbnb whenever we are away for a weekend. We just started but so far this has been very successful. Thanks for your feedback!

@Lee Ripma lots of good things to consider here Lee. Thank you! We do own our current home, although have been looking at trying to get into a duplex instead. Currently we are doing short term rentals on air Bnb whenever we can and I just started looking at SoFi for options on refinancing.

@Brant Richardson thanks Brant! Yes that kind of financial ball and chain was not exactly my dream way to start my career so trying to get creative about paying things off as quickly as possible. I really appreciate your advice. I just recently started looking into refinancing and am thinking about paying off all of the loans above 6%, refinancing the rest to a much lower rate and possibly looking at a duplex or finding ways to rent out our current house on air Bnb more frequently. This weekend we are going to camp near our house and rent out the house so hopefully that will be successful. Thanks again for the feedback.