Student loans or investment property

171 Replies

I'm in a very similar position. Sorry you're getting some "neggy" comments here - everyone's situation is unique on why they have to borrow to get educated & shame on the fed!  Anyway, I bought an investment property with the money I would have paid into my student loan and now that investment property earns enough to pay the loan back - I was fortunate, there were long-term tenants in place when purchased. I have owned the investment property for 2-3 years and if I wanted to sell it today, I can pay off the student loan entirely and still walk away with some remaining investment money.  If I didn't make the real estate investment move mentioned herein, psychologically, I would have felt forever imprisoned - chipping away for 10 years or more.  Lastly, the deposit to get this real estate return was 1/2 the amount of the student loan owed.  Try and do both - package the student loans and put a healthy deposit down to bring the payment to a manageable level then find a real estate deal that works for you & in my opinion, not necessarily in that order.  Best wishes!!

To add to Mandee's idea of doing both.  If you figure out roughly the purchase price you will be investing in (sounds like around 200k) then keep the necessary funds to do a deal like that in a savings account (+2%) and you could use the what cash you have left over for student loan pay down.  You will need around $50k depending on how much of a project you are willing to tackle.  20% down + closing costs + minor repairs. Be patient for a great deal.

Have you researched or made a phone call today about getting those student loans refinanced?

@Syed H.

Lol that was funny. I just can’t get over the excuse that someone has to take out that much in student loans to go into the medical field. There are many ways to save up money or to get scholarships and grants to go to medical school. I know of many who have done it, I work in the medical field as an IT Professional at the University of Minnesota. In fact if you took a couple years off before you went to medical school you could live on nothing, rent and save up as much as you possibly can.

@Ashley Gish

So tell me you went to college to be smart but you can't figure this out a new a no-brainer you have over 200k in debt and it's reported on your credit report . Dissolution should be crystal clear pay off the high debt student loans and go invest in real estate.

I think it all comes down to the numbers and preference. As long as the investment property is going to make a return that's a higher % than that of your student loans interest than there is reason to assume you're making a smart choice by investing. 

However, there are two types of people out there. Risk-loving and Risk-averse. the risk-averse would recommend paying off your student loans. The risk-loving would say the appreciation you would get on the property is of far more value and therefore more beneficial for you in the long run, even if the net margin is lower than your student loan interest rate. Other than that the only thing to keep in mind is that the economy has been breaking records for the past 10 years. Additionally, with the fed dropping the rates, indicating that the economy has come to a standstill and in need of a push, it might be wise to consider a possible economic downturn in the next 1-2+ years. That will have an effect on your investment property, and if you're still largely in debt possible insolvency for your family. 

My personal opinion would be: it would be very hard for you to justify the purchase of an asset, in today's market, in Oregon that would give you above the needed ~6.5% return that you need to get. Multifamily would be the safest option, but that depends on where in Oregon. That being said if it were in Portland it would probably be at a much lower cap rate. The only possibility I see is a value ad play, and I don't know your experience with real estate but that has its own issues especially with the timing of the market. 

I would pay off debt and hold cash for when the economy comes down and cash becomes king.

@Marcus Johnson

Which do you think is a better choice?

  A.  "if you took a couple years off before you went to medical school you could live on nothing, rent and save up as much as you possibly can" as a waitress making 50k per year.

 B.  Take out a $200k in student loans to get through medical school.  Then "live on nothing, rent and save up" and pay back the loans while making $200k per year as a doctor.

Hint: You wont be able to save up $200k as a waitress.

I agree that it sucks to take on that kind of debt and not have tangible assets to show for it but education can be an extremely important investment.  It can be a terrible trap too, as a student its easy to think that your student debt will easily be paid off when you graduate and start making the big bucks.  All those psychology majors that end up with a career that has nothing to do with their college education really feel the pain of those student loans.  In the case of an MD or other highly paid professional getting their graduate degree, it makes sense, especially if they love what they do.  

@Ashley Gish thats why I never wanted to go to school..

Anyways what I would do - is take enough for a downpayment on next investment, and put the rest in the debt.

What I would recommend you even more to do- work more hours, budget your finances, by that, live in a cheap studio apartment/with roommates, do not eat in restaurants or go out.

You are pretty stuck and you have to get out of this as soon as possible.

My first 5 years when I tried to save as much money I lived in a 5 roommates apt, didn’t eat outside and in the meantime bought books about RE investing and educated myself.

@Ashley Gish

Throw that money to student loans. You do not need to be playing in real estate investing when you are in debt up to your eye balls. Look at Dave ramsey and research what he says about student loans and investing.

@Ashley Gish ,

Personal finance isn't a one size fits all, so the people who say -- save up-- they are right.   The people who say go for it-- they are right too!    What matters is what works for you, and what your goals are.  

I guess I'm in the minority, but I think student loans are a necessary evil in order to get a high paying job.  If you are hardcore Dave Ramsey, sure-- save and do whatever you need to get yourself to zero debt.. but IMO you'll miss opportunities.   I hate debt, but life isn't a savings race to get to zero.     When you get to zero,  guess what-- you're at zero.  

There will never be a perfect time to invest IMO, there's always expenses/life that hits, so if you want to jump in-- and the numbers work-- go for it!       When we started investing, we had student loan debt (granted only like $60K), and guess what... 3 years later-- we still have it, prob like $57K now...  my biggest regrets now-- the houses we didn't buy when we could (and should!) have figured it out!  

Figure out if you can swing it, you'll regret not trying more than if you try and have to sell!   I will say, with that much debt, you should have 7-8 months or more in an emergency account, actually more when you get more houses-- this is especially important if you get properties! Repairs can be very expensive!

@Ashley Gish

This probably is ****** for me to say but I wish the best of luck making this decision.

I made a 2 family home invest a year ago knowing next month on the anniversary of buying it, I’d pay off my student loans. 45 more days $150 more dollars left.

Do both... is my advice!

@Marcus Johnson peoplr come on here for help and advice, not to be dragged through the mud. If you have nothing helpful just move on and don't bother saying nothing. This is a community to help each other, not try to make others feel like **** or bad about themselves. Not sure why you think you deserve to judge others on what they should and shouldn't be doing.

@Rhonda McDaniel the reason student loans are not bankrupt-able is because they are federally backstopped by Sallie Mae & Freddie Mac. So the idea is that taxpayers shouldn’t be subsidizing people who default or bankrupt their loans. So if you want to default on your loan let’s agree to stop federally backing this program as we agree it’s stupid. Put the loan risk on the private market just like normal loans.

However it’s not ‘Trumo’ who is making you take these dumb loans, rather the same people you vote for are the exact people causing the problem by demanding that the federal government insures this dumb loan program so people can pursue 100k advanced pottery degrees. The same people you vote for are all about letting you default on taxpayers backed loans but those same clowns want to keep this broken system in place.

i don't like this advice...to stop living - move in with 10 other people, eat ramen noodles, take bus, live in candlelight - all in order to pay off a $200k debt - that would take 10 years or more living like that! Imagine living that way for your prime adult life when all your friends/colleagues are enjoying themselves lol complete torture.

In my opinion, people get student loans to get better jobs! Those that managed to save enough money working menial jobs to pay for their school - well congrats! good for you! but for majority of people that is not possible, sometimes there is no way to save when you have parents or kids to take care of - so a student loan is the only option. So whatever judgments you throw at people that have debt - it doesn't make you look more intelligent than them.

I think if you are able to make payments on your student loans, and have some left over for saving/investing - then do both. Just be smart about it - do your calculations and research. Your investments should have the potential to pay off your loans.

Just pleaseeeee don't shut yourself off from the world in order to pay off your debt in 10 years versus 15-20 years. Life is short!!!! Don't listen to the hermits. Yes they have great plans for the future - but what if they don't get there? My grandfather always worked, always planned for his great retirement, but then when he was finally done working he was too tired to do anything he planned. So plan ahead, but not too much ahead.

Assume inflation at 2-3%.  eg a $1000 a month payment becomes worth $970 in inflation adjusted terms in year 2,and likewise in year 3,4,5,6, etcetera.  So in terms of inflation your payment is declining 2-3 percent per year based on what money can buy. (You have to use your exact figures but using $1000 is easy for me here sitting on the couch.)

 If you buy a house where rents are rising, say a $1000 rent rises to $1030 or $1040 per month in year 2 and so forth in each subsequent year...  Point being that you have rising rents against static/declining fixed student loan payments.  Now consider additionally that your property increases in value 2-3 % per year.  Now consider you may (or may not depending on your situation_ benefit from depreciation.  (probably you will.)

Need I go further?  If you buy right your rents will wipe out student loans.

@Ashley Gish You should do both. Not financial advice, but I would do the following in your situation: forget any idea of savings, retirement, etc. Focus on growth and debt pay down; you're not going to gain interest for retirement and savings akin to the interest lost to loans.  

Use a debt restructuring strategy, I think one of the guru programs call it velocity banking. Turn your amortized interest into simple interest by paying chunks of the student loans and mortgages with revolving credit like credit cards or home equity lines to drastically reduce the total amount of interest you'll pay over the course of the loan.  

Also, buy a property that you can live in and make a profit, duplex/multifamily, Airbnb rooms in a SFH, get out of paying rent. Using some strategies, you can also structure your mortgage with the seller however you want as long as they are alright with it.

Make as much money as possible, keep a reasonable living budget that you can actually stick to and survive comfortably, and be prepared to work very hard. You can make a lot of money in real estate, but not if you think real estate is just waiting for the checks to roll in.

I hope that helps a little.

@Ashley Gish Invest do not pay the loans off. (yet) They are decent interest rates and typically favorable clauses. Invest and cover the interest and more.

There is a big political push to forgive student loans so keeping them may just pay off in other ways as well.

@Ashley Gish I may be late to the game, and certainly didn't read every response in this forum.  That being said, you should look into refinancing your student loans(if it was said before, I apologize), I always see ads for First Republic Bank with rates as low a 1.95%, and I'm sure there are other players in the game.  If you can get those to a manageable rate, you can invest and pay off the loans at the same time.

Hi Ashley,

I try to evaluate decisions like this based on the spread, how much of a guarenteed, "built-in" ROI will I recieve by paying down the debt in question vs. how much can I earn in the given investment? If your interest rates on your loans are higher than that which you could recieve from the investment, it would make more sense to pay down the loans first. The nice thing about debt payoff, in addition to the mental relief, is that it provides a guarenteed ROI in the amount of the interest attached to the debt. Nothing in the market will provide a similarly guareteed return, however there are of course "good" options.

Depending on your cash position, you can split it up too, pay off the highest loans, say whatever is over 6% (or whatever you decide) and then use the remaining cash as a down payment for a rental (ideally, to house-hack if you can swing it with your current living situation). In addition to reducing your debt, depending on how your loans are structured, you will also reduce the amount of cashflow "out," maybe even significantly enough that the cashflow "in" provided by your new rental will cover what remains of your student loans. 

@Brandon Ramsay thank you! And thank you to everyone for the constructive feedback. But to be honest this is my first time posting in this forum and likely will be the last. I have a good job that I enjoy and pays well and a nice home and great kids. I am financially stable and can easily afford my student loan payments and everything else I need for a very comfortable lifestyle to be honest. Just looking for a way to get things paid off a little more quickly. I certainly don’t need to be criticized or feel like I need to justify my schooling, career or lifestyle choices. I know we aren’t supposed to kill threads but if anyone knows of a way to make this one stop that would be amazing. This is becoming so much less than helpful.