@Ashley Gish Great, question. I'm sure many can relate so thanks for the post.
Let me start by saying...Don't even think about paying off your student loans. That is the mother load of bad ideas! The Hindenburg was a better idea.
There is no rational reason to pay them off, especially if they're fixed rates. And if they're not fixed rate re fi them asap with a fixed rate.
Several on the thread have given you some good advice, don't pay off student debt and buy a rental prop(s) to have tenants pay off you loans and build equity for you. But I don't think they went far enough to explain why.
First let's go over the numbers so we can do a thorough analysis.
I don't know exactly how much you have to use for investments or debt reduction but I'll assume you have 200k because that's the amount of your loans and you're talking about paying them off. This is enough where you could make all your student loan payments with the positive cash flow from the rental props if you invested the 200k.
(I'd suggest markets in the Midwest and south where you can get a higher R/V ratio. If you're set on investing in Oregon, maybe you could check out Corvallis, Eugene, Hood River, etc. a smaller metro area that may have better R/V ratios.)
Now let's look at the rate of inflation.
I've gone over this in great detail on other posts more pertaining to this topic so I won't get into the inflation details here. That said, look at a chart of historic rates of inflation (far right column)
2001-2018
1967-1983
The reason I wanted to show 67-83 is it was a time of higher inflation. I think the probability of the US going through substantial rates of inflation over the couple decades is very high (again, that's a different post) but we'll just use the numbers from the past 18 years. On average about 2.5% per annum.
For the sake of ease I'll say the positive cash flow coming in from the properties is $1000. Initially this will all go to cover your monthly student loan payment. But what happens when rents go up? And not even in real terms, just with the rate of inflation?
After 5 years you'll have an additional $131 monthly in rent above and beyond your student loan payments.
After 10 years you'll have an additional $280.08 per month.
After 15 years you'll have an additional $448.30 monthly.
And after 20 years you'll have an additional $638.62 monthly. Using the mean number ($280) times the 240 months of the 20 year term of the student loan, you get about $67,000 in additional cash flow assuming rents go up at the rate of inflation and assuming inflation stays ridiculously low (which is possible but unlikely, and obviously this is a very crude number, but I don't have time to do the exact math)
What if the US averages 5% inflation over the next 20 years? Totally possible, again look at 1967-1983.
Please notice the ending 20 year number at 2.5% ($1638) compared to 5% ($2653).
It becomes glaringly obvious how you make money off inflation because the debt payments stay the same. But that's just the cash flow, now let's look at the appreciation.
Notice: Over the long run homes don't appreciate, they merely go up with the rate of inflation.
But that doesn't mean you don't increase your purchasing power via inflation. (Assuming you're using 30 year fixed rate debt, which is the second smartest thing you can do after not paying your student loans.)
Assume you have 200k in equity, but the combined value of the homes on you balance sheet is 500k. If inflation increases by 10% the value of your assets goes to 550K, an increase of 50k. But 50k is not a 10% increase of 200k, which is your investment. It's 25%. You've increased your purchasing power (made money) and your asset didn't appreciate it just went up with inflation.
Here's what it looks like in the calculator.
Your asset went up in price by 319k but your investment was only 200k, so again, you increased your purchasing power or you made money. Let's look at what happens with a 5% rate of inflation.
The numbers get big very fast. ;)
And remember your renters have been paying down the balance of your mortgages so you've got more equity as well.
After 20 years you'll have a balance of 146k, in other words, your renters paid you another 154k.
But wait there's more!
You'll have the depreciation of the assets to use to offset part of your income.
Finally, lets add everything up to get an apples to apples comparison.
Choice #1, the Dave Ramsey (Hindenburg) option leaves you with:
- 0 dollars in 20 years and 0 student loan debt in 20 years
Choice #2, the rational option leaves you with: (nominal dollars)
- 67k from cash flow
- 319k from appreciation (inflation)
- 154k from renters paying your mortgage
- 200k from your original equity
- ?? from tax deductions in the form of depreciation
- And 0 in student loan debt
For specific numbers please adjust for inflation but you get my point. Not paying your student loans, taking the money and investing in cash flowing rental props with 30 year fixed rate debt, is the absolute no brainers of all time no brainers.
Good luck Ashley, I sincerely hoped that helped.
George