Student loans or investment property

171 Replies

@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 

@Ashley Gish I’m ten years in to repaying $50k of student loans. I didn’t prioritize these and spent money on a variety of different things, including real estate. Now, I’d give anything to have this paid off, and wish I would’ve done it sooner. I’m not a huge Dave Ramsey fan, but in this case I’d recommend you don’t gamble- pay down the loans and regain some control. Real estate will be there, and I’d bet that if you pay down half of those loans in the next 3-5 years, you’ll be in a great position as this economy tanks. Pay down the loans, don’t pretend like you have money you don’t.

This forum sees A LOT of posts along the lines of "I'm 22 and just got out of college with massive debt but want to get into real estate.  What do I do?"  Unfortunately you got lumped into this category though it is not your story at all.  Bigger Pockets is the best learning resource for real estate I have ever come across.  Stick around, check out some of the podcasts and don't be afraid to post more questions.  

I went to college years ago and I had the chance to either pay off my student loans or buy my first property this was 2015 I wish I would've bought that property I drive past it when I visit Saint Louis all the time. I just bought another property in north county. My advice do the rental property and make a payment plan for the student loans.

@Ashley Gish

Hi, just putting my 2cents. From my pov, wouldn't the ROI from an investment property have to be greater than your loan interest rates for an investment property to be worth it?

If you can't find an investment property that gets you a minimum annual ROI >8% then paying down the debt would help you speed up the time it takes for you to start saving money that you can invest into real estate? (ex: if you pay down the debt then it would only take you 3yrs to pay it all off and afterwards you would be able to start saving way more money to invest rather than wait 6yrs to pay it all off and then start to save money)

Hope this helps. I wish you the best and if you don't mind, could you update us on what you decide to do and why?

Thanks!

Originally posted by @Marcus Johnson :

@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.

My sister and brother in law took about $400k combined. They paid it off in 5 years and make $800k-$1m/year. But hey guess they’re idiots.

There’s this thing called opportunity cost as well, so your plan to take off for a few years is pretty stupid. 

@Syed H

It sounds like you need to take a math class. When you calculate for risk, which most investors fail to do, there is a high probability of going bankrupt. You and Brandon can name call, but that usually means your losing an argument. Also I would recommend reading the book The Millionaire next door or anything from Dave Ramsey, because debt is the number one reason people fail. The people researched in the Millionaire next door don’t believe in debt and Dave Ramsey judy interviewed over 10k people and none of them used debt to get rich. I don’t mind mortgages, so long as I put 25% down and buy low and sell high or get really good cash flow like I do on my investment properties. Still laughing that Brandon called me a high school drop out. Talk about judging someone. Lol

Paying down student debt is not the best use of funds. The ideal scenario is selling your current home and using any equity as a down payment for a multi unit investment property. If you don't live in the right market to make that happen, you should move. You can always pay down the student debt later using money that is worth less than it was when you borrowed it due to inflation. With any luck you will even be able to use passive income from real estate investments to make the debt payments.

Originally posted by @Marcus Johnson :

@Syed H

It sounds like you need to take a math class. When you calculate for risk, which most investors fail to do, there is a high probability of going bankrupt. You and Brandon can name call, but that usually means your losing an argument. Also I would recommend reading the book The Millionaire next door or anything from Dave Ramsey, because debt is the number one reason people fail. The people researched in the Millionaire next door don’t believe in debt and Dave Ramsey judy interviewed over 10k people and none of them used debt to get rich. I don’t mind mortgages, so long as I put 25% down and buy low and sell high or get really good cash flow like I do on my investment properties. Still laughing that Brandon called me a high school drop out. Talk about judging someone. Lol

Didn’t call you any names, just said your plan was stupid. I think you might need to retake that math class as well.

You would want people to work & delay med school for 4-5+ years off to save enough to pay for med school, and lose 4-5 years of increased pay of a physician... like I said do you understand opportunity cost? 

I can guarantee you the math doesn’t work in your favor. I’d do the math out for you, but I can see you have some chip on your shoulder and/or bought into the cult of Ramsey. & Ramsey actually says certain degrees are definitely worth paying for.


 Not sure who he interviewed but I know plenty of multimillionaires who used leverage. High leverage is never a good thing. 

@Ashley Gish Check out the book “Five Day Weekend” (except for the last section). There is a good tool for analyzing which debts to pay down relative to the timing of your investment career.

@Ashley Gish Hey Ashley! I posted something similar on here not too long ago (in a very similar situation). I also got destroyed (mostly by the dave Ramsey crowd), but I also got some really good ideas and made some excellent connections. I also met a few fellow medical professionals on the thread that had already successfully done what youre asking about. For what it's worth I want you to know that I gained some really good knowledge from this thread.

Also for federal loans, dont consolidate! They will all have a single interest rate and kill the ability to strategically pay them down!

Having been through posting a thread like this on here, I can tell you its gonna last 3-5 days, but it will end! ;-)

@Rhonda McDaniel just curious, what happens if you don't pay them?

I had a small one once when I was post military but was luckily able and smart enough to pay it off when I had a windfall of funds from traveling with my job.

@Ashley Gish this might seem flippant but, from my perspective, your student loans are a sunk cost. That's just a bill you're going to pay, for a long time, and that's ok, no judgment from me. But it's equally obvious that you have funds available to purchase an investment property.

If you can continue to make the loan payments regardless of the down payment you are contemplating, then analyze that deal. Analyse it again, and a third time. If it looks profitable and if you'd be happy with the return on your investment, buy it. The worst that happens is that you took a chance and it didn't work. The most likely scenario, if it's a good deal, is that you, for once, are making money every month. And regardless of the amount, that is an eye opener and game changer. Real estate isn't the passive game it's made out to be, at least for most, but it is a tried and tried vehicle for people looking to increase their quality of life. If you can take a jab at it without causing yourself harm on a bad decision, I say do it. And I also recommend reading up on how to suck away that money so that you see it, are motivated by it, but HAVE it and don't RELY on it in case it's needed for CAPEX.

Originally posted by @Nathan Hall :

@David Fairall s 401k isn't debt, it's a tax deferred investment.

 I know. Maybe you misread my comment. I was saying that some schools of thought are that you pay off high interest debt before you invest in anything and a possible exception to that would be investing in a 401k where you receive some kind of match from your employer. 

Originally posted by @Michael Laviolette :

Having been through posting a thread like this on here, I can tell you its gonna last 3-5 days, but it will end! ;-

Thanks Michael! Feels good to be able to get a laugh in after all of this! And know that the end is near! I agree, It has definitely been a learning experience. I really appreciate all of the people like yourself who are genuinely interested in sharing knowledge and helping others find their path. 

Hi @Ashley Gish

I feel your pain with the student loans. Since your major was in the medical field, there may be some option for student loan repayment with your employer. Here’s a website to check out

https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service

I also like the house hacking idea as well. That would definitely cut your living expenses.

There’s also a car sharing program out there called Turo that could possibly cut down on your car payments

https://turo.com/

I hope these suggestions help.

Thank you for being so transparent. We all have situations and this should be a platform we can be transparent and helpful without people being insulting.

All the best to you and your family

Allyn

@Ashley Gish

One more consideration, I do not think anyone has mentioned, should be capital gains tax on the sale of your rental in UT. If you made a good profit on that sale, the government is going to want their cut before you pay down your student loans. That alone may make a 1031 into a new rental in your area a more appealing option.

That said, I have not sold a rental yet, but it is my understanding that if you are going to do a 1031 exchange you need to act fast...

Best of luck in whatever you decide!

In my opinion. I would do investment property that pays for your student loan! At the end of the day, you want cash flow from an asset. 

Ashley... I had a lot of debt out of college. It made life a living $#@@ until paid off. 

You need to attack the debt head on. Depending on where you live, max out your retirement percent from each paycheck, pay your bills, put one income after paying yourself to the highest interest debt and start saving up for flipping houses to build up money.