Student loans or investment property

171 Replies

@Ashley Gish my wife and I had substantial student loans - not as much as you guys. But, we worked 5 jobs between the two of us to pay down the student debt as quickly as possible because of the high interest. We paid all 8 years of student loans in under four years. After that EVERYTHING was easy! We still lived that life style while saving money for several years. Now we invest and I still work a regular job. Life has been so much easier with no student debt! At this point the only loan we actually pay on is our primary house note.

Student loans first! IMO

another factor to consider... by floating down your student loans you are leaving the door open for more favorable conditions to pay them off (such as getting a job that qualifies for student loan forgiveness, or new legislation being passed that somehow reduces student loan debt/rates.

Originally posted by @Christian Rojmar :

@George Gammon

“So what it then boils down to is measuring the actually risk of taking 200k and paying off student loans opposed to investing in positive cash flow rentals with 30 year fixed rate debt at sub 4%, because it makes them feel good.”

I think you are missing the point people are making about “do what ever is going to make her feel best.”

The problem I see with your argument that it “boils down to measuring the [actual] risk of taking 200k and paying off student loans opposed to investing in positive cash flow rentals. . . because it makes them feel good” is that it is all about the financials. People simply value things differently. You assume that just because a person will be better of in the future based on math, that person will feel better down the road. Financially, yes, but happiness, enjoyment of life, etc. maybe not. I did not see her asking what makes most sense financially (but maybe that was inherent in her question) but more general, "what should I do?". For example, while working 15-hour days and not seeing my family, and living in a 500 sf apartment is the financially right decision, it is the wrong decision for me because I value time spent with my family way more than I value money. Same can hold true for stress/piece of mind.

“In the prior post we established they'd lose around 800k...I think that qualifies as risk.”

Frankly, I do not think we have established that they would lose 800k unless we make some extremely irrational assumptions that favor investing in RE. And don’t take me wrong, everyone on this site want to invest and believe investing in RE is the way to get out of the rat race but the numbers are not reality. For example:

  • You assume that they actually have $200,000 to invest right away;
  • You assume a first-time investor will find properties that will generate $1,500 monthly true cash flow on a $200,000 investment;
  • You assume that they will pay no tax on the cashflows from the investment;
  • You assume they will pay no capital tax on the sale of properties in future;
  • You do not factor in the risks of investing in RE rather than paying off debt;
  • You assume that they will pay off the debt completely rather than put at least some of the $200,000 in market which should conservatively generate 5% annually (which can be leveraged significantly just like RE). Even just $100k in market will generate ~$165,000 pre-tax in 20 years.

“What makes 2019 10x more dangerous than 2009? In 2009 the private sector was bailed out by governments, in the next recession who bails out the governments?”

While I certainly agree that a recession will happen eventually (probably sooner than later), you are talking about an event that will change the way we live today... I would probably buy gold if I believed this would happen. If you are thinking of a “normal” recession, then market will come back just like it did after 08-09, similarly to how the RE market came back.

2. And this is by far the most important topic you brought up. Can rents increase if wages are flat

This was very informative, helpful, and appreciated – but I am not sure it answered my concern? I am not talking about fixed debt v. rent but real rent v. real wages. If rent is going up by 5% per year, inflation by 5% and wages by 2%, real rent is staying flat while real wages is going down by 3%. The discrepancy between real wages and real rent is increasing rapidly – less people can afford housing. Same is true for home values.

Help me understand how “at some point people can’t afford the sky high rents” and “but remember those are inflation adjusted numbers and debt is nominal” have anything to do with my concern that real rent is increasing more rapidly than real wages?

My point, and again I may just be missing what you are saying, is that while $1 in real wages (accounted for inflation) was worth $1 in real rent in 1960, in 2014, $1 in wages is only worth $0.73 (if I am doing the math correctly – 120%/165%-1). Real income is not keeping up with real rent and something will have to give regardless of whether debt stays the same.

I totally get what you're saying about real wages vs. real rents.  These are high level topics both of us are trying to tackle via text, which is hard.  I don't think I'm doing a good job explaining my point on inflation.  There's an obvious mis communication.  Regardless, I sincerely appreciate the dialogue.

I'd like to strongly encourage everyone reading this thread to start thinking about how macro can and will affect you investments, job, retirement, and overall quality of life.  And please dedicate time to mastering the concept of inflation...you'll thank me in 20 years. ;) 

P.S.  If anyone would like to communicate directly with me, regarding the topics I've outlined in this thread or anything else, all my contact info is on my profile page.   

@George Gammon, I read your profile. You are certainly someone with a lot of experience and a solid depth of knowledge.

You stated that you "feel a moral obligation" to show the light on Dave Ramsey, who has "destroyed more American minds than anyone else."  If you could please do that in this thread, I'd appreciate it. I'm sure the 12 other people you tagged in your comment about DR would appreciate it too.

DR, to my knowledge, has never recommended fixed income investments. In the context of DR, a comparison of real estate investing to fixed income is an unfair straw man argument. DR mentions this often enough that I'm pretty certain most DR listeners know his position too.

DR recommends putting 15% of gross income into retirement in 'good growth stock mutual funds.' A fair argument would be to compare someone who followed DR's preferred method to your example. But even that would probably not be fair-- because nobody on this thread has advocated that. Maybe compare someone who uses that $200k to pay off their student debt, then saves a down payment and then invests in real estate? 

Second, you keep bringing up that people here don't understand inflation. Could you please explain what you mean by that? I would think that a strong basic understanding of housing inflation is one of the things that attracts people to real estate investing, at least that's the impression I've gotten from reading the forums. It certainly seems to be a regular point of emphasis on the various BP podcasts.

Finally, why do you feel that net level of positive cash flow of $1500 a month on a 500k portfolio of properties with 40% down is reasonable, especially for novice investors? Please go into detail on this. One of the great things about BP is that there are so many experienced real estate investors, like yourself, here. That seems like a fantastic return, especially for novice investors, and I just don't have the confidence yet that that's reasonable. Maybe I'm confused, but I've listened to enough BP podcasts where I've been cautioned not to expect to make a strong return on my first real estate investment. As a novice real estate investor, I'd appreciate it. Oh, and feel free to be as technical and detailed as you want on this-- I need practice at calculating real estate investment returns.

Thanks. 

Originally posted by @George Gammon :
Originally posted by @Derrick E.:

@George Gammon Respectfully, you are not taking in to account DSCR/DTI with those student loan payments hanging over your head. I am paying off some of my student loans to open up more buying power down the road.

Derrick, thanks for your response.  Even with a 100% cash purchase, assuming 200k in student loans and 200k cash, they're much better off in 20 years financially.  They'd still have all the cash flow from inflation, the original 200k, the nominal/real appreciation of the asset, depreciation, and zero student loan debt.  

George  

I'm not disputing that. I am pointing out that paying off student loans (wiping out the monthly payment) opens up your DTI which gives you more purchasing power. Every situation is different. There's not a cookie cutter answer for this question.

@Ashley Gish first off congrats on planning your life wisely and working hard in order to get a job that you enjoy. A fulfilling career is of the utmost value and yours is likely to continue to enrich your life long after the student loans are history. Also I like the way you handled the trolls at the beginning of the thread. BP is a bit of a "tough love" type community but it is a good one, you just have to curate the advice and embrace the skin-thickening which you'll need in this biz. Going on the info you have shared, I would urge you to think harder about your goals and how investing in REI will realistically help you reach them before diverting funds from paying off your student loans or taking time away from your career and family. I say this because of the two strategies you mentioned: investing in a SFH an hour away that you would self-manage, and wholesaling. I wanted to steer you in a different direction because in my opinion neither strategy has a lot of potential to be worth your valuable time considering that you are a high earner so there is significant opportunity cost. Self managing rentals or wholesaling is taking on a second job. Do you want a second job? Wouldn't it be wiser to focus on your career in medicine, putting more effort into making more money doing what you enjoy and paying your loans down faster by being more successful in the field you went to school for? Or if your goal is simply to find a passive investment vehicle that will provide greater returns than the interest rate on your loans, then there are far better options than a SFH rental or wholesaling. If you buy a SFH an hour away and try to self manage while working a demanding job with a family, or try to wholesale on the side, I don't see either of those strategies as having much of a chance at enhancing your life in a significant way, while there is a real risk that doing either of those things will detract from your ability to advance your career, take time away from your family, and slow down the rate at which you pay off your student loans while adding more debt to the equation and providing very little if any income. So I would urge you to rethink your strategy before diving in. You might look into a multi family building with professional management or simply invest in REITs, a syndication, or index funds so you can stay focused mostly on your career and family. REI is risky and many people find out it is a lot more work and both less pleasant and less profitable than they thought it would be, especially those who already have a demanding career and a family and don't have enough time in the day to start a second career and give it 100%. Doctors especially are well known to flirt with real estate for a few years and fail royally at it, I think mainly because they tend to underestimate the learning curve, invest poorly because they don't take it seriously enough and make the mistake in thinking that it is an easy way to make "passive" income on the side while in reality it's like running any business in that the effort you put in is commensurate to what you get out. ... and if you don't put enough effort into a business it will fail. Just my .02, but to contradict myself I will add that if you are passionate about and truly interested in real estate you can definitely pull it off as many medical professionals and determined people from all walks of life do, I've just seen so many others, doctors especially including many that I know personally who got into this thinking it's an easy side hustle to pay off their student loans but they aren't really interested in it or don't actually have the bandwidth or patience or passion to really make it work so they end up selling when they get tired of it (which often means not holding long enough to see a return, plus wasted time). If you're going to do it, do it right and stay the course is all I'm saying. If you take the approach that REI is an easy way to solve your student debt problem without taking into account the added workload and liability, that's a recipe for disaster and you may just end up with more problems. However if you are actually interested in real estate and are willing to educate yourself in a new field and work hard at it in order to be successful, then go for it! Just be aware if you do it wrong you will lose money, waste time and end up worse off financially. I envy you in that you have a career helping people every day, so much cooler than us boring real estate investors. I hope this comment brings some value to your BP experience, sorry for the long-windedness and run-on sentences, and good luck in all your endeavors!

Hey, @Ashley Gish

I have not seen a lot of people talk about it, but one thing I would look into for yourself is that you can actually claim up to 2500 in tax deductions on student loan interest depending on your MAGI when you do your taxes. I would talk to your CPA/accountant about it, but it's been super helpful to us. Taking that into account when you run your numbers, it could make the difference.

Beyond that I would definitely look at doing a refinance to take advantage of our current interest rates and then start investing as soon as you can!

@George Gammon     Thank you for taking the time to write it all out a couple pages back.  Most of us know that inflation is good for real estate but have not really looked in depth at the numbers like you laid out.  Understanding in general is pretty simple, summed up something like "inflation is good because the value of money in the future will be worth less therefore the loan will be worth less.  Also, rent should go up while the loan payment stays the same so cash flow increases."   Great post, very informative.

Originally posted by @Mac F. :

@George Gammon, I read your profile. You are certainly someone with a lot of experience and a solid depth of knowledge.

You stated that you "feel a moral obligation" to show the light on Dave Ramsey, who has "destroyed more American minds than anyone else."  If you could please do that in this thread, I'd appreciate it. I'm sure the 12 other people you tagged in your comment about DR would appreciate it too.

DR, to my knowledge, has never recommended fixed income investments. In the context of DR, a comparison of real estate investing to fixed income is an unfair straw man argument. DR mentions this often enough that I'm pretty certain most DR listeners know his position too.

DR recommends putting 15% of gross income into retirement in 'good growth stock mutual funds.' A fair argument would be to compare someone who followed DR's preferred method to your example. But even that would probably not be fair-- because nobody on this thread has advocated that. Maybe compare someone who uses that $200k to pay off their student debt, then saves a down payment and then invests in real estate? 

Second, you keep bringing up that people here don't understand inflation. Could you please explain what you mean by that? I would think that a strong basic understanding of housing inflation is one of the things that attracts people to real estate investing, at least that's the impression I've gotten from reading the forums. It certainly seems to be a regular point of emphasis on the various BP podcasts.

Finally, why do you feel that net level of positive cash flow of $1500 a month on a 500k portfolio of properties with 40% down is reasonable, especially for novice investors? Please go into detail on this. One of the great things about BP is that there are so many experienced real estate investors, like yourself, here. That seems like a fantastic return, especially for novice investors, and I just don't have the confidence yet that that's reasonable. Maybe I'm confused, but I've listened to enough BP podcasts where I've been cautioned not to expect to make a strong return on my first real estate investment. As a novice real estate investor, I'd appreciate it. Oh, and feel free to be as technical and detailed as you want on this-- I need practice at calculating real estate investment returns.

Thanks. 

Thank you for your post and questions.  I'll respond by first outlining why Dave Ramsey's ideas are dangerous.  Like a politician, he either knows the truth and is lying or he's an idiot.   

Let's start by using DR "Financial Peace University" baby steps.

Step 1 - $1000 emergency fund.  I can't argue with this.

Step 2 - Pay off all debt, using debt snowball.  This is where he starts to go off the rails.  Consumer debt is bad, granted, but all debt is not created equal.  A 30 year fixed rate mortgage on a cash flow positive rental property is the opposite of consumer debt.  There's no better way (risk adjusted) to build wealth in today's economic environment.  Paying off fixed rate debt, that's paid by a 3rd party, is a terrible idea.  And he's not talking about consumer debt exclusively, here's a pictograph from his website referring to real estate investing. See step #1

Also note: 5% of net worth.  Another insane suggestion I could discuss for hours.  

Step 3 - 6 months expenses in savings.  Agreed.

Step 4 - Invest 15% of Household Income into Roth IRAs and Pre-Tax Retirement.  Once again completely insane.  I'll go into why this is incredibly high risk below when I discuss mutual funds.  But if you want tax free way to build wealth real estate (starter homes in midwest purchased under the cost of construction) does that and is 100x less risky.  

Step 5 - College fund.  I disagree with the entire cultures obsession with sending kids to college (this isn't DR specific.)  Do a simple cost/benefit analysis, 90% of degrees are a waste.  If you want to be educated you have the internet, everything I know about macro, as an example, I learned from internet, audio books, and Youtube.  

Also, I was a self made millionaire at the age of 34.  Literally used nothing I learned in school past grade 3.  Another example, a good friend is a small car dealer, his oldest son loves cars and just turned 18.  My friend gave him the option of college or start out in family biz.  Kid chose biz, is now making 70k a year and has a skill (flipping cars) he can use for the rest of his life to make 100k plus a year... no student debt and a much healthier liver.  

The problem is the statistics on college are extremely misunderstood.  They point to the fact college grads make more money, but they don't adjust for the skills required to graduate from college, such as self discipline, motivation and intellect.  

My point is, it isn't necessarily the degree but the skillset and personality the kid had prior to college...college just gets all the credit, wrongfully so.  The exceptions are skilled trades, doctor, lawyer, engineer etc.  but there my argument would be most kids go into those fields for the money and you could make much more money flipping cars or 1000 other things by learning the trade instead of going to college and signing up for 200k in debt you can't unload in bankruptcy.  

Step 6 - Pay off home early.  I completely disagree.  Why?  Because, in most cases, it's financially crazy to own a home.  

Most people live in a home, that if it were a rental, would have an atrocious R/V ratio.  So own rental starter homes in the midwest, under cost of construction, with 30 year fixed rate debt, that have good R/V ratios.  

It's much better to rent a 1 million dollar house to live in and take the 1 million dollars and buy good rental props.  Even if you don't pay cash it's most often cheaper to rent a nice house than to buy it when you consider the costs of owning.  So rent where you live and buy things to rent to others.

Or house hack.  Buy a triplex, live in one unit, and have your renters pay the mortgage (again, make sure it's 30 year fixed rate).  This and BRRRR are by far the smartest suggestions on BP.  

FYI, I'm 46 now, I've never owned where I lived.  

Step 7 -  Build wealth and give.  This is where he want's you to "invest in mutual funds," and to be fair real estate (all cash and 5% of your investments).  So let's assume the other 90-95% goes into mutual funds.  Just go to his website and it's obvious he's drank the mutual fund koolaid.  Again, not sure whether he knows how bad his advice is and is lying or is completely ignorant.  My guess is it's the former because of the mental gymnastics required for articles like this from his blog.  


And if you read the blog post it becomes obvious why I tend to believe he's blatantly lying to his audience and his whole schtick is a rouse.  see below

Notice he brushes off the lost decade by saying you have to look at the bigger picture and you can't cherry pick time frames.  But that's exactly what he does to make his claim about the 12% average returns.  The whole basis for for the blog post and a big part of what he sells to his audience.  

But it goes from a subtle white lie to blatant fraud when you look at how he's selling a "12%" return.  

Meaning, most of his listeners are unsophisticated, they don't know a 12% drop one year and a 12% gain the next doesn't put you back at zero.  They think that their money will just compound at a 12% clip annually.  Let's look at reality.

If we took what DR says at face value, the market goes up on average of 12% a year going back to 1923, we should be able to type the value of the 1923 S&P into a compound interest calculator, input 12%, and we should have roughly 3000 (where the S&P is today).  I only have data from 1928 on, but I think you'll still get my point.  The S&P was 17 in 1928.  Let's see what happens...

If what DR says is true, the way he sells it to his audience, if S&P would have to be at 512,000 right now!!!  It's at 3000!!! 

And I'm not even adjusting for inflation.  Adjusted for inflation (meaning 12% annual increases in purchasing power) the S&P would be at over 7,500,000!!!  YES, 7.5 MILLION.  

You maybe saying to yourself, "what George is saying can't be true" DR would never get away with that much of a lie.  Here's why DR can get away with his claims.  They're true in literal terms but they're wildly false in the way he presents it to his audience and how his audience perceives what he's saying.  

DR presents this 12% claim as though, over the long haul, your money will grow by 12% a year.  FALSE! Why?  Because when a number is reduced by 10% and then increased by 10% you're not left with the same number...it's lower.

As an example.  Take $1000 and decrease it by 50%, you now have $500.  Increase that $500 the next year by 60% and you now have a total of $800.  A $200 (20%) loss but a 5% average return (-50 + 60 = 10/2 = 5%).  

This becomes very clear when we look at graph of annual S&P returns.


Or better yet,  look at an inflation adjusted chart.  Please notice how much you'd make if you invested in 1928 and left your money in for 52 years, until 1980.  

You would've made zero (adjusted for inflation).  Dave Ramsey what happened to 12% per year??  

What infuriates me the most is he targets people in the south and people who go to church, in other words people with traditional values who are more susceptible to his "be prudent, save money, no debt, invest in mutual fund" snake oil.  

To be clear, 10% of what he says is spot on, have a rainy day fund and don't take on consumer debt, but the other 90% is so bad it's completely inexcusable.  

If you're one of the millions of Americans, not just DR fans, who have drank the koolaid of the financial services industry and invested into the "safety" of mutual funds, I apologize, I don't relish being the bearer of bad news.  But as I said in my first post on this thread, I feel a moral obligation to set the record straight.  

Please note:  I didn't even hit the tip of the iceberg of why mutual funds are quite possibly the worst investments on a risk/reward basis.  I understand I exclusively focused on S&P and mutual funds typically contain bonds.  I did this because interest rates have been driven down so low by the Fed, mutual funds no have to overweight equities because they can't get a return from bonds.  This problem will be exacerbated if/when US bonds go into a negative yield like Europe and Japan.  

I realize this is complex stuff.  It's why DR can dupe so many, including maybe himself.  I'd like to point out I learned none of the above in college.  ;) 

If you have any questions don't hesitate to reach out, all my contact info is on my profile.

Good luck,

@George Gammon , how is Dave Ramsey duping people regarding stock market returns? First of all, the investment he's talking about when he uses the 12% number is the Investment Company of America fund-- it's returned 11.96% since it's inception in 1934 and is one of the ten largest mutual funds by assets under management.

https://www.americanfunds.com/...

https://www.forbes.com/sites/r...

Second, your calculations on S&P returns leave out dividends and dividend reinvestment-- that's one of the major reasons that S&P returns are not a good proxy for mutual fund investments (full disclosure-- I'm a former stockbroker). Third, please stop with the bonds. Dave Ramsey, to my knowledge has never recommended fixed income investments, or mutual funds with bonds in them. The only fixed income you'll find in the funds Dave recommends will be cash equivalents (like T-bills and overnights)-- generally because the fund is holding the cash while trying to find an investment opportunity. If you want to do a comparison of your preferred method compared to the 8-10% annualized mutual fund return, go for it.

You're a talented copywriter, but if you're going to say someone's 'lying or completely ignorant,' you might want to get your facts right.
 

Originally posted by @Mac F. :

@George Gammon, how is Dave Ramsey duping people regarding stock market returns? First of all, the investment he's talking about when he uses the 12% number is the Investment Company of America fund-- it's returned 11.96% since it's inception in 1934 and is one of the ten largest mutual funds by assets under management.

https://www.americanfunds.com/...

https://www.forbes.com/sites/r...

Second, your calculations on S&P returns leave out dividends and dividend reinvestment-- that's one of the major reasons that S&P returns are not a good proxy for mutual fund investments (full disclosure-- I'm a former stockbroker). Third, please stop with the bonds. Dave Ramsey, to my knowledge has never recommended fixed income investments, or mutual funds with bonds in them. The only fixed income you'll find in the funds Dave recommends will be cash equivalents (like T-bills and overnights)-- generally because the fund is holding the cash while trying to find an investment opportunity. If you want to do a comparison of your preferred method compared to the 8-10% annualized mutual fund return, go for it.

You're a talented copywriter, but if you're going to say someone's 'lying or completely ignorant,' you might want to get your facts right.
 

Mac what numbers do I have incorrect?  I'm not sure you understand my point.  My point is NOT that xyz mutual fund doesn't have a 12% average return going back to 1934.  My point is the way Dave Ramsey, and the entire financial services industry, make it seem as if you put $100 into a mutual fund, and that mutual fund has an average return of 12%, your $100 will grow at 12% annually.  

That's unequivocally false.  

The market goes up and it goes down.  A 12% loss and a 12% gain the following year is a loss to your capital but it's a 0% annual return.  Let's go over my original example once again.  

You start with $1000.  The mutual fund goes down by 50%.  You now have $500.  The following year the mutual fund goes up by 60%.  You now have a 60% gain from your balance of $500, giving you a total of $800.  You are down $200 from your original investment of $1000.  But the mutual fund has an average return of 5%.  

If a mutual fund told you it had an average annual return of 5% would you expect it to make money or lose money?  

That's my point.  A mutual fund  (S&P, Dow, anything) can have a positive average return and the fund can still lose money.  Just because you're in a fund that has a 12% average return, it doesn't mean your money will grow at 12% per year.  

Here's a chart from the link in your post. 

 Notice, it includes dividend reinvestments.  Also, it's over 20 years, 19 of which have been parts of the largest/longest bull market in US history (in other words, the numbers only get worse if you go back to 1934).  According to this very chart, from their own website, $10,000 invested with them in 1999 would now be worth $35,000, including dividend reinvestment.  

$10,000 compounded at 6.5% is $35,000.  Notice: 6.5% NOT 12%.  And thats not adjusted for inflation.  Adjusted for inflation $35,000 in 2019 is actually only about $23,000 in 1999 dollars. 

Adjusted for inflation, $10,000 invested in the very fund you sent me the link too, compounded at a rate of about 4.2%.  A far cry from 12%.

And remember this 20 year time frame includes 19 years of the greatest bull market in history.  Yes, we had a 50% draw down, but thats what happens in a stock market.  It goes up, and it goes down.  And it's cyclical, and we're 11 years in to a the longest bull market in history, and interest rates have been declining for 40 years, and the S&P was lower (adjusted for inflation) in 1980 than it was in 1928...52 years with a negative real return.  

I'm sorry for anyone invested in a mutual fund assuming an average rate of return is the rate at which your money should grow...that's simply not true.  

The good news is you can take your money out of a mutual fund without penalty, and put it into cash flowing real estate, bought under the cost of construction in linear markets with 30 year fixed rate debt...Unless of course you took Dave Ramsey's advice and your money is in a 401k or IRA. ;)

George 

@Mac F. I maybe wrong.  I thought he was blatantly fraudulent, now I'm leaning towards him just being an idiot.  Here's a blurb from his website.

Notice he provides links after "The current average annual return from 1923 to 2016 is 12.25%."  If you actually click the link, that he provides, it takes you to a calculator which correctly measures the CAGR.  

 Even the calculator he links to in his post says he's lying!  haha

And it's adjusted for inflation and includes dividends... 7.26%, not 12.25%.  

I included the description of the calculator because it probably does a better job than I did of explaining why average rates of return are a sham.  

Lastly, you'll notice he has an affiliate link right below where he over inflates the return you can get in the S&P, and right above where he says, "12% isn't a magic number, based on the history of the market, it's a reasonable expectation for your long term investments." 

Is he a fraud or an idiot?  I let others decide.  

@George Gammon , I've sold the Investment Company of America (ICA)-- that's not the way it's done. The standard sales presentation is to show what ICA did during the 70's, which was a horrible time for the stock market.  Investment advisors who take the approach you are suggesting (i.e. 'how would you like to own a fund that grew 40% last year?) generally don't sell ICA (an investment advisor is lucky if an ICA rep will buy them a cup of coffee).

I used ICA as an example because that is the example Dave uses. One of the reasons ICA has performed poorly recently is because the recent couple decades have been poor for the fund category ICA is in (growth and income). Dave recommends buying funds in four equally weighted categories-- growth, growth and income, aggressive growth, and international. Good growth and aggressive growth funds would have outperformed during this period, international and growth and income funds would have under performed. Dave's honest about this-- a lot of his listeners are scared of stock market volatility, and he doesn't minimize the risks. If you're going to criticize Dave's approach, I'd suggest using returns from his preferred investment mix.

And FWIW, I know this from experience. I'm by nature a value investor-- my growth and income and small value investments have taken a pounding lately. The stock market's cyclical. So is real estate. Should real stock market returns be adjusted for inflation? Yes. So should real estate returns. So what?

One of the reasons I'm here on BP is because I want to learn from others how to mitigate the risks of real estate-- vacancy, repairs, CAPEX, tenants, neighborhood decline, etc... I live in one of the hottest real estate markets in the nation (DC metro), and next to one of the most challenging (Delaware). I'll ask my main question for the third time:

Why do you feel that net level of positive cash flow of $1500 a month on a 500k portfolio of properties with 40% down is reasonable, especially for novice investors? Please go into detail on this. One of the great things about BP is that there are so many experienced real estate investors, like yourself, here. That seems like a fantastic return, especially for novice investors, and I just don't have the confidence yet that that's reasonable.

Originally posted by @Mac F. :

@George Gammon, I've sold the Investment Company of America (ICA)-- that's not the way it's done. The standard sales presentation is to show what ICA did during the 70's, which was a horrible time for the stock market.  Investment advisors who take the approach you are suggesting (i.e. 'how would you like to own a fund that grew 40% last year?) generally don't sell ICA (an investment advisor is lucky if an ICA rep will buy them a cup of coffee).

I used ICA as an example because that is the example Dave uses. One of the reasons ICA has performed poorly recently is because the recent couple decades have been poor for the fund category ICA is in (growth and income). Dave recommends buying funds in four equally weighted categories-- growth, growth and income, aggressive growth, and international. Good growth and aggressive growth funds would have outperformed during this period, international and growth and income funds would have under performed. Dave's honest about this-- a lot of his listeners are scared of stock market volatility, and he doesn't minimize the risks. If you're going to criticize Dave's approach, I'd suggest using returns from his preferred investment mix.

And FWIW, I know this from experience. I'm by nature a value investor-- my growth and income and small value investments have taken a pounding lately. The stock market's cyclical. So is real estate. Should real stock market returns be adjusted for inflation? Yes. So should real estate returns. So what?

One of the reasons I'm here on BP is because I want to learn from others how to mitigate the risks of real estate-- vacancy, repairs, CAPEX, tenants, neighborhood decline, etc... I live in one of the hottest real estate markets in the nation (DC metro), and next to one of the most challenging (Delaware). I'll ask my main question for the third time:

Why do you feel that net level of positive cash flow of $1500 a month on a 500k portfolio of properties with 40% down is reasonable, especially for novice investors? Please go into detail on this. One of the great things about BP is that there are so many experienced real estate investors, like yourself, here. That seems like a fantastic return, especially for novice investors, and I just don't have the confidence yet that that's reasonable.

You're ignoring the fact it's a misrepresentation because joe public thinks an average annual return is the same as CAGR.    

Moving on.  I can only answer one question at a time. ;) 

1.  3 properties in the midwest, good neighborhoods, great school districts, 1200 sq ft, 3 bed 2 bath, will run you about 450k-475k (turnkey, much less if you buy/remodel/rent).  They'll rent for about $1400 a month giving you a gross of $4200 a month.  Assume $1000 for expenses and your mortgage will be about $1600 a month, bringing your total to  4200 - 1000 - 1600 = $1600 positive cash flow.  

Of course I'd suggest buy/remodel/rent which would give you a much larger margin of error.  

They way you mitigate risk is to buy/remodel/rent cash flowing properties under the cost of construction in "A" US neighborhoods with a portion of your portfolio and buy cash flowing properties outside the US, denominated in another currency, in a country with very little to no credit in the system, with a portion of your portfolio.  

That portfolio set up, along with some gold, eliminates the most risk possible.  I'm specifically talking about macro risk, but the first part of the suggestion applies to bottoms up risk you were referring too.  Because of the supply constraints and inflation, demand for those props in the US should be strong on the rent and buy side for the medium term.

Originally posted by @George Gammon :
Originally posted by @Mac F.:

@George Gammon, I've sold the Investment Company of America (ICA)-- that's not the way it's done. The standard sales presentation is to show what ICA did during the 70's, which was a horrible time for the stock market.  Investment advisors who take the approach you are suggesting (i.e. 'how would you like to own a fund that grew 40% last year?) generally don't sell ICA (an investment advisor is lucky if an ICA rep will buy them a cup of coffee).

I used ICA as an example because that is the example Dave uses. One of the reasons ICA has performed poorly recently is because the recent couple decades have been poor for the fund category ICA is in (growth and income). Dave recommends buying funds in four equally weighted categories-- growth, growth and income, aggressive growth, and international. Good growth and aggressive growth funds would have outperformed during this period, international and growth and income funds would have under performed. Dave's honest about this-- a lot of his listeners are scared of stock market volatility, and he doesn't minimize the risks. If you're going to criticize Dave's approach, I'd suggest using returns from his preferred investment mix.

And FWIW, I know this from experience. I'm by nature a value investor-- my growth and income and small value investments have taken a pounding lately. The stock market's cyclical. So is real estate. Should real stock market returns be adjusted for inflation? Yes. So should real estate returns. So what?

One of the reasons I'm here on BP is because I want to learn from others how to mitigate the risks of real estate-- vacancy, repairs, CAPEX, tenants, neighborhood decline, etc... I live in one of the hottest real estate markets in the nation (DC metro), and next to one of the most challenging (Delaware). I'll ask my main question for the third time:

Why do you feel that net level of positive cash flow of $1500 a month on a 500k portfolio of properties with 40% down is reasonable, especially for novice investors? Please go into detail on this. One of the great things about BP is that there are so many experienced real estate investors, like yourself, here. That seems like a fantastic return, especially for novice investors, and I just don't have the confidence yet that that's reasonable.

You're ignoring the fact it's a misrepresentation because joe public thinks an average annual return is the same as CAGR.    

Moving on.  I can only answer one question at a time. ;) 

1.  3 properties in the midwest, good neighborhoods, great school districts, 1200 sq ft, 3 bed 2 bath, will run you about 450k-475k (turnkey, much less if you buy/remodel/rent).  They'll rent for about $1400 a month giving you a gross of $4200 a month.  Assume $1000 for expenses and your mortgage will be about $1600 a month, bringing your total to  4200 - 1000 - 1600 = $1600 positive cash flow.  

Of course I'd suggest buy/remodel/rent which would give you a much larger margin of error.  

They way you mitigate risk is to buy/remodel/rent cash flowing properties under the cost of construction in "A" US neighborhoods with a portion of your portfolio and buy cash flowing properties outside the US, denominated in another currency, in a country with very little to no credit in the system, with a portion of your portfolio.  

That portfolio set up, along with some gold, eliminates the most risk possible.  I'm specifically talking about macro risk, but the first part of the suggestion applies to bottoms up risk you were referring too.  Because of the supply constraints and inflation, demand for those props in the US should be strong on the rent and buy side for the medium term.

Now we're at the point where we can do the actual comparison.

Option A: With your portfolio of three $125k houses, 4 months of gross rent in reserve (~$25k), $350 per month in variable expenses (10% mgt fees, 5% CAPEX, 5% repairs, 5% vacancy), you are netting $1600 per month if everything goes perfectly. That income goes to pay off student debt.

Option B: 
A fair contrast would be to use DR's suggestion to pay off consumer debt with the $200k, and then using debt to buy the real estate.

In this scenario, you save the $1500 student loan payment you no longer make for ten months, which gives you enough to put 3.5% down on one house and four months gross rent in reserve. The house should cash flow $250 per month if everything goes perfectly (all things equal except mortgage payment amount and PMI). You continue to save and buy another one in eight months, and then a third in six months. You have $750 in monthly income (assuming everything goes perfectly) which you can spend, or use to invest in more properties.

Why do you think option A is better than option B for novice investors? Also, why is that a good variable expense rate? I've generally seen CAPEX and repairs percentages being higher.

How many months you expect to find another job if the economy turns sour?  If it is government civil service, medical profession, you may consider both.  

My physician client wanted to pay $1.2M cash for their CA home. Wife, ex-nurse does not need to work so she has no income. I dragged him into their HR getting a no interest mortgage assistance for 10 years, as fraction of mortgage. The two both paid off their student loans quickly in their career. They both grew up and were brought up that way.  Another plastic surgeon with his wife rent a $10K home (mo) this piano, dance, voice training lessons, country club dues could not even come up with funds for a closing cost with a huge student loan and awful FICO.  

Refi makes sense. AirBB & living in a duplex from your tenant where you may not get peace are things you want to consider. Both can be painful.  Many towns in America has restriction on using homes as AirBB-vacancy, tenant issues, PM and neighbor complaints are some of the worries.  

@Ashley Gish

Same situation here. I'm approaching it by asset-liability matching. I'm just completing my second BRRRR deal. I have $15k in cash equity invested, generating $600 in free cash flow which is auto-paid to the loans. Need two more deals to meet my $1200 month student loan liability.

The leverage with real estate, at lower interest rates than the student loans, plus the longer maturity makes this a positive carry trade. Let the tenants pay off the student loans. Better yet, get Section 8 tenants so the government can pay themselves back.

Tackle those student loans, first and foremost. If the interest rate were lower I might suggest otherwise, but at 6% - 7.2% it is best to drive that debt down first. I hope this helps! And best of luck. Once you do decide to get things moving with a rental, I definitely have some recommendations to make managing your rental process easy. 

@Ashley Gish

I've recently had my student loan dropped off my credit report and my score is currently raising, so I'm really looking forward to investing in real estate in order to make enough money mow. I'll pay off the loan with the proceeds from my properties; probably settle the loan for pennies on the dollar.