Save for Down Payment, Pay off Student Loans, or Mix of Both?

Question

I am currently a college student interested in starting my real estate journey after graduation. I was looking into house hacking after graduating, but I am going to have a lot of student debt to pay back. Does it make the most sense to save money earned while in school and in summers for a down payment on a multifamily property to house hack, and continue saving for future house hacks/real estate while paying back my loans on time? Or should I prioritize paying down principal on my loans while in school and pursue a debt avalanche-type strategy to pay down my loans faster after I graduate instead of saving for a house hack? Or should I do a mixture of both? I was originally considering saving for a house hack while in school and using the profits coupled with saving income to use a debt avalanche strategy to pay down my loans faster after graduating, while also saving a small sum for a similar house hack/property after my first, but I wasn’t sure if there were better options.

Thank you so much in advance for your guidance!

Scott Passman · Answer

There are a lot of variables present (loan debt amount, interest rate, rental rates in your area, etc), however, in general you would likely get the best bang for your buck by househacking.  The amount of monthly expenses you would save would likely add up to much, if not all, of your student loan debt obligations plus you would own an asset which is likely to appreciate over time and that you are building equity in for the long haul.  Plus, I personally wouldn't put anything additional into student loan payments right now because there is such a heavy push from the democratic platform to pass some type of loan forgiveness that unless someone has a ridiculously high interest rate, it may be best to see what comes of this before paying additional money towards the principle.

Aaron W. · Answer

@Logan Sherwin It is great to hear you are interested in real estate at such a young age!

As @Scott Passman said, everyone's situation is different and househacking is a good strategy to start out. Not only are you building an asset, but you will gain landlording and property management experience at the same time. If you bring on roommates or tenants, then they can also help to lower your costs to own the property. You are also building credibility with lenders through the househack that will be invaluable when you start to scale and looking for financing.

In regard to your student loans, just be prepared to continue to pay them, because who knows what will happen with them in the future. I'd put no more into the payments than necessary, but that is my preference. Some people hate the fact that they have any debt to their name. Typically student loan interest is low enough that it would make sense to put the extra payments to something else that actually pays you back... real estate?

Good luck on the journey!

Theresa Harris · Answer

Chance are your money will go further if you rent out rooms in your house (or buy a duplex).  your living expenses will be lower and if you want, you can use the extra income to pay down your student loans faster if the debt bothers you.

Do the math and see what you save by paying down the loans faster compared to house hacking.  Chances are with the increased income and lower living expenses, house hacking will win.

David A Lisowski · Answer

@Logan Sherwin

Debt to Income is a ratio. So not necessarily a 1:1 correspondence between the benefits.

In some instances, lowering your monthly debt will have a bigger impact on your qualifications (on paper) in terms of DTI. Sometimes, your increase in income will be a better benefit to DTI.

I don't have specifics at the moment, but you can calculate DTI easily...

I guess my point is that most people can control their debt load easier than increasing income.

Typically, student loans will count as 1% of the balance as the monthly payment (unless you can provide a fully amortized payment plan). Depending on the balances of the student loans, that can eat up your qualifying income pretty quickly. Then again, paying off a $20,000 or $50,000 loan can seem like a mountain especially when you want to "save" to invest.

Generate wealth by purchasing assets to put your money to work. No one gets ahead by saving (not in the traditional sense).

Tap into equity to leverage "hidden" savings to really give a boost.

Hopefully, this helps. I feel like I'm rambling...

Save for Down Payment, Pay off Student Loans, or Mix of Both?

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