Selling Rental to Pay off Crazy Student Loan

Samantha Springs · 2023-08-03T15:30:03-07:00

Hi BP Fam! I am considering selling my duplex to pay off my insane student loans and would love to hear from the BP brain trust. My student loans are $355K total with a 7.5% interest rate. Once repayment starts in October, I will pay about $1,300 monthly (but that will increase as my income increases, which it will continue to do as I get regular raises and have a promotion coming in the near future). I am about 10 years from payoff given the loan repayment program I am in. My partner and I are currently renting in Los Angeles and intend to continue (interest rates and home prices are too high for it to make sense for us right now) and the duplex is also in Los Angeles. My current interest rate on the duplex is 2.75% (bought during COVID, what a time). I would only sell if I could pay off my loans in their entirety, which would require a sale price of about $1.1M (which I think is doable in this market) and I owe about $737K. I have owned for almost 3 years and I lived in it for the first 2.5, so I would be exempt from a large portion of the capital gains, though I know depreciation recapture is a consideration. I just started renting out the front unit on a medium term basis and combined with the long term rent in the back unit, I about break even right now, but could hope to cash flow around $200/month (on the conservative side) once I get more reviews and stays under my belt. From a non-financial perspective, I am not loving the property management aspect of the home as it is not in a great neighborhood and even as the best AirBnb host ever, there are environmental factors that I can't control. My goal is to start investing out of state where I can do much more with my money and afford to pay a property manager, cash flow in a more meaningful way, and generate passive income to subsidize (and maybe eventually replace) my W2 income. Should I sell to payoff the debt or keep it and keep paying on my student loans? Or do something else? Any thoughts are welcome!

Samantha Springs

OP

Investor · Los Angeles, CA · Member since 2022 · 35 posts · 23 votes

3y

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Matt Devincenzo

Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes

3y

I'd typically say keep it and leverage the asset, but in this case it seems selling may be the way to go. You are 100% eligible for 121 exclusion (based on dates seems like you have until early 2026 to sell) which allows $250K/500K gain to be excluded and you to pay off your student loans. Personally I'd hold out until mid to late 2024 or early 2025 if I were you...I believe interest rates will tip back down in the second half of 2024 and prices should remain stable locally until then. It's a gamble if values increase much from now until then, but since you have until 2026 to sell for the 121 exclusion, I'd take the gamble that values may pop a bit in a year or so...

That's my crystal ball perspective and it may be incorrect, but as market sentiment improves in 12-18 months I think you may get some decent additional gain out of the transaction by holding off a bit.

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Travis Biziorek

Investor · Arroyo Grande, CA · Member since 2014 · 1k+ posts · 1k+ votes

3y

Hey Samantha, I'll take a stab at this.

It sounds like there are really two separate decisions to make here. Do you sell the rental? Do you use the proceeds to pay off the student loan?

It sounds like you're leaning toward selling the rental. You aren't enjoying the management side of it and it's not making you a ton of money. Why not realize those tax free gains and move on? It sounds like selling is the right move for you.

Now, do you pay off the 7.5% interest student loans?

That's hard to say. I think many will say "absolutely" but I don't believe it's that cut and dry. Is that payment a burden for you? As soon as you pay those loans you're giving up a pile of cash that you could invest out of state with. And yes, you could do better than 7.5% in the right market.

Will you regret giving up that access to capital?

Also, are you able to do anything to reduce the student loan interest rate? I'm not too familiar with them but I'm wondering if you can refinance at a better rate somehow.

Lastly, I have no clue how much money you make, how much other savings you have, etc. The big question here is how quickly will you be able to start investing out of state? Without much cash on hand it could take awhile to get going.

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Jake AndronicoBusiness Member

Realtor · Reno, NV · Member since 2019 · 1k+ posts · 938 votes

3y

Samantha,

With your $355k in student loans, I'm assuming you have a lucrative job with a lot of upside.

There is no shame in paying off that student loan debt (for financial AND peace of mind reasons), and "starting from square one".

You've benefited from massive appreciation in a short amount of time, and I'm assuming you'd be able to save a lot of money relatively quickly to start building up your portfolio elsewhere, with more of an emphasis on cash flow.

These are assumptions, but something to chew on :)

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Theresa HarrisPro Member

Member since 2019 · 15k+ posts · 11k+ votes

3y

Given you don't like being a landlord, I'd say sell it. If you lived in it for a while, you should be able to sell and not pay capital gains. You will have realtor's fees and other things to pay. Now what you do with the money when you sell is another story. I don't know if I'd pay off all of the loans. While the interest rates are high, could you invest that money elsewhere and see a better return? Be careful with out of state investing. Lots of people do it, but you need to know the area and have a good PM.

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Matthew Paul

Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes

3y

i would sell and pay off the student loan . Then you are free , you wont have the debt of the house or the student loan debt . If you have a good income , you can quickly save up a down payment and you would look great on paper to get a loan on a property .

Things may work today , but the RE market could tank and you lose that opportunity , but my crystal ball is out of battery and I cant tell the future right now .

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V.G JasonPro Member

Investor · Member since 2022 · 3k+ posts · 3k+ votes

3y

You should have never bought a rental until you paid off such loans. I think the only "debt" someone should have before investing in physical real estate is maybe their own primary home mortgage, but that's it. If you have any other debt, don't invest in physical RE. You got caught leveraging upon leveraging in the historically low, low interest rate environment. That's not forever, and you're going to learn the hard way. Sell the rental, pay off all debt(s) you have. Then invest in a position of strength. Quit thinking mathematically, think behaviorally.

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Nicholas L.Pro Member

Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes

3y

@Samantha Springs

this is one of those really personal questions that I don't like advising on. it's a good one - it's just such a personal decision.

you got a really thoughtful response from @Travis Biziorek with some things to think about it.

here's something from me. why not hire a property manager? yes, this will 'hurt' your cash flow, but it sounds like it will improve your quality of life. that's a big deal. it's not permanent. try it for a year. see what happens.

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Jamie Jones

Lender · Nashville, TN · Member since 2017 · 205 posts · 107 votes

3y

Quote from @V.G Jason:

You should have never bought a rental until you paid off such loans. I think the only "debt" someone should have before investing in physical real estate is maybe their own primary home mortgage, but that's it. If you have any other debt, don't invest in physical RE. You got caught leveraging upon leveraging in the historically low, low interest rate environment. That's not forever, and you're going to learn the hard way. Sell the rental, pay off all debt(s) you have. Then invest in a position of strength. Quit thinking mathematically, think behaviorally.

You say she should never have bought a rental until she paid off such loans. However, my guess is she probably would have never been able to pay off the debt if she had not purchased the rental. Sounds to me like she made a very wise decision to purchase when she did, and can now compound that decision into freeing herself from that large amount of debt. I do agree that people should invest from a position of financial strength but with that amount of student debt, she likely has a decent paying job and (even with the student loans) was able to purchase an investment property in one of the country's most expensive market. That doesn't sound like a place of weakness to me. It would be different if she was talking about six figure credit card or multiple pay-day loans.

Great job @Samantha Springs

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V.G JasonPro Member

Investor · Member since 2022 · 3k+ posts · 3k+ votes

3y

Quote from @Jamie Jones:

Quote from @V.G Jason:

You should have never bought a rental until you paid off such loans. I think the only "debt" someone should have before investing in physical real estate is maybe their own primary home mortgage, but that's it. If you have any other debt, don't invest in physical RE. You got caught leveraging upon leveraging in the historically low, low interest rate environment. That's not forever, and you're going to learn the hard way. Sell the rental, pay off all debt(s) you have. Then invest in a position of strength. Quit thinking mathematically, think behaviorally.

You say she should never have bought a rental until she paid off such loans. However, my guess is she probably would have never been able to pay off the debt if she had not purchased the rental. Sounds to me like she made a very wise decision to purchase when she did, and can now compound that decision into freeing herself from that large amount of debt. I do agree that people should invest from a position of financial strength but with that amount of student debt, she likely has a decent paying job and (even with the student loans) was able to purchase an investment property in one of the country's most expensive market. That doesn't sound like a place of weakness to me. It would be different if she was talking about six figure credit card or multiple pay-day loans.

Great job @Samantha Springs

If she saved money for the downpayment, she was going to be well on her way to paying off that debt. She clearly wasn't in a position of strength, if she's still owes 700k+ in mortgage debt AND $350k + in student loan debt. She wasn't in a position of terrible weakness, but definitely not in strength. If she took the time to pay off this student loan debt when it was paused, she'd be debt free going forward and could focus on a primary residence for herself.

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Michael SmytheBusiness Member

Real Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes

3y

Put the duplex up for sale and while listed, start looking for better investments.

Ask yourself if you really want to be a landlord at all! If you hire a PMC you will have less headaches, but still need to be involved in decision making.

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JD MartinBusiness Member

Moderator

Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

3y

Since you don't love the property and see some potential future downsides, I see nothing wrong with selling and taking your guaranteed 7.5% return.

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Samantha Springs

OP

Investor · Los Angeles, CA · Member since 2022 · 35 posts · 23 votes

3y

Quote from @V.G Jason:

Quote from @Jamie Jones:

Quote from @V.G Jason:

You should have never bought a rental until you paid off such loans. I think the only "debt" someone should have before investing in physical real estate is maybe their own primary home mortgage, but that's it. If you have any other debt, don't invest in physical RE. You got caught leveraging upon leveraging in the historically low, low interest rate environment. That's not forever, and you're going to learn the hard way. Sell the rental, pay off all debt(s) you have. Then invest in a position of strength. Quit thinking mathematically, think behaviorally.

You say she should never have bought a rental until she paid off such loans. However, my guess is she probably would have never been able to pay off the debt if she had not purchased the rental. Sounds to me like she made a very wise decision to purchase when she did, and can now compound that decision into freeing herself from that large amount of debt. I do agree that people should invest from a position of financial strength but with that amount of student debt, she likely has a decent paying job and (even with the student loans) was able to purchase an investment property in one of the country's most expensive market. That doesn't sound like a place of weakness to me. It would be different if she was talking about six figure credit card or multiple pay-day loans.

Great job @Samantha Springs

If she saved money for the downpayment, she was going to be well on her way to paying off that debt. She clearly wasn't in a position of strength, if she's still owes 700k+ in mortgage debt AND $350k + in student loan debt. She wasn't in a position of terrible weakness, but definitely not in strength. If she took the time to pay off this student loan debt when it was paused, she'd be debt free going forward and could focus on a primary residence for herself.

Thanks for your feedback. I was not close to paying off the debt as I utilized the FHA loan program and only had to put 3% down (roughly $25K). I definitely could have made different decisions in regard to my debt back then, but I didn't and here I am now, so trying to make my next move my best move.

1 Reply

Samantha Springs

OP

Investor · Los Angeles, CA · Member since 2022 · 35 posts · 23 votes

3y

Quote from @Jamie Jones:

Quote from @V.G Jason:

You should have never bought a rental until you paid off such loans. I think the only "debt" someone should have before investing in physical real estate is maybe their own primary home mortgage, but that's it. If you have any other debt, don't invest in physical RE. You got caught leveraging upon leveraging in the historically low, low interest rate environment. That's not forever, and you're going to learn the hard way. Sell the rental, pay off all debt(s) you have. Then invest in a position of strength. Quit thinking mathematically, think behaviorally.

You say she should never have bought a rental until she paid off such loans. However, my guess is she probably would have never been able to pay off the debt if she had not purchased the rental. Sounds to me like she made a very wise decision to purchase when she did, and can now compound that decision into freeing herself from that large amount of debt. I do agree that people should invest from a position of financial strength but with that amount of student debt, she likely has a decent paying job and (even with the student loans) was able to purchase an investment property in one of the country's most expensive market. That doesn't sound like a place of weakness to me. It would be different if she was talking about six figure credit card or multiple pay-day loans.

Great job @Samantha Springs

Thank you! I did the best I could with the information I had at the time and I generally feel very good about the purchase.

2 Reply

Samantha Springs

OP

Investor · Los Angeles, CA · Member since 2022 · 35 posts · 23 votes

3y

Quote from @Travis Biziorek:

Hey Samantha, I'll take a stab at this.

It sounds like there are really two separate decisions to make here. Do you sell the rental? Do you use the proceeds to pay off the student loan?

It sounds like you're leaning toward selling the rental. You aren't enjoying the management side of it and it's not making you a ton of money. Why not realize those tax free gains and move on? It sounds like selling is the right move for you.

Now, do you pay off the 7.5% interest student loans?

That's hard to say. I think many will say "absolutely" but I don't believe it's that cut and dry. Is that payment a burden for you? As soon as you pay those loans you're giving up a pile of cash that you could invest out of state with. And yes, you could do better than 7.5% in the right market.

Will you regret giving up that access to capital?

Also, are you able to do anything to reduce the student loan interest rate? I'm not too familiar with them but I'm wondering if you can refinance at a better rate somehow.

Lastly, I have no clue how much money you make, how much other savings you have, etc. The big question here is how quickly will you be able to start investing out of state? Without much cash on hand it could take awhile to get going.

Thank you so much for the thoughtful response. I am an attorney and I make a good salary, so I do think I could start investing out of state pretty quickly. That said, you've given me a lot of food for thought as to the best use of the proceeds if I do sell.

1 Reply

Samantha Springs

OP

Investor · Los Angeles, CA · Member since 2022 · 35 posts · 23 votes

3y

Quote from @Nicholas L.:

@Samantha Springs

this is one of those really personal questions that I don't like advising on. it's a good one - it's just such a personal decision.

you got a really thoughtful response from @Travis Biziorek with some things to think about it.

here's something from me. why not hire a property manager? yes, this will 'hurt' your cash flow, but it sounds like it will improve your quality of life. that's a big deal. it's not permanent. try it for a year. see what happens.

Agreed. It is such a personal question but I do appreciate the responses I've received that offer me different perspectives than just the thoughts bouncing around in my own head.

1 Reply

Samantha Springs

OP

Investor · Los Angeles, CA · Member since 2022 · 35 posts · 23 votes

3y

Quote from @Michael Smythe:

Put the duplex up for sale and while listed, start looking for better investments.

Ask yourself if you really want to be a landlord at all! If you hire a PMC you will have less headaches, but still need to be involved in decision making.

Thanks. I don't mind the landlord bit of it, decision making and oversight is something I am generally good at and enjoy. It's the day to day tenant interaction that drains me.

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Michael Ehrhart

Realtor · Los Angeles · Member since 2023 · 12 posts · 4 votes

3y

Hi Samantha,

I'm not sure if you have heard of the new save plan that was implemented. As this might affect your decision. https://studentaid.gov/announcements-events/save-plan

Even as a high earner it looks like this plan could save you money.

It's definitely a personal choice, as it depends on if you are looking at the short or long term, but I would look at all of the data before making your decision.

Personally I would look at the long term as Real Estate is a long term game. Calculate what you would pay long term for the student loan debt, including your potential pay increases, compared to what the duplex would earn you in appreciation and future potential cash flow. As you stated the property is not currently in a great area, which could mean huge potential upside for you in the future.

Plus keep in mind the average mortgage loan rate right now is between 6 to 7% which isn't far off from your student loan interest rate, if you were to turn around and buy a property.

Feel free to reach out if you need help sourcing any of the market data to make your decision!

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Selling Rental to Pay off Crazy Student Loan

Selling Rental to Pay off Crazy Student Loan

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