Pay back student loans or flip a house?

Involved In Real Estate · Worcester, MA · Member since 2014 · 21 posts · 16 votes

Hi all, I have a hypothetical question for you all. If you were a 20-something who was fresh out of college and buried in student loans (oh the perks of being young, not). You managed to save up some pretty decent money from your first job, say $20k. Would you use this money to pay off your loans or invest in real estate, specifically flipping a house? Thanks for your input in advance! Vi L.

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Will BarnardPro Member

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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

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A key factor I don't see mentioned in this thread is the interest rate of your student debt. That is a very important piece of the puzzle and has an impact on the choice. If that rate is lower than what you can reasonably gain from the investment if the savings, invest. If it us higher, pay off the debt. Simple as that.

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Aaron Junck
Real Estate Investor · Sioux Falls, SD · Member since 2013 · 415 posts · 84 votes
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It sounds like the student loans would be paid off completely, correct???
I personally wouldn't pay them off bc I like RE and feel that if I can have both, then I want both :) Meaning if I could buy RE, or any other investment, and have that pay off my student loan for me from the cash flow , then that to me is "killing 2 birds with 1 stone".
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Jayme Lonokapu
San Diego, CA · Member since 2015 · 1 post · 2 votes
11y
Are you asking the bigger pockets world what they would do with 20k? I think you know the answer! But if you need to hear it... INVEST!
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Vi Lai
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Involved In Real Estate · Worcester, MA · Member since 2014 · 21 posts · 16 votes
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Hi Aaron and Jayme, I knew I wanted to invest, however coming from a "financially conservative" family who convinced me otherwise, I was starting to doubt my initial decision. I guess I have to surround myself with like minded individual like you guys more often :). Thanks for your replies! Vi
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Aaron Junck
Real Estate Investor · Sioux Falls, SD · Member since 2013 · 415 posts · 84 votes
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Being debt free is great for a personal financial standpoint. However, having no money at all and having no debt or assets,IMO, s*cks. Been there before and I rather have a good amount of cash in my safe than 0 debt.
By no means have a ton of debt and a ton of cash , that is just throwing away money. But, you should have some sort of cash reserves always. You will have to be the one that decides how much that is. It may be $200 or it may be $100,000 . Whatever it is that lets you sleep well at night . If your a high risk individual (like myself) then I would rather use cash to acquire assets that pay for my toys. Need something to pay for depreciating assets other than me going to a JOB.
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Sean Moen
Investor · Sacramento County, CA · Member since 2013 · 104 posts · 20 votes
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Vi,
I am - more or less - in that situation. Now my student loan debt is a bit larger than that and we've got a bit of a plan to handle it. We're taking care of 2 of the 3 loans I have to improve our cash flow position and make sure to stay our of consumer debt. After that, it's all about the game. On the heels of reading 2 epic "Ramsey/Kiyosaki" posts; we're going to play the responsible leverage game. When we have the cash, we plan to take the money and earn 20% CCR instead of paying the 6.5% interest on the loans. Short term it make sense and long term it does as well.
If you haven't read the posts below; take a read. Decent sized discussion but amazing content as always.
http://www.biggerpockets.com/forums/311/topics/170...
http://www.biggerpockets.com/forums/48/topics/9025...
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Vi Lai
OP
Involved In Real Estate · Worcester, MA · Member since 2014 · 21 posts · 16 votes
11y
Originally posted by @Aaron Junck:

Being debt free is great for a personal financial standpoint. However, having no money at all and having no debt or assets,IMO, s*cks. Been there before and I rather have a good amount of cash in my safe than 0 debt.
By no means have a ton of debt and a ton of cash , that is just throwing away money. But, you should have some sort of cash reserves always. You will have to be the one that decides how much that is. It may be $200 or it may be $100,000 . Whatever it is that lets you sleep well at night . If your a high risk individual (like myself) then I would rather use cash to acquire assets that pay for my toys. Need something to pay for depreciating assets other than me going to a JOB.
Aaron, I really appreciate your input. You are absolutely right. The answer really comes down to my own risk profile. I guess I already knew what I really wanted but needed to hear something like this to be 110% sure :). Thanks again!
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Peter MckernanBusiness Member
Residential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
11y
@Vi Lai
I would say if you have the money to pay off the debt right now, do that. I believe that if the debt is paid off right away and you have no other debt that is slowing you down you will be able to save for the flip with a lot more momentum.
If you are able to pay it off right away and start throwing money in your savings account for the flip project in the near future, you will be able to build cash that much quicker to put that money down and it will free up cash to help you pay for holding costs of the flip if you need it.
That is just my two cents.
Good luck,
Peter
The McKernan Group4.957 Reviews
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Vi Lai
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Involved In Real Estate · Worcester, MA · Member since 2014 · 21 posts · 16 votes
11y
Originally posted by @Sean Moen:

Vi,
I am - more or less - in that situation. Now my student loan debt is a bit larger than that and we've got a bit of a plan to handle it. We're taking care of 2 of the 3 loans I have to improve our cash flow position and make sure to stay our of consumer debt. After that, it's all about the game. On the heels of reading 2 epic "Ramsey/Kiyosaki" posts; we're going to play the responsible leverage game. When we have the cash, we plan to take the money and earn 20% CCR instead of paying the 6.5% interest on the loans. Short term it make sense and long term it does as well.
If you haven't read the posts below; take a read. Decent sized discussion but amazing content as always.
http://www.biggerpockets.com/forums/311/topics/170...
http://www.biggerpockets.com/forums/48/topics/9025...
Thank you so much for the reads Sean! I have been following both of these guys. I'm very excited to see what everyone has to say. I hope we both make the smart decisions at the end :)
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Kyle Mack
Investor · SE Wisconsin/NE Illinois · Member since 2012 · 109 posts · 57 votes
11y
I agree with @Aaron Junck , get the best of both worlds by killing two birds. Do the best flip you can by doing your hw and making sure your numbers all work out to increase your "odds" on your first flip. In the process you will learn tons about flipping and RE in general. Then when the "investment" pays off, use that to pay off some student loans.
*Repeat these steps again and continue the cycle
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Vi Lai
OP
Involved In Real Estate · Worcester, MA · Member since 2014 · 21 posts · 16 votes
11y
Originally posted by @Peter Mckernan:

@Vi Lai
I would say if you have the money to pay off the debt right now, do that. I believe that if the debt is paid off right away and you have no other debt that is slowing you down you will be able to save for the flip with a lot more momentum.
If you are able to pay it off right away and start throwing money in your savings account for the flip project in the near future, you will be able to build cash that much quicker to put that money down and it will free up cash to help you pay for holding costs of the flip if you need it.
That is just my two cents.
Good luck,
Peter
@peter mckernan thanks Peter! That was my thought as well. I want to be debt free very badly but at the same time, I just want to take a chance with real estate. It is after all my passion. I have met investors who took a chance with credit card debts (not saying it is good/bad) and became very successful.
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Mike HurneyPro Member
Real Estate Investor · Boston, MA · Member since 2009 · 2k+ posts · 542 votes
11y
@Vi Lai @Sean Moen Hey Guys, I wouldn't be in a hurry to pay off those student loans. I believe they're low interest and deferred for a while?
You may want to check into how they're retired/forgiven, something like working in public service for two years, which ain't paying that bad right now...
What fields are your degrees in?
As a Mortgage Broker sometimes I'll get recent grads applying for a Purchase loan and when I run their credit..... $80, 90, 150k in student debt. I'll say Wow, what are you like a Doctor or something?
Of course they bristle and exclaim That's the price of a good education! So where are you working with this good education? At the airport! hmmmm How about work in your degree field? No Jobs. (At this point I feel bad. Expensive degree and little job prospects. And they tell us the economy is improving...)
OK, then let's succeed in Real Estate anyway!
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Sean Moen
Investor · Sacramento County, CA · Member since 2013 · 104 posts · 20 votes
11y
@Mike Hurney
Not to get too into the weeds but there are 2 types - Private and "Public" student loans. The private loans are the ones we're trimming off but the "Public" loans - held by the Government - are getting the long haul treatement.
The deal with forgiveness is 2 fold:
If you work in the public or non-profit sectors for 10 years and make 10 years of on-time payments, the rest is forgiven.
If you make 20 years of on-time payments, the rest of the debt is forgiven.
This what I know based on my student loans - your mileage may vary.
With that being said and getting into REI; we deliberately minimize/steer clear of consumer debt & increasing the Income side of my DTI ratio by working full time while going to school. The road I picked to travel has paid off in spades and am in a great spot looking over the next 1, 3, 5 years. I will consciously be keeping my Government-backed student loans and purchasing buy and holds to make my payments for the next 20 years.
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Stanley Okazaki
Residential Real Estate Agent · The Woodlands, TX · Member since 2015 · 109 posts · 40 votes
11y
If you have the experience or know someone that does, I would say go invest in real estate. Fixer uppers may not be the best way to start if you don't know what you're doing. House hacking may be a great way to start.
If you'd rather wait to flip your first house I would learn more about flipping homes, or find a mentor then go flip a house. Point is, I wouldn't pay off the student loan if I we're in your shoes. 20K can go so much farther in real estate, assuming you know what you're doing.
Good debt is better than no debt.
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Derek Daun
Investor · Sacramento, CA · Member since 2012 · 289 posts · 151 votes
11y
Depends on interest rates. My student loans are 2.5%, so I don't plan on paying them off for quite a while. If I was paying >10% interest on something, then I'd be looking to pay them off rather than investing, as a 10% return is pretty good.
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Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
11y
A key factor I don't see mentioned in this thread is the interest rate of your student debt. That is a very important piece of the puzzle and has an impact on the choice. If that rate is lower than what you can reasonably gain from the investment if the savings, invest. If it us higher, pay off the debt. Simple as that.
Podcast Guest on Show #130
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Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
11y
Hi Vi,
I'm not quite as experienced as some of the other investors in this thread, but I think that personally, I would feel a little bit anxious about increasing my debt load while attempting a flip for the very first time. $20,000 may not go nearly as far as you might think on your first flip, depending of course on the condition of the house.
In my case, I decided to actually live in the property I purchased - something that might be more reasonable for you with only $20,000 to invest. You get great financing terms as an owner-occupier, and a full year to make the investment work out. If the property is a multi-family (I bought a duplex), you can also rent out parts of it - the savings you get on your living situation might be well greater from a true cash flow perspective than the interest rate on your student loan.
Whatever your decision, best of luck!
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Account Closed
Minneapolis, MN · Member since 2014 · 332 posts · 288 votes
11y
What is the interest rate on the loan? That's a KEY piece of info that's missing.
For example, I graduated from college 15 years ago and I have purposely not paid off my college loans yet, even though I have the capacity to do so. Why? Because my interest rate is fixed at 3%. Since I have the income to handle that debt payment each month with ease (it's about the cost of a really nice dinner for 2 with wine), I choose to only pay the minimum each month and use my capital to invest, where I can earn a substantially higher return.
Also, keep in mind. If you have no experience, it's not like it's necessarily an equal "either or" consideration. You may very well lose that $20,000 on your first flip if you don't know what you are doing. That said, in my opinion, if you have the fortitude to bounce back from that, it's probably the best $20,000 in educational money you ever spent.
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Roy N.Pro Member
Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
11y
Originally posted by @Vi Lai:

Hi all,
I have a hypothetical question for you all. If you were a 20-something who was fresh out of college and buried in student loans (oh the perks of being young, not). You managed to save up some pretty decent money from your first job, say $20k. Would you use this money to pay off your loans or invest in real estate, specifically flipping a house?
Thanks for your input in advance!
Vi L.
Vi:
This is a math problem.
Your opportunity cost is the interest rate on your student loan combined with your marginal tax rate.
If you can invest the 20K and earn a return which, after you pay taxes on it, is greater than the amount of interest you pay on your debts, then you should invest. Otherwise you should pay down your debt.
Either way, you should retain an equivalent of 3-4 months income in liquid savings as your rainy day fund.
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Jeff Rabinowitz
Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
11y
Yes, to all who talk about interest rates and returns on investment. I have partners who pay me 18% to borrow money for 6 months. Why would they do that? Because they are astute buyers who consistently purchase at favorable prices, rehab the houses efficiently, and earn considerably more than that when they sell. It is not a good idea for an inexperienced person to do that but it will also be difficult for an inexperienced person to find a lender to back them.

If you think you have a good chance of earning considerably more than the interest rate on your student loans it makes sense to invest the money. If you are not fairly certain that you can find a good deal or are not prepared to do the work necessary to make the deal a success you may be better off paying down the student loans.
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Vi Lai
OP
Involved In Real Estate · Worcester, MA · Member since 2014 · 21 posts · 16 votes
11y
wow I'm overwhelmed by all the great responses and advices! Thank you everyone!
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Jeff Torres
Real Estate Agent · Worcester, MA · Member since 2015 · 2 posts · 0 votes
11y
Wow, this is exactly the same situation I'm in right now. 20k and wanting to invest or pay off student loans and bills.
Great feedback in this thread..
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Jawad Ihmoud
Chicago, IL · Member since 2014 · 15 posts · 4 votes
11y
My advice, i don't know if it was stated above, would be to make 2-10% payments towards your student loans with every deal you close. Look at the loans like a monthly bill so that you will be more motivated to make more money to "make ends meet"
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