Should I focus on REI first or eliminating my student loan debt?

27 Replies

I would start investing now. Getting financing is a big part of real estate investing so using cash to pay off that debt at this point of your real estate journey will make the journey slower.

@Mohammad Haidarasl I would echo what @Adam Parker said here. 

Let's say that you were paying 5% interest on your student loan debt.

Well, if you had the capital, and you could put it into an investment that was going to get you 8% do you think that would be a good idea?

It isn't quite as simple as this, but you would essentially be netting that 3% difference. 

Yes, it is great to get debt off of your books and out of your head, but if you can put your capital to work for you instead and get a better return then that's the better option. 

Now is a great time to refinance your debt- I was able to lower my 6 figure debt to 3%, which has allowed quite a bit of freedom to look at other investment opportunities.

I know the scenarios given are often "but you could make 8%+ with that money!" Having been in BIGGER student debt than now, sometimes there's a mental victory from not feeling that weight. You have to decide how important that is to your happiness. Also, that's a guaranteed return of (insert interest rate here) v. investing which has risk in the best of circumstances. Lastly, if you need to take out a loan to REI, often your debts are incorporated in that decision and may disqualify you.

Make sure your earning potential is maximized, your other debts (credit card, etc.) are definitely taken care of, and then weigh the pros/cons. Best of luck!

Originally posted by @Mohammad Haidarasl :

I have quite a huge student loan debt, which is the only type of debt I have. I would like to get into REI immediately but like to know the smartest move to make.

 This would be easier to answer if we know how much student debt you have and how much you earn? There is a huge difference between you owing $18,000 and $300,000.

If you owe $18,000 and make $100,000/yr, then I suggest you pay it off as soon as possible. Postpone investing until after you are finished. If you owe $300,000 and make $20,000 then I suggest you put off investing or paying the loan down until after you can greatly increase your income.

@Mohammad Haidarasl not counting the potential investment income, can you make the payments with your current cashflow? If so I would invest you cash pile. If not, look at refinancing it to a lower rate and see if you put down some money if the payment will be more manageable.

@Mohammad Haidarasl if you have multiple separate loans (with different loan amounts outstanding and interest rates), consider picking some to pay off completely to help free up your Debt-to-Income ratio a bit. This will come in handy if you need to speak to a lender about a rental property in the near future.

Freeing up those fixed monthly minimum debt payments can be a big deal to a lender as well as to yourself for cash-flow and flexibility reasons.

@Mohammad Haidarasl   Not knowing how much your debt is, the interest rates and payment along with your income, makes it hard to give advice.  Generally speaking, your interest on your student loans will be lower and as long as you can save for a rental, you can then use the extra income from the rental to service your debt.

For me this answer really boils down to 1. What is your strategy and targeted returns and 2. How confident are you based on your skills knowledge and experience that you can hit those goals. If your loans are 5-6% and you intend to invest in stabilized SFRs with 8-10% that might be too risky a spread for you. On the other hand if you intend to do a deal with a targeted 20+% return than you've got plenty of margin for error. Hope that helps

@Mohammad Haidarasl most student loans are permanent debt, meaning the debt cannot be discharged with bankruptcy, so it must be paid off. For that reason, student loan debt should be targeted first. It is a good thing that student loans are permanent debt, because without that protection, banks would need to double or triple interest rate to account for default. So it is a good and bad is what I am saying.

Even if you don't pay it all off, try to make double or triple payments. Often the loan payments are very low, which means a very slow principal pay down. Unlike a mortgage, there is no fixed term for student loan payoff, so you could be stuck paying forever.

I know some people argue the return in real estate is better, but not necessarily. Loan pay down is a guaranteed return equal to interest you avoid. Real estate is projected return and subject to actual performance. Market changes or even bad tenants can cause your return to be low to nothing in real estate. 

Originally posted by @Stephen Keighery :

I would start investing now. Getting financing is a big part of real estate investing so using cash to pay off that debt at this point of your real estate journey will make the journey slower.

 Thank you Stephen, this makes a lot of sense and is something that I've always thought about but wasn't sure about. 

Originally posted by @Adam Parker :

@Mohammad Haidarasl what kind of rates on your debt ? I think depending on what rates you can get on a mortgage that could be a better thing to paying down all the debt

 Hi Adam, thank you for replying to my post! Sadly, this is what I'm currently working with:

Originally posted by @Nathaniel Hovsepian :

@Mohammad Haidarasl I would echo what @Adam Parker said here. 

Let's say that you were paying 5% interest on your student loan debt.

Well, if you had the capital, and you could put it into an investment that was going to get you 8% do you think that would be a good idea?

It isn't quite as simple as this, but you would essentially be netting that 3% difference. 

Yes, it is great to get debt off of your books and out of your head, but if you can put your capital to work for you instead and get a better return then that's the better option. 

Hey Nathaniel, thank you for your reply to my post. I have varying rates and am quite inexperienced in REI, but this is currently what I'm working with:

Originally posted by @Chris Gouveia :

Now is a great time to refinance your debt- I was able to lower my 6 figure debt to 3%, which has allowed quite a bit of freedom to look at other investment opportunities.

I know the scenarios given are often "but you could make 8%+ with that money!" Having been in BIGGER student debt than now, sometimes there's a mental victory from not feeling that weight. You have to decide how important that is to your happiness. Also, that's a guaranteed return of (insert interest rate here) v. investing which has risk in the best of circumstances. Lastly, if you need to take out a loan to REI, often your debts are incorporated in that decision and may disqualify you.

Make sure your earning potential is maximized, your other debts (credit card, etc.) are definitely taken care of, and then weigh the pros/cons. Best of luck!

Thank you for your feedback Chris. I'm in a lot of SLD, so I'm not sure how long it'll take me to pay it off, but I assume it'll take years. This is what I'm currently working with:

 

Originally posted by @Anthony Gayden :
Originally posted by @Mohammad Haidarasl:

I have quite a huge student loan debt, which is the only type of debt I have. I would like to get into REI immediately but like to know the smartest move to make.

 This would be easier to answer if we know how much student debt you have and how much you earn? There is a huge difference between you owing $18,000 and $300,000.

If you owe $18,000 and make $100,000/yr, then I suggest you pay it off as soon as possible. Postpone investing until after you are finished. If you owe $300,000 and make $20,000 then I suggest you put off investing or paying the loan down until after you can greatly increase your income.

Hey Anthony, thank you very much for taking the time to reply to my post, I really appreciate it. Sadly, this is what I'm currently working with:

 

Originally posted by @Timothy Lewman :

@Mohammad Haidarasl not counting the potential investment income, can you make the payments with your current cashflow? If so I would invest you cash pile. If not, look at refinancing it to a lower rate and see if you put down some money if the payment will be more manageable.

To be honest, I wouldn't be able to. Not until I secure a better position. This is what I'm currently working with and am making minimum wage (long story):

 

Originally posted by @Ben Raygor :

@Mohammad Haidarasl if you have multiple separate loans (with different loan amounts outstanding and interest rates), consider picking some to pay off completely to help free up your Debt-to-Income ratio a bit. This will come in handy if you need to speak to a lender about a rental property in the near future.

Freeing up those fixed monthly minimum debt payments can be a big deal to a lender as well as to yourself for cash-flow and flexibility reasons.

Thank you for your feedback Ben. I think it'll take me a while to get into REI since I have a huge debt to pay off with hardly any income at the moment (minimum wage). This is what I'm currently working with:

 

I think there have been a few different flavors of responses here, which if you add them all up, it would give you some sense of direction. Based on your question, I would agree with the rest of the group that it is hard to give you some solid direction without knowing more details and actual quantifiable data.

Below are the questions that I think you should ask yourself:

1. What is the debt interest vs. interest from investing and does it make sense at a first look to even consider it?

2. How risky of an investment would it be for you to get your 8-10% return, which would net 3-4%
(assumption) taking out your student loan rate?  Keep in mind that every investment has risk, and don't take the 8-10% guaranteed. 

3. What stage of your life are you at? (single, engaged, married, kids?). Although this might seem not related to the topic, it does become relevant when life changing events get thrown in the mix. 

4. What is the amount you owe and how long would it realistically take for you to pay it off with your current situation vs. if you had another 8-10% from an investment? this should give you a sense of how long it will take oyou to pay off and whether you want to go into the investing world.  (keep in mind that the 8-10% return would also require you to invest upfront, so consider that money gone in your analysis). 

5. if you decide to invest, are you experienced and competent in the area you are investing or will someone else manage the investment for you? (Be cautious of certain investment choices because they dont always work out the way you want them to. Form experience, if you have never dealt with Real Estate, things in real life dont always turn out to be the same as on paper. Seek advice form someone that has been doing it for a while to avoid surprises). 


Regardless of what you choose, good job thinking ahead and trying to figure out how to maximize your returns while paying your debt down to 0. I hope this helps. Best of luck.

 

Originally posted by @Theresa Harris :

@Mohammad Haidarasl  Not knowing how much your debt is, the interest rates and payment along with your income, makes it hard to give advice.  Generally speaking, your interest on your student loans will be lower and as long as you can save for a rental, you can then use the extra income from the rental to service your debt.

Hi Theresa, thank you for your reply. I'm currently making minimum wage and this is the debt that I have (long story):

@Mohammad Haidarasl Please don’t take offense to what I’m about to say, because I mean this in a good way, specifically the second part of my advice. Here are the two things I would recommend:

1. Refinance your student loan debt. You should be able to find much lower rates. This can lead to immediate savings.

2. Instead of focusing on REI, I would recommend that you focus on finding a better job. Again, don't take that the wrong way. But when I look at your profile I see a good degree and you certainly come across as a smart, hard working individual. You should have a job making a lot more than minimum wage.

If you’re able to do both of those things, you will be able to save up more money to properly jump into real estate investing.

Hey man if you are able to qualify for the loan on the investment property even with your student loans, then I would say go for it. Especially if you are planning on going the BRRRR route. A lot of times people will try to do the cash out refi, and end up not being able to because Debt to income ratios are too high. If you can qualify for the loan now with your debt now, you will most likely qualify for the refinance in the future. GOOD luck!

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