Classic debate: Pay down student loans or begin RE investment?

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Classic debate: Pay down student loans or begin RE investment?

Steve Walko
New Paltz, NY · Member since 2018 · 22 posts · 10 votes

Hi everyone,

I'm wondering whether my fiancé and I should begin to pay our debt down ASAP or begin investing in RE. I know there are intelligent arguments on both sides of this issue and that it depends on the details of our situation.

So here is our situation:

We both are therapists in private practice with incomes approximately between 60 and 70k per year at this point. I am 36 she is 29.

Between us, we have 120k in student debt. She has about 80, I have about 40. Interest rates are 6.5% for her and 6.8% for me.

While we do have a wedding coming up with some more expenses on that front, if you set that aside, we have the ability together to save probably 2k total on top of minimum payments of $800 minimum payments a month on the student loans, which means we can put approx 2800 towards student loans a month.

I feel pretty sure that using an FHA loan to buy a multifamily unit (most likely a duplex given what is around us) is a smart play. We currently pay 1450 in rent with everything included. If we could live for free in the unit and have the tenant pay off the mortgage, then we could add that 1450 to our monthly savings that we could put towards the debt. For simplicity, we'll call that $4200/month. Accounting for some unexpected expenses, we could probably pay off our debt in 3 years that way. OR we could get very aggressive in real estate.

What do you all think?! 

PS: I should add that we live in a smallish college town where a lot of people rent. 

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Michael Swan
Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
8y

Hi @Steve Walko,

You are not going to like my answer. Each of you get a part time job on the side and attack that debt faster. Don't invest in IRA or 401K and attack this debt and make it gone in the next 12-15 months. Get rid of car payments and live like NO ONE now so you can live like NO ONE ELSE later. Brown bag your lunch, streamline everything. Stop going out to eat more that one or two times a week too. The most we ever made W2 earnings for my family was $80,000 before taxes.

You are both so young.  Fast forward to 52 like I am now and you could have 122 front doors and $160,000 cash flow and rising every year.  If a lowly paid teacher can do this, anyone can.

"If you change the way you look at things, the things you look at change right before your eyes."

Swanny

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  • Michael Swan
    Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    8y

    Hi @Steve Walko,

    You are not going to like my answer. Each of you get a part time job on the side and attack that debt faster. Don't invest in IRA or 401K and attack this debt and make it gone in the next 12-15 months. Get rid of car payments and live like NO ONE now so you can live like NO ONE ELSE later. Brown bag your lunch, streamline everything. Stop going out to eat more that one or two times a week too. The most we ever made W2 earnings for my family was $80,000 before taxes.

    You are both so young.  Fast forward to 52 like I am now and you could have 122 front doors and $160,000 cash flow and rising every year.  If a lowly paid teacher can do this, anyone can.

    "If you change the way you look at things, the things you look at change right before your eyes."

    Swanny

    23Reply
  • Steve Walko
    OP
    New Paltz, NY · Member since 2018 · 22 posts · 10 votes
    8y
    Originally posted by @Account Closed:

    There isn't a legitimate debate. The wrong side is just trying to justify bad decision making. 

    Which is the wrong side in your eyes?

    0Reply
  • Steve Walko
    OP
    New Paltz, NY · Member since 2018 · 22 posts · 10 votes
    8y

    @Michael Swan

    Quite an aggressive plan! No problem. I am open to all ideas. To those who argue that if you are getting a better ROI in RE, you should do that instead of repay the debt, what do you say? What are the benefits of your approach?

    0Reply
  • Marcus Johnson
    Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes
    8y
    Most people don’t calculate for risk, so I love what you said about paying off your debt in three years. If it were me I would take those three years to pay off her student loans if not faster by working more. Could you imagine having $120,000 debt paid off and all of that extra income coming in each month to save up for a huge down payment on a duplex or even something bigger. If you were going to tell me it was gonna take 10 years to pay off all your debt then I might change my mind and say jump in on a house hack.
    1Reply
  • Brian Schmelzlen
    Accountant · La Mesa, CA · Member since 2017 · 477 posts · 476 votes
    8y

    I like the idea of house hacking so that you are essentially living for free.  In terms of what you should do with your profits/additional savings, there is a pure math answer and an emotional answer.

    The pure math answer is to do whatever makes/saves you the most money.  You have a blended interest rate of about 6.6%, so if investing the additional money into more real estate will provide you a greater return than 6.6% you should do that.  If your investment will not get you that return, pay down the debt.  I think in most cases your real estate investments should do better than that, but obviously that depends on what investment you are looking at.

    For the emotional answer, it is how does the debt affect you and your fiance emotionally.  Does it cause you any stress or anxiety, or is it just another bill that needs to be paid?  If having the debt affects either of your quality of life (not for any rational reason, but simply because having debt makes either of you feel less secure), then that has to be factored in.

    6Reply
  • Bill F.
    Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
    8y

    @Steve Walko it isn't an either or question. One impacts the other. Your debt affects your DTI ratio and thus your ability to get a loan.

    Look into what impact has on your 31/43 DTI with an FHA loan and let that drive your decision making.

    1Reply
  • Michael Swan
    Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    8y

    Hi @Steve Walko

    You could do both for sure.  Get those part time jobs and house hack.  Plus, after a year at two jobs you could qualify for more property too.  Plus you would be attacking that student debt etc...

    Swanny

    2Reply
  • Steve Walko
    OP
    New Paltz, NY · Member since 2018 · 22 posts · 10 votes
    8y
    Originally posted by @Bill F.:

    @Steve Walko it isn't an either or question. One impacts the other. Your debt affects your DTI ratio and thus your ability to get a loan.

    Look into what impact has on your 31/43 DTI with an FHA loan and let that drive your decision making.

    Fair point which I have thought. We are going to get pre-approved tomorrow, so will know more then. However, I suspect we will qualify, and if so, I still think it comes down to a comparison of the ROI of the two scenarios which seems to favor RE investment, but with more risk.

    0Reply
  • Steve Walko
    OP
    New Paltz, NY · Member since 2018 · 22 posts · 10 votes
    8y

    @Michael Swan

    Well, to be honest, there is no way we are getting a second job. First of all, we are mental health therapists. We make a good hourly rate. If we really wanted, we could just take on more clients. But the quality of work would suffer and the chance of burnout would be high. I think our best bet is to just push it as far as we reasonably can without getting fried. 

    0Reply
  • Steve Walko
    OP
    New Paltz, NY · Member since 2018 · 22 posts · 10 votes
    8y

    @Brian Schmelzlen

    Thanks for the reply. That really seems to be the crux of it. The logical/math side of me combined with my willingness to take risk says go for the RE, but I do have a conservative side that gets nervous that I will mess up somehow, even though I'm pretty thorough and diligent when I set my mind to something.

    0Reply
  • Rachel H.
    San Antonio, TX · Member since 2009 · 3k+ posts · 1k+ votes
    8y

    @Steve Walko If you decide on a multi family, just be sure you pick a neighborhood with the type of clientele you can work with. Neighborhoods attract certain types of people, not the property itself. Learned this lesson the hard way. Good luck!! 

    0Reply
  • Steve Walko
    OP
    New Paltz, NY · Member since 2018 · 22 posts · 10 votes
    8y

    @Rachel H.

    Thanks for the feedback. Yeah, like I said, we live in a smallish college town. Renters would range from college students, to single professionals just starting out, to small families starting off. Just got to do a good job tenant screening.

    1Reply
  • Michael Swan
    Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    8y

    Hi @Steve Walko

    Since our W2 was $80,000 combined, I had to work 60 hours a week for 10 years at that low family W2 earnings to be at $5,000,000 in RE and 2.5 million in Equity and $160,000 and rising cash flow and 122 front doors.  I did not buy my first rental property until the age of 45.  You could be financially free by 45 if you live like nobody else now.  3 to 5 years of working like a dog and buying RE at the same time is what I would do and then you would be financially free by 45 years old.  Both of your W2 earnings are sooooooooo much higher than mine was and is.  I still love teaching and still keep my day job too.  

    I play hockey twice a week and still have time for by beautiful wife.   The great thing is that I am financially free.  If we lost our jobs tomorrow, how long would my money last.  Not a worry!! That is an amazing feeling.  Going into work and knowing you don't have to work is an amazing feeling.

    Whatever the mind can conceive and believe it will achieve.  We are only limited by the limits of our mind.  As When I reach each goal, I keep raising my goals.  I only thought rich people owned apartment complexes when I bought my first little rental property cash flowing about $350.00 a month in May of 2011.  Now I have 8 apartment complexes and 4 single family rental properties, with 122 front doors total.

    What a country!! America!!!

    Swanny

    9Reply
  • Grant Rothenburger
    Investor · Taylor Mill, KY · Member since 2016 · 2k+ posts · 964 votes
    8y

    @Michael Swan I vote duplex

    0Reply
  • Steve Walko
    OP
    New Paltz, NY · Member since 2018 · 22 posts · 10 votes
    8y

    @Michael Swan

    Sounds like you are crushing it and have an amazing work ethic. Great for you man!

    I've been working really hard to get even to the point I'm at. My first job out of grad school, I made 37k a year and had to have a second job for half the year or so. One year, I was working 75 hours a week, and my day job was counseling in a high school - not exactly a carefree job. That was just what I need to do to have enough money to have a little bit of a cushion. Now I have had a private practice for almost 2 years. For 9 months, I was working at the high school full time while I built the practice on the side. So I have definitely hustled. It'd be hard to do too much more than now. Regardless though, my fiancé and I have the chance if we are really tight with our money to either crush the debt or start a great real estate investment portfolio. We shall see which way we go! But the initial house hack is a definite step.

    3Reply
  • Steve Walko
    OP
    New Paltz, NY · Member since 2018 · 22 posts · 10 votes
    8y

    @Grant Rothenburger

    The real question is what to do after the initial duplex?! Debt pay down or more investment. Decisions, decisions.

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    How do you plan to deal with the student debt when your real estate investment hits the usual bump in the road and goes sour.

    It happens, you won't be able to make your mortgage payments, and is why you should clear your bad debt before you plan on investing.  

    2Reply
  • Steve Walko
    OP
    New Paltz, NY · Member since 2018 · 22 posts · 10 votes
    8y

    @Thomas S.

    Fair point of course. One argument in favor of paying off the debt. However, with adequate planning (i.e., factoring in a conservative cushion for repairs and vacancies), you'll generally be good, no? And again, it comes back to the ROI.

    Also, in my house hacking plan, I would create a cushion and have the added benefit that if the duplex is vacant, it's just like I'm paying rent again (it won't be much more). So worst case scenario there is I'm not bringing any more money in to invest or pay down the debt. That's just for the first property. Then of course, it gets more tricky. But with conservative planning, seems like it should be good under generally expectable circumstances.

    0Reply
  • Grant Rothenburger
    Investor · Taylor Mill, KY · Member since 2016 · 2k+ posts · 964 votes
    8y
    Originally posted by @Steve Walko:

    @Grant Rothenburger

    The real question is what to do after the initial duplex?! Debt pay down or more investment. Decisions, decisions.

    That's true, I think the house hack is a great idea regardless. After that, too hard to say really. Part of me thinks you should pay down the debt, part of me thinks investing is a better idea. What are your goals? If you want to be a huge investor I'd lean more towards getting started asap. If you just want to have some additional income, maybe paying down the debt is the better idea. You could also start paying down debt and in the mean time, learn about how to do bigger deals and syndications. So many variables.

    1Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    At those interest rates that’s a no brainer. Pay off student debt
    0Reply
  • Steve Walko
    OP
    New Paltz, NY · Member since 2018 · 22 posts · 10 votes
    8y
    Originally posted by @Grant Rothenburger:
    Originally posted by @Steve Walko:

    @Grant Rothenburger

    The real question is what to do after the initial duplex?! Debt pay down or more investment. Decisions, decisions.

    That's true, I think the house hack is a great idea regardless. After that, too hard to say really. Part of me thinks you should pay down the debt, part of me thinks investing is a better idea. What are your goals? If you want to be a huge investor I'd lean more towards getting started asap. If you just want to have some additional income, maybe paying down the debt is the better idea. You could also start paying down debt and in the mean time, learn about how to do bigger deals and syndications. So many variables.

    FWIW, my goals are to help me save for retirement and if I'm well on my way to that, perhaps provide supplemental income.

    0Reply
  • Steve Walko
    OP
    New Paltz, NY · Member since 2018 · 22 posts · 10 votes
    8y

    @Caleb Heimsoth

    Round the debt up to 7% and say the RE ROI is 10-15% as many argue is feasible. I'm guessing you think that the higher ROI is not enough to justify the risk? Not even when you factor in leveraging?

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y

    @Steve Walko that is correct.  Remember everyone on this site says leverage is amazing and is awesome and it is when some correctly.  If you over leverage you’ll ruin yourself.  Leverage makes returns greater but also increase risk.  

    I’ve been taught that since 14 lol.  That and compounding interest is the “8th wonder of the world”.

    If I were you I would pay off the debt.  

    0Reply
  • Travis Emerson
    Madison, ME · Member since 2017 · 23 posts · 6 votes
    8y

    @Steve Walko I am in a very similar situation but I'm 100% in favor of leaving my "bad debt" where it is and start REI. I get awesome tax breaks and I end up paying under 2% interest. I started a thread similar to this and I heard a lot of the same things they are saying here. (don't tell them you have a bran new truck btw they think you're some sort of devil)

    What I find most interesting is they get so worked up about risk. Well what is more "risky", pouring all your spare cash into you loans, because you're so scared of loosing your job or whatever else may happen. Or establishing a 2nd or 3rd source of income so if you do loose you job you still have some money coming in but still having the school loans hanging over your head.

    You don't need to live like a homeless person to have school debt and be a successful REI in my opinion. Set goals, meet them, and enjoy being young. That's how I live my life and I think I'll be just fine.

    For me its more about the numbers and less about the risk, I have a degree/license in a very strong field and I would rather "risk" it and make 15-20% on my money than wait 3-4 years because I don't want to pay <2%. When you look at just the numbers it's a no brainer of course.

    0Reply
  • Anthony Vann
    Investor · Hampton, VA · Member since 2017 · 49 posts · 86 votes
    8y

    I don't know if this is an either or scenario. Split the difference. I went Dave Ramsey for a few years and got rid of almost all of my bad debt. Cars and credit cards and everything are all paid off. I paid down MOST of my student loan but the last 20k is only costing a payment of $100 a month. There's no way I would sink that 20k into paying off a debt that I don't even feel every month. At that point I transitioned into investing. Now I have much more access to credit which makes everything easier. Just last summer fridge went out in our rental unit, some plumbing needed to be repaired, and the HVAC needed to be replaced. 

    I think of bad debt as weight when you're swimming. Can you swim with weights? Yes, if you're a strong swimmer. But if you have time to cut some weights off it makes the swim that much easier. The more you cut off the easier the swim gets.

    5Reply
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