Smart to buy (owner occupied) with student debt?
Rental Property Investor · Elk Grove, CA · Member since 2019 · 18 posts · 1 vote
I have $60K in student loan debt. I am interested in purchasing an investment property (I will live there) while renting out the extra rooms. After a year or more, I will move and rent all of the rooms out.
Smart move, yes or no? What is preferred for a first time investor? FHA loan, 20% down, high LTV, lower LTV? Etc.
Any further thoughts are appreciated.
Thanks,
Nick
Investing with 60K in bad debt is very high risk. This is a difficult business to be in so if you decide to invest you will need significant cash reserves available, which you likely do not have, to get you through the rough patches or you will risk bankruptcy.
Risk comes with starting any business. The risks of having 60K bad debt in addition to starting a business is not something I would advise anyone to do. If on the other hand you were only looking to buy a personal home then I would say go look and see if you can qualify for financing. Your lender can then determine their risk and advise you.
Nick, the first step is to speak with a lender who has other products than FHA. There are 3% down payment first mortgages where the lender pays all the closing costs through their First Time Home Buyer Program. You'll need to have solid credit and qualify with your student debt included. There are also Down Payment Assistance Programs that also reduce the amount of cash required to close. But - in any scenario - you will also want to skip the part about renting out rooms...that potential income will not be included in the calculation and will not be perceived well.
If you do decide to rent out rooms, you're going to need to know Landlord/Tenant law, have rental contracts, and require tenants to have renter's insurance with added coverage. You may need to check city ordinances to see if you have to register the property as a "legal rental." I'm not a fan of "room rentals" for a host of what can and will most definitely go wrong but here's a fact you should know:
The median net worth of an American homeowner is $231,400, according to the Federal Reserve. That is more than 44 times the median net worth of renters, which is $5,200. The median net worth of homeowners surged by an inflation-adjusted 15 percent from 2013 to 2016, according to the Fed, while renters actually became poorer over that time.
Yes, very smart as long as the numbers make sense. I'd shoot for a fourplex. A student loan has nothing to do with it but if you do it right then the property could probably make your monthly student loan payment.
@Nick Pacheco Are you considering a multi-family such as a duplex, or only single-family with the intent to rent out rooms? Just make sure you work out the numbers so the house will cash flow after you move out. There is no "one thing" that is preferred for a first time investor, it all depends on what your goals are what you are trying to accomplish. In general, having a lower LTV and putting 20% or more down gives you a little more flexibility to weather any down periods but again it depends on your risk tolerance. Like @Patricia Steiner was pointing out though, it is a great idea to start acquiring property and building your wealth especially at such a young age as the payoff down the road will be huge.
I'd do conventional to avoid paying the mortgage insurance that comes with FHA. But if you don't have much cash, do FHA of course. I'd get a duplex rent out the other side and rent out your rooms. There will probably be headache to renting out rooms, but you can go for it and if it doesn't work out you'll still have income from the other side.
It costs to rent and it costs to own, might as well do the one that will make you money over time. Just make sure that your rent will be high enough to make you money when you move out.
Investing with 60K in bad debt is very high risk. This is a difficult business to be in so if you decide to invest you will need significant cash reserves available, which you likely do not have, to get you through the rough patches or you will risk bankruptcy.
Risk comes with starting any business. The risks of having 60K bad debt in addition to starting a business is not something I would advise anyone to do. If on the other hand you were only looking to buy a personal home then I would say go look and see if you can qualify for financing. Your lender can then determine their risk and advise you.
Check out some personal finance books and podcasts before you jump into it. Scott Trench's book Set for Life and BP Money is a good place to start.
By buying a house and renting out rooms, will you be increasing or decreasing your current living expenses? (don't forget to factor in repairs, utilities and commute time).
For example, if you are living with family and paying little or no rent, take advantage of that situation and pay off the student debt before trying to buy a house. I know it's SUPER tempting to get into investing, but only do it if it makes sense in your current situation. Buying a primary residence doesn't make sense in every market.
The goal should be to pay off that interest accruing student debt as fast as you can. If buying a house and renting out individual rooms helps you do that, then great! But if that is going to slow down your progress to financial freedom, then hold off until you get that student loan paid off.
*To answer your question, in your situation I would try to get in with as little money as possible on a conventional (not FHA) loan. If you can decrease your living expenses while putting as little money into the purchase as possible, that would be ideal. Just make sure to save money for repairs.
Nick, the first step is to speak with a lender who has other products than FHA. There are 3% down payment first mortgages where the lender pays all the closing costs through their First Time Home Buyer Program. You'll need to have solid credit and qualify with your student debt included. There are also Down Payment Assistance Programs that also reduce the amount of cash required to close. But - in any scenario - you will also want to skip the part about renting out rooms...that potential income will not be included in the calculation and will not be perceived well.
If you do decide to rent out rooms, you're going to need to know Landlord/Tenant law, have rental contracts, and require tenants to have renter's insurance with added coverage. You may need to check city ordinances to see if you have to register the property as a "legal rental." I'm not a fan of "room rentals" for a host of what can and will most definitely go wrong but here's a fact you should know:
The median net worth of an American homeowner is $231,400, according to the Federal Reserve. That is more than 44 times the median net worth of renters, which is $5,200. The median net worth of homeowners surged by an inflation-adjusted 15 percent from 2013 to 2016, according to the Fed, while renters actually became poorer over that time.
Investing with 60K in bad debt is very high risk. This is a difficult business to be in so if you decide to invest you will need significant cash reserves available, which you likely do not have, to get you through the rough patches or you will risk bankruptcy.
Risk comes with starting any business. The risks of having 60K bad debt in addition to starting a business is not something I would advise anyone to do. If on the other hand you were only looking to buy a personal home then I would say go look and see if you can qualify for financing. Your lender can then determine their risk and advise you.
100% agree. That is a lot of student debt, my college as $60k a year with room and broad (private). the scholarship, aids and working helps a lot i graduated with $8k debt. I would really pay down your debt first while, over extent yourself can lead to bankruptcy and then you really going to extent your potential future since no bank will loan you money.
@Nick Pacheco Find a lender and loan officer you like and have them look at everything with you. See if they approve you first. All this becomes a moot discussion if you can't get approved.
Hi Nick,
It all depends on what your total debt to income ratio is after taking on the new mortgage which is your PITI (principal, interest, taxes, insurance). Now if your ratio is at the max say 45% then don't do it. If your DTI is around 20-25% then it makes sense. You also need reserves. Don't buy if your down payment exhausts all your savings.
It's common for a college grad whos working now with large student debt. That shouldn't stop you from purchasing your first property. I would go with the down payment that will leave you a good amount of reserves maybe 8-12 months worth. You will have roommates that will supplement your payment which is a great idea.
You gotta start somewhere and you gotta work with what hand you're dealt.
@Scott Passman Thank you for your response! I am looking towards single family homes but I am open into looking to duplexes as well! If the ROI is high enough, I'm hoping that one investment property will cover a large amount of my monthly loan payment (at the very least).
Hi Nick,
It all depends on what your total debt to income ratio is after taking on the new mortgage which is your PITI (principal, interest, taxes, insurance). Now if your ratio is at the max say 45% then don't do it. If your DTI is around 20-25% then it makes sense. You also need reserves. Don't buy if your down payment exhausts all your savings.
It's common for a college grad whos working now with large student debt. That shouldn't stop you from purchasing your first property. I would go with the down payment that will leave you a good amount of reserves maybe 8-12 months worth. You will have roommates that will supplement your payment which is a great idea.
You gotta start somewhere and you gotta work with what hand you're dealt.
Hey Frank, thank you for your detailed response. It looks like I may have to wait 6-8 months longer to purchase a property (because my savings will be all gone if I buy now). I will continue to learn more. I appreciate the input!
Check out some personal finance books and podcasts before you jump into it. Scott Trench's book Set for Life and BP Money is a good place to start.
By buying a house and renting out rooms, will you be increasing or decreasing your current living expenses? (don't forget to factor in repairs, utilities and commute time).
For example, if you are living with family and paying little or no rent, take advantage of that situation and pay off the student debt before trying to buy a house. I know it's SUPER tempting to get into investing, but only do it if it makes sense in your current situation. Buying a primary residence doesn't make sense in every market.
The goal should be to pay off that interest accruing student debt as fast as you can. If buying a house and renting out individual rooms helps you do that, then great! But if that is going to slow down your progress to financial freedom, then hold off until you get that student loan paid off.
*To answer your question, in your situation I would try to get in with as little money as possible on a conventional (not FHA) loan. If you can decrease your living expenses while putting as little money into the purchase as possible, that would be ideal. Just make sure to save money for repairs.
Cassi, that is some great advice! I will definitely take those factors into consideration. I will look at my market and see what makes sense. The first thing to do is save!