Pay off student loans or invest ?

121 Replies

Hey guys ! I have about $34000 of private student loans left to pay off at an interest rate of 3.55% that’s approx 675 per month. I’ve also managed to save 40k up until now, I earn about $5200 per month net. With a credit score of 801. Should I use this saved up 40k (which includes my emergency fund) to put 3.5% down on a fourplex in order to house hack it? Or should I just pay off my debt. What would you do in my position? I live in NYC looking for fouplexes in nyc or connecticut.

Pay off your debt. 

How much does a four-plex in NYC cost? $1-1.5M... prices are sky high right now. Wait for real estate to cool off a bit. 

The Biden administration is trying to see if they can legally wipe out up to $50K of student debt.  Personally, I am not in favor of this activity, but if the government is actively giving away the money, you would be wise to wait and see if it benefits you.

@Tanvir Sattar @Greg Scott thank you guys but student loan forgiveness only would apply to federal loans and not private, either way I don’t bank on politicians to make my life any better than it is. Some of their policies certainly do help but there has been countless times when they’ve walked back or bend the core message of what they’ve campaigned on. Thanks for the input anyways.

Originally posted by @Gervon Thompson :

@Tanvir Sattar @Greg Scott thank you guys but student loan forgiveness only would apply to federal loans and not private, either way I don’t bank on politicians to make my life any better than it is. Some of their policies certainly do help but there has been countless times when they’ve walked back or bend the core message of what they’ve campaigned on. Thanks for the input anyways.

Really good attitude on not banking on politicians. There have been many issues with the existing student loan forgiveness programs where people worked often low paying public service jobs for a number of years to follow forgiveness guidelines, only to get to the finish line and the loans didn't get forgiven.

If I were in your position I'd pay down debt, but I also wouldn't clear out my emergency fund to do it. I'm sure most will tell you that the interest rate on the student loans is too low to justify paying it off, but in my opinion it will give you a lot of peace of mind when you do start buying rentals. If COVID has shown us anything, it's that nothing is guaranteed and a lot of things can go wrong. Paying off the loans means having one less thing that can go wrong for you.

Having just paid off my student loans 2.5 years ago before getting any real estate investments and paying for a decent vehicle in cash. It does feel great that my only debts are making me money now. I have experienced some highs and lows with losing a job, investment property expenses, and starting as a real estate agent a year ago. I am unsure if I could of weathered the storm without knowing I had no bad debt. Just my two cents. I will not be too upset if now student loans get forgiven and I was not compensated by being responsible because  for me it was more about the psychological freedom.

@Gervon Thompson in my opinion its about risk and return. Your student loans have an interest rate of 3.55%, which is very low. Can you have an investment make a return of greater than 3.55%? That's my mindset and why I invest heavily (more stocks/crypto up until recently) instead of paying off my student loans. In my case I've made far more profit than the loans have generated interest. So it just comes down to what risk you're willing to take. Paying off the loans is a guarantee to put you in a better position, but investing has the possibility to slingshot you past that guarantee. 

@Gervon Thompson

Hey Gervon,

My situation is near identical to yours. I took the route two years ago to start investing in real estate here in Denver while continuing to make the monthly payment on my student loans which is just shy of what you pay per month. At this point in time, I have the option to pay off the outstanding balance of my student loans with the money I’ve saved up in the last year, but chose again to proceed with a second house hack. I can tell you in my personal experience, I’m glad I did not choose to pay off my student loans first.

I think the question becomes.. if you paid off that $34,000 with the money you have saved up, how many more years will it take for you to save that money again to use as a downpayment? Hypothetically say it takes 3 years. That’s 3 more years of appreciation, debt pay down, and cash flow you’d be missing out on. Additionally, after those 3 years, home values likely would have increased even more than they are now, leaving you with even more money that you’ll need to come up with. If you used that as a downpayment now, then you could eliminate your largest expense (housing) altogether and then focus on paying down your student loans while building wealth at the same time.

Not sure what part of NY you’re looking to buy in, but in Denver, I’m finding that the time is now. The sooner I can buy and acquire the better.

Good luck to you!

I agree with @Samuel Whelan . This is a math problem. Your student loan debt interest rate is 3.55%. We're right to acknowledge the risk of investment, because there are no guarantees in life except death and taxes. That being said, the historical return in the stock market is 10%. The average appreciation in Denver has been 6% over the last 50 years, not to mention the benefits of debt paydown, depreciation, and cash flow that makes the actual cash-on-cash return of REI much greater (and this is the true power of house hacking, but that's another post entirely).

I often repeat the sage wisdom from Warren Buffet that it's not about timing the market, but it's time IN the market. And here's why: As @Nick Elder points out, in just the past month, we've seen 6.7% appreciation for SFHs in Denver and almost 20% in the last year. At some point (if not already), buyers will be legitimately priced out of the market.

However, Buffet is more well known for his quote that it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.”

Especially in New York City, this is a golden time to get in the market when interest rates are low and housing prices have softened. We all know that city is going to bounce back, it may take time, but that city is not going anywhere. I firmly believe in the importance of self-education so investors are empowered to make their own decisions and my style is to provide that information rather than tell other people what to do. However, I can say if I lived in NYC, I would be doing whatever I could to buy now.

@Gervon Thompson

Interest rates are lower than they’ve been in 50 years. Buy property now. That’s what I did even though i have student loans. Now I’m way farther ahead than my friends.

Your student loan is institutional-grade low interest TAX DEDUCTIBLE debt. Ride that out as long as you possibly can. Your real estate investment will work much harder than that.

The one thing I would say is that your emergency fund may be a little soft. You want 6 months of funds set aside. Plus a cap ex fund for your upcoming property

Originally posted by @Samuel Whelan :

@Gervon Thompson in my opinion its about risk and return. Your student loans have an interest rate of 3.55%, which is very low. Can you have an investment make a return of greater than 3.55%? That's my mindset and why I invest heavily (more stocks/crypto up until recently) instead of paying off my student loans. In my case I've made far more profit than the loans have generated interest. So it just comes down to what risk you're willing to take. Paying off the loans is a guarantee to put you in a better position, but investing has the possibility to slingshot you past that guarantee. 

Agree 100%

 

@Gervon Thompson

You know what to do!! Live like no one else now, so you can live like nobody else later. Live in rice and beans, pay off debt and get as far away from ZERO as you can!! Then build up your financial freedom account to about $75,000 and then start thinking about RE.

You are young!! What is your second or third job to get you back to Zero faster?

Feel free to message me. I love this stuff!!! That goes for everyone here!!!

Swanny

@Gervon Thompson

I would either

1) invest in real estate because depending on your strategy there’s never a bad time to invest you just have to adapt what your goals are.

OR

2) Pay off your student loans with you a HELOC or large personal line of credit in place so if the right deal comes along you can have quick access to cash.

Also don’t go cash poor by following all of your money into student loans without setting aside 3 to 6 months of personal living expenses in savings even if it’s just a little bit each month.

@Gervon Thompson

Buy the property no question. Let’s assume current rent (or mortgage) you pay right now is $1500. If your new 4plex can at least turn that into a payment of only $800 (probably less) then you’re saving your student debt payment right there alone, not to mention other things mentioned here already such as appreciation, tax benefits, mortgage pay down and eventually cash flow once you rent move into the next one and rent all 4 units out(theoretically).

@Gervon Thompson

I would pay off the debt so you have a clean slate. There are things that being debt free will do for you that are not math related or crunched with numbers. You’ll have the ability to run your life ultra lean which might allow you to invest in something slower growing at first but with long term potential with low overhead.

Your options become broader. If and when you decide to buy an investment you will also look better to the mortgage company for the loan with a low debt to income ratio.

I say you just crush the student loans first. If you buy a property then any financial benefit from it will be pointless because the student loans are still bleeding you dry financially. In order for you to start winning, you need to stop losing first.

Additionally, getting rid of your student loans will help with your debt to income ratio, which will help you get a better rate when financing properties, making them better deals, etc.

@Brad L. Thank you ! My private student loans have weighed heavy on my mind for the past 4 years and now that I have the ability to pay it off does give me a major sense of achievement, however, how about historically low mortgage interest rates? And the cumbersome task of starting over from scratch once these student loans are gone?

@Jared Hottle .

Oh yeah I def yearn for that psychological freedom from my loans. But FOMO is seriously hitting me right now, I mean can you say with confidence that real estate market will have a lower barrier to capitalize on good rates in the next couple of years?

Originally posted by @Gervon Thompson :

@Brad L. Thank you ! My private student loans have weighed heavy on my mind for the past 4 years and now that I have the ability to pay it off does give me a major sense of achievement, however, how about historically low mortgage interest rates? And the cumbersome task of starting over from scratch once these student loans are gone?

 So it seems the general feeling by posters here is pay off your 3.5% college loan

Then save more money and go get a real estate loan at the prevailing rate at time which may or may not be 3.5%

Ok got it 

@Nick Elder

Hey Nick ! Thank you so much for your response! I’m definitely in total agreement with you! I really want to get rid of this looming debt but I yearn for financial freedom even more. The immediate NYC area is really expensive, to the point where 40k is barely enough for 3.5% fha loan. I’m thinking about out of state such as connecticut or maybe Orlando florida, I’m surprised to see that Denver seems to be leaning towards the expensive side as well. Thank you sir your post was definitely inspiring.

@Chris Freeburg thank you sir! I’ll def be looking at properties and crunching the numbers, even though my student loan debt have proven to be a source of slight depression over the past few years, nothing would make me happier at this moment than achieving financial independence through wise investments. Thanks again.

@Kyle O'Donnell

Hey Kyle ! Thank for your response, at this moment I’m currently looking at properties and number crunching, your post only serves as a morale booster! Thank you. However, I do have one question, student loans are tax deductible? My tax guy said I didn’t qualify for tax deductions via my student loans, I think the reason behind it was my income, but I could be wrong.

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