Pay off student loans or invest ?

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Pay off student loans or invest ?

Gervon Thompson
Brooklyn, NY · Member since 2016 · 66 posts · 69 votes

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.

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Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
5y

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.

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  • Zachary Beach
    Specialist · Los Angeles, CA · Member since 2018 · 291 posts · 231 votes
    5y

    @Gervon Thompson house hack but make sure you keep  adequate reserves.

    0Reply
  • Benjamin Enriquez
    Rental Property Investor · San Antonio, TX · Member since 2019 · 16 posts · 1 vote
    5y

    @Gervon Thompson I would invest the 40k and pay down the student loans little by little with the cash flow. My brother in law makes great money but always payed his debt first, but for some reason or another he would somehow accumulate more debt and do the same cycle over and over. He finally told me I’m done paying off debt first, I’m going to invest the 25k I have. He’s in a better position now then he ever was. Great job though on having the discipline to save 40k, most people can’t do that.

    0Reply
  • Kwadwo AsarePro Member
    Rental Property Investor · Sacramento, CA · Member since 2019 · 8 posts · 10 votes
    5y

    @Gervon Thompson

    I say invest in real estate. If you’re about to find an investment property that cash flows nicely you can can leverage that cash flow to pay off your student debt.

    This would be after you set a side some financial reserves for emergencies 😊🤙🏿

    0Reply
  • Account Closed
    Member since 2021 · 237 posts · 153 votes
    5y

    @Gervon Thompson

    The limiting belief here is that you can’t do both. I’ve the last decade or better, every time I wanted to purchase something extra stupid like a Mercedes or a $10k guitar etc I bought a house to pay for it. Not saying student loans are stupid (certainly not the same level of stupid as a Mercedes) just saying find a property that you can live in & hack that cash flows $750 monthly and do both.

    1Reply
  • Byron Anin
    Investor · Phoenix, AZ · Member since 2020 · 10 posts · 4 votes
    5y

    Hey @Gervon Thompson,

    I'm in a Similar situation but without the debt part. What you could do is use an FHA loan with down payment assistance and use your remaining funds after paying off your College debts to pay for closing cost. If you can clear up your DTI you'll look better to BANKS. Remember house hacking does one thing, it removes your biggest expense which is RENT, and allow you to save money for your next deal. Good luck mate.

    0Reply
  • Shivam Patel
    Rental Property Investor · Clementon. NJ · Member since 2019 · 116 posts · 25 votes
    5y

    @Gervon Thompson

    Oh man haha, this reminds me of my thoughts from a year ago. I had medical school loans and masters in computer science loans. I bought a house with fha and rented it out. Looking back, I don't regret it. My loans was 6%interest. I was able to deduct interest of my student loans and based on what amount you said I'm gonna say your monthly payments are around 500 bucksish/month right?

    Now if you are renting, and it costs you 700-800$+ more, and the property youre looking at will allow you to house hacking and cash flow, it's worth it right? Even if it's not $500. You've eliminated rent, which costs a lot of people a significant portion of there income. Now even if you don't cash flow using the same example, losing $300 bucks a month, you're breaking even because again, no rent. Only different is, you can deduct taxes on rental property and you still save more. No matter how you look at it, investing was the way to go for me. Also some parts of closing costs are deductable.

    Ideal scenario, if you cash flow positive at least 500$, you are already financially free because that cash flow pays down your student loans and you're living rent free. Also you don't have to worry about the first months mortgage. Double check with the bank you're using but for me I didn't have to pay for two months, was part of my closing costs.

    The only worst case scenario I see here is not being able to get a tenant in, or analyzing the property wrong or making bad investment.

    Yeah just assess how much risk your willing to take and worst case scenarios for yourself.

    0Reply
  • Reggie Desir
    Rental Property Investor · Boston, MA · Member since 2020 · 34 posts · 53 votes
    5y

    @Gervon Thompson

    Buy the house hack. Renting and paying down debt isn’t a great position to be in. You’ll be able to pay off the student loan faster anyway once you start cash flowing, in addition to whatever you do for a living.

    Option A- pay down student loan and take 2-4 years before you replenish your savings which means another 2-4 years of not owning a home. This also means that you might miss out on the historically low rates

    Option B- house hack

    Your property will grow in value unless a major crash happens but if you’re cash flowing the market won’t really hit your pockets

    You’ll be able to replenish your savings faster due to the added rental income

    0Reply
  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    5y

    @Gervon Thompson

    Will 40k allow you to put a down payment and cover loans fees / costs for a conn or ny 4 plex ? I doubt it

    0Reply
  • Luke Larkin
    Rental Property Investor · Grand Rapids, MI · Member since 2019 · 4 posts · 2 votes
    5y

    @Gervon Thompson

    Great post, I am in the same position as you. 24 years old, about $40k in student loans at 4%, approx $500/month with a payback period of 10 years.

    I decided to invest in real estate, and I fully believe it was the right decision. Invest for cash flow, increase your income from your job and grow your money instead of pay off the loans in full. Over time, that $500 will become much less of a meaningful expense as your income grows, and it will be gone in 10 years anyway. Paying them off in full just sets you back at ground zero, and delays your investing success for at least a few years.

    Everyone always wishes they started investing earlier. Each year you don’t invest is a year of lost cash flow, appreciation, loan paydown, and tax advantages. Hope the best for you!

    1Reply
  • Greg Franck
    Investor · Saint Louis, MO · Member since 2016 · 72 posts · 65 votes
    5y
    Originally posted by @Gervon Thompson:

    @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?

    Gervon. Deals are there in times with high rates and low rates so be patient and ensure that the deal pencils to YOUR numbers and desired return profile. Rates simply have the most impact on pricing, which is something to think through when you plan to use a low downpayment product as you will be "underwater" faster. If you believe rates are going up that most likely means downward pressure on prices. Just be mindful of this. I wish the best for you!

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    5y
    Originally posted by @Zachary Beach:

    @Steve Vaughan are you serious? You could have bought a house hack in the hardest hit market in the US at the peak of the market and made this interest rate squared. Are you trying to scare people out of investing so you can get more properties? Maybe you Purchased a very poor investment that you could share with us to add value to the community? I don't see what your motive in tell this guy to not go with math is. It's incredible easy to get 10% IRR in real estate not counting appreciation even. if you are willing to do minimal work. Much much higher for house hacking. It is important to have good reserves and maybe you can make a point on him not having the reserves depending on the size of the house. Im interested in what had lead you to say that sub 4% interest is better to pay than to make an amazing investment maybe times more profitable than the cost.

    You must be new. I have no angle and never have.  Discouraging othere so the 10x Napper can get more deals. LOL 

    This is a tough market to buy right in is all.  Investimg in real estate is talked about like buying a mutual fund.  Just invest in real estate.  Not so easy.  

    Glad I got a reaction because the difficulty in finding something that makes sense is not easy.  I recommended to continue to save because it may be a while.  That's as pragmatic as I get. 

    0Reply
  • Gervon Thompson
    OP
    Brooklyn, NY · Member since 2016 · 66 posts · 69 votes
    5y

    @Chris Pasternak thank you for your response! Duly noted.

    0Reply
  • Gervon Thompson
    OP
    Brooklyn, NY · Member since 2016 · 66 posts · 69 votes
    5y

    @Brad L. Thank you wholeheartedly for being so sincere, I am big fan of Warren buffet so I think I’m leaning towards investing in order to get my “time” in the market. I think I can cut cost in other factions of my life that would free up some more cash to help me pay for my student loans if needed. I’ve also increased the amount of hours I’m currently working. I’d very much like to get to the point where I can stop trading time for money, I’ve been lurking around the BiggerPockets forum for a while now and I’d like to get my feet wet. Thanks again !

    1Reply
  • Gervon Thompson
    OP
    Brooklyn, NY · Member since 2016 · 66 posts · 69 votes
    5y

    @Jacob Lapp

    Thanks Jacob will def check out your podcast ! And yep $675 is the minimum amount of payment I can make. In your calculations how much of a down payment did your friend manage to save up for the total cost of the properties? Did he/she utilize a fha loan or a low 3-5% conventional loan ?

    0Reply
  • Gervon Thompson
    OP
    Brooklyn, NY · Member since 2016 · 66 posts · 69 votes
    5y

    @Alexander Szikla hey Alexander! Definitely understand what your saying, thanks for your input.

    0Reply
  • Gervon Thompson
    OP
    Brooklyn, NY · Member since 2016 · 66 posts · 69 votes
    5y

    @Carlos Gonzalez thank you I just have to make sure the numbers are done right to achieve net positive cash flow. Thanks for your input !

    0Reply
  • Jacob Lapp
    Rental Property Investor · Souderton, PA · Member since 2020 · 124 posts · 106 votes
    5y

    @Gervon Thompson

    Understood, we utilized 5% down first time home buyer conventional loan for a duplex. Had him saving 30k to make this down payment for a roughly 200k duplex that he could rent one unit in our area live in the other and have his expenses covered maybe 50-100 in cashflow while living there. $1000 in cashflow after moving out and renting his unit.

    This increased his savings rate by a lot because he was able to eliminate his rent expense.

    0Reply
  • Gervon Thompson
    OP
    Brooklyn, NY · Member since 2016 · 66 posts · 69 votes
    5y

    @Dennis Pressey Jr

    Hey Dennis! Thanks for your response. I definitely see the theory behind what your saying and I’m in agreement. Also, if the government does decide to payoff student loans ( in which I won’t be holding my breath) they won’t be paying mines anyways since it’s private loans and not federal. Thanks for your response.

    0Reply
  • Gervon Thompson
    OP
    Brooklyn, NY · Member since 2016 · 66 posts · 69 votes
    5y

    @Cody L. Hey Cody ! Thank you for responding, duly noted.

    0Reply
  • Aaron Ram
    Real Estate Investor · West Chester, PA · Member since 2015 · 7 posts · 2 votes
    5y

    @Gervon Thompson

    student loans at 3.5% are a pretty decent loan terms. if you have higher rate of return options (stock market averages ~6%) then it makes sense to invest elsewhere.

    if it would make you generally feel better to be debt free however then your question is answered better with psychology than finance

    my personal inflection point for paying off loans is around 5% depending on if the loans are tax deductible or not.

    0Reply
  • Gervon Thompson
    OP
    Brooklyn, NY · Member since 2016 · 66 posts · 69 votes
    5y

    @Bonnie Griffin Kaake

    Hello madam! Thank you so much for responding, I’m not really privy to real estate vernacular but when you say “ forced depreciation” do you mean Appreciation?

    0Reply
  • Gervon Thompson
    OP
    Brooklyn, NY · Member since 2016 · 66 posts · 69 votes
    5y

    @Aaron Wisch Hi Aaron, thank you so much for your input. I am in agreement ! I just have to do my due diligence when number crunching to ensure my investment doesn’t turn into a money pit.

    1Reply
  • Gervon Thompson
    OP
    Brooklyn, NY · Member since 2016 · 66 posts · 69 votes
    5y

    @Michael Swan

    Yes sir, will do!

    0Reply
  • Zach LemasterBusiness Member
    Rental Property Investor · Denver, CO · Member since 2015 · 1k+ posts · 3k+ votes
    5y

    @Gervon Thompson

    Lifestyle choice here, but I know what I would do.  Invest in a rental to make the monthly loan payment.

    3.5% interest is pretty dang low for debt.  If you could take that same capital to buy a rental that would yield you double digit returns & that you could use the cash flow from a rental to make your monthly loan payment wouldn't that make sense?  When the loan is fully paid off from the rental income you will then have an asset that has appreciated, and is cash flowing.  Not too mention you might get some relief from the government.  All that considered I would suggest investing the money wisely.  I apply this concept to really all debt with a low interest rate (cars, toys, etc.).  Buy assets to pay for your liabilities! 

    [email protected]800-311-6781Podcast Guest on Show How to Get 10%+ Off Your Next Real Estate Deal Right Now
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    1Reply
  • Eric Schultz
    Investor · San Diego, CA · Member since 2016 · 265 posts · 305 votes
    5y

    @Gervon Thompson

    If there is promising government relief, great but I wouldn’t base your game plan around something that you might qualify for.

    If you intend to be a cashflow investor, this is a simple analysis.

    Can you do better than $675 / month net cashflow with a four plex house hack (or other investment) versus immediately eliminating the $675 debt payment each month?

    2Reply
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