Whether or not to pay off student loans...

7 Replies

Hello BP,

I'm not brand new to Bigger Pockets, but have yet to ask for input from anybody so I figured I'd jump into the community and see varying opinions about deployment of capital.

I just closed on my 2nd Duplex last Tuesday and I'm torn about paying off the remainder of my student loan (roughly 28,000 @ 7 percent, monthly debt service being 475) or moving forward with either another duplex or a 4 plex in the Lincoln area.

I had a discussion with my banker today and he said with my current debt to income I should have no problem qualifying for another investment property, but looking down the road he told me that my debt to income ratio will eventually disqualify me for conventional financing. I have enough to pull the trigger on both another property and student loan debt elimination but that would leave my reserves lower then I like to keep them.

Any input from the community would be greatly appreciated.

Regards,

Cody Brinkman

Well the "textbook" answer is to compare rates of return. If you get a better "return" by paying down your debt (7%) than you would get from investing (say, 1% in a money market account), then you should pay down the debt. And vice-versa.

So how are your Cash-on-Cash returns at your properties?

With the 2 properties combined I'm sitting around 33% after some conservative cap ex, maintenance and vacancy projections. I guess that makes it a pretty easy decision.

Thanks for the input! 

The textbook answer is a good one, most of the time. But consider the benefits of keeping cash available for opportunities. It is a sound idea to pay down your student debt, but depending upon your cash position, you might consider putting some of the money in an investment that is more liquid than paying down a student debt.

You could probably kind of do both as well. Buy the multifamily and then make your student loan payment, only pay extra to it each month. You'll knock out the student loan in less than half the time then. That's what I'm currently doing.

Thanks guys, you all have valid points.

Originally posted by @Cody Brinkman:

With the 2 properties combined I'm sitting around 33% after some conservative cap ex, maintenance and vacancy projections. I guess that makes it a pretty easy decision.

Thanks for the input! 

 Be careful here. Technically, you want to compare the (expected) return of your next property, not your overall return from all of your previous properties. If the only thing you can get on your next property is a 4% return, then it doesn't matter what your previous properties yielded. In that case, the better investment is to pay the 7% debt.

(By the way, I'm guessing your answer is still the same, just be sure to compare apples to apples)

@Cody Brinkman  I am in a similar situation, although the student loans are my wife's. She has a mountain of student debt but I am just doing the standard payments each month and choosing to invest in real estate (2 duplexes now). I will continue to invest in real estate instead of trying to pay of the student loans faster.

I look at it like others have said that I can get better returns in RE than paying off the student debt. Plus, eventually I will be able to use the extra cash flow from RE to pay off loans and debt in the future. This would be extra cash flow that I would not have in a few years if I am working on only paying down student loans.