Debt, Investing, and Market Timing?

Question

Hi BP,

I'm a soon to be investor trying to educate myself as much as possible in the months leading up to my first investment. I have a question I'm hoping I can get some opinions on, knowing that no one has any perfect answers or knows the future. Here are the elements that go into my situation:

1) Currently in mid-range salary job (60k). I'm 30. Have a bit of personal debt I hope to get rid of by July.

2) Salary will jump up to 350-550k/yr next July (I'm a professional)

3) Looking to get into real estate to create passive income. Currently hold no assets.

4) Holding 300K in professional school student loan debt at 6.8%, plan to refinance perhaps at 5%

I'm trying to figure out my strategy for avoiding taxes on my high salary/income that will start soon, and hoping to invest aggressively in the next few years in order to set myself up for passive income in the future. I lean towards the ideas of multi family and apartments, but I'm open to a lot of new ideas as I keep learning.

My question is what is people's opinion on where I should put my money first? Is it better to pay down my debt quickly or invest quickly and try to pay my debt with income from investment? The other bit of my question is whether anyone's opinion is changed at all by the commonly held idea that the market may be topping out a bit. Maybe better to pay debt now and use capital later to buy assets when they are cheaper? Just wondering what everyone would do if they were me.

I know it's a complicated question. Thanks in advance!

Kevin Moen · Answer

Personally I would invest in a fund with an 8%+ preferred return with equity split that pushes the realized return to double digits before I would pay off that debt. I've never had student debt, do you get to write off the interest? That is another consideration. You can invest similar to a bank by earning a higher return with your capital, that you are paying on your debt. The upside to paying down your debt is borrowing power, but if you invest in funds for passive income, you don't need leverage for those investments to still make double digit returns.

Daniel Chang · Answer

@Samantha N.

Hello doctor, and congrats on graduating residency.

Get ready to pay some taxes.  A lot of it.  You will also lose the deductibility of your student loan interest.  If you aren't already do all the standard personal finance stuff, like maxing out 401k's, backdoor IRA's, HSA's, you should.  You are going to pay an extra 3.9% on investments outside of tax-sheltered vehicles (since Obama now considers you rich).

Unfortunately, there's no way for real estate to lower your taxes.  You can't deduct passive losses at your income level.

Personally speaking, I would 1st max out all tax-sheltered vehicles, then pay off that student debt before getting into real estate.  Since I'm assuming by real estate you are talking about buy and hold (since you will still be working hard, although not as hard as in residency).   You should be able to erase that 300k debt in 2 -3 year tops.

Chris T. · Answer

Hi @Samantha N.

I agree with your mindset to pay off debt quickly first. That debt is costing you 6.8%.

Unless you can find a means to get a guaranteed higher rate of return of your money, I think that is a wise move.