Houston, TX · Member since 2016 · 40 posts · 16 votes
Hey BP,
My wife and I are looking to settle into our first SFR or small multi fam this Fall but I'm curious over the long run what is the best solution. We are both physical therapists, make around 150k. Our student loan debt is currently 118K. We have been paying that off as fast as possible starting February 2016 when the balance was 197K.
Between now and Sept we can put away about 30-40K which we could use for either a down payment on a conventional SFR or FHA a multi fam (owner occ,) and house hack the units.
Or throw that 30-40K at loans, rent for a year, save another down payment and really delay REI for another 2-3 years.
We are both about 30 years old and looking to start a family in the next year as well. This would be in the Sugar Land-Stafford-Missouri City area of Houston.
Debt load, starting a family, buying a home, all things that work very much against you in regards to succeeding in investing.
Concentrate on your student loans until they are completely paid off. Investing in real estate is high risk with many ups and downs. Carrying a debt load during the lows can easily lead to bankruptcy.
Fix your personal finances before you take the risk of losing money.
You would be wise to hold off on family also if you want to seriously invest. Get yourself established with investing then think about a family.
Great job working down that student loan debt. Keep that up, and study in the meantime. With the student loans out of the picture, and keeping with what appears to be a heathy savings habit, you two will be able to get in a great investing position in a short amount of time.
Great choice in career by the way.
I will disagree with some folks here. Don't pay debt. Let inflation do it for you. But seriously, answer a few questions:
1. Can you borrow money? What is your borrowing capacity?
2. How much cash do you have?
3. What is your risk tolerance?
3. What are your investment options?
Run some scenarios in excel. Say your student loans are at 4%. After tax deduction, you are paying 2.5%, may be. Can you invest and generate 10-20%? If you can - why would you pay 2.5% debt? Also consider the inflation, that's what paying off our national debt :) What do you think inflation will do to your debt in 10 years? What will it do to your assets? Also, consider - having a baby will add expanses and reduce time you have available. Don't get all workout over measly 120k in debt. If you are successful in real estate, you will have one or two more zero's in your debt column. At any rate, you are doing well, good luck.
Listen to the most recent podcast with Scott Trench.
I think you are way better off saving the money and house hacking. This ticks off one of your largest expenses, provides income, and in a couple years, increases your purchasing power. Like others have said, this assumes that the interest rate is low on the remaining debt.
But you can't go too terribly wrong the other way. Paying down the debt gives you more runway to take off.
I disagree with the folks who say pay off student loans first. I bought my first property, a four plex with an FHA loan one year out of grad school. I had $41,000 in student loans at the time and my salary was only $24,000 at the time. To qualify I too take income sensitive student loan payments, the lowest payment possible. Student Loan interest is tax deductible and it's was only 5% anyways. With inflation student loan payments are actually shrinking the longer you hold the debt as is the value of the principle on the debt. With your income being at $150k with your wife there is a lot of tax benefit to REI. You have depreciation, mortgage interest to write off, if you house hack you can live in your house practically rent free that frees up cash flow while your downpayment sits there in your equity and slowly appreciates. Eliminating the rent or house payment by buying a multifamily will save you thousands a year if you can find a duplex or something bigger.
Had I passed on my first deal I would have missed $1000/ month is cashflow profit, that I know get and probably will until I die. My property is in auto pilot now. I would have missed appreciation from $53,000 to $120,000 in 4 years. It is work. I repaired and remodeled a lot over the first 3 years. But choosing to wait longer would have meant missing an opportunity and loosing time that cannot be made up. Getting the real estate snow ball rolling is huge.
I suggest you keep your debt manageable for yourself. Avoiding dumb debt like high car payments and petty credit financing of luxuries like TVs. That can hurt your ability to borrow for the wise debt of RE. I would recommend lowering your student loan payments as low as you can and accumulating as much cash as you can. If you can find a 15% cash on cash return in a duplex or triplex or 4 plex you can use owner occupied financing to snag your first deal before you have kids. That 15% COC return is a better deal than throwing money at your students.
4 years ago when I bought my 4 plex I was not married and had no kids. I am now married with one kid and one in they way and a wife that wants to stay home. You better believe I am happy now that that my 4 plex cash flows over $1000 month. If I had waited to payoff my student loans first I would never have bought that property. I would still be slavishly paying down student loan debt and my wife would be working full time.
I would look for a deal that allows you to live in the property and heavily your own housing cost, because if it is multi family and will break even with living in it, it will cashflow well once you move to your next property. If you do that you can get the ball rolling. Also, that owner occupied mortgage at a fixed low rate, you can keep that forever if you want when you more on to the next property.
Paying off debt is a smart thing. 1) But if you have no debt and no cash and no cash flowing property is that better than option ....
2) $1000-2500 in cashflow (that is not taxed as much as W-2 income), an appreciating asset at 3.5% year, depreciation tax deduction, mortgage interest deduction, and a manageable student loan payment that is by the way, also a deduction.
I will take the second option all day. Investing wisely in real estate takes some skill, but for someone willing to learn the skills needed, it's the easier path in the long run.
Just read your profile! Buy a fourplex this year! If you house hack a four plex, it's hard to go wrong with that, most people will not do that buts got to be one of the smartest ways to get the ball rolling in the right direction. The finance deal you will get in that is untouchable for non owner occupied investors. It will probably be paying you to live in it if you do that. If the units are full you will make money living in your house.
Assuming the student loans are low interest as most of them are, pay them down after you buy your house hack. You have to have roof over your head anyway. Better to have someone else help pay for it than to buy a SFH and foot the bill on your own. Smarter than renting where you will be paying for someone else's equity.
You have demonstrated your ability to be disciplined and pay it down pretty quickly. Keep your discretionary spending down. Avoid dumb debt like credit card bills for fancy vacations. I view student loan debt like business debt if it helped you get a degree that has actual market value like physical therapy school.
I agree with most of what people are saying about investing first, so I won't repeat what 100 people before have. But I would like to add one thing to consider in your decision. In your current situation, you can save up $30k - $40k in a year so if you invest in a property and lose every penny of it, you will be set back approximately 1 year worth of labor. This is not lost money though as you will have learned A TON from that one transaction. Considering both of your professions, it's safe to assume you are both NOT dummies and can learn real estate 10x faster than the intense courses you had to take for school. I think in your situation, invest because the upside is huge and the downside is pretty minor. On the flip side, for those of you reading this that make minimum wage and maybe saved up $40k or gained some inheritance, I would probably recommend paying off the debt first because your ability to replace that money if lost would take many many many years (if ever) and paying off the debt is a guaranteed way to increase your cash flow with 0 risk involved. Like anything in life, there is no black/white answer to these things. It really depends on your personal situation. Just my opinion, for what it's worth : )
I agree with what David Dachtera and Frank C. Said. Just jump in. You have to live somewhere anyway. Unless you plan to live with parents. Student loans are a pain in the you know what. But getting started investing asap is in your best interest because of the variable time.
Talk to a lender. They will tell you what's possible. If you can get a mortgage loan with all the student loan debt, then yes, I agree with the above comments to go for the REI now. But your options might be limited with respect to what kind of property you can buy with the student loan debt.
Good luck! In the meantime you can learn a lot here about RE investing!
Thanks for all the feedback everyone, I haven't been on in a few days but several mentioned the interest rate. We have 1 loan left at 6.38% but once it drops below 100K we can refi with Sofi for about 4.5-5.5% based on what I have read, but I don't know that as fact yet. Minimum payment on the loan is $530 per month right now and we have no other debt payments.
Definitely a lot to consider and I will look into several of the options. We are in the process of speaking to a lender right now about how much we can borrow based on the above facts. Should find out this week.
For now, I will keep soaking in as much information as possible!
Please report back, I'm about to graduate with my masters and about 60k in loan debt. I'll definitely be following to see how things shake out for you!
@Stanley Parsley Could you break down what it means to "leverage one property into another property", I've read and heard this a ton but don't really understand what that would look like.
One thing to also keep in mind when you are trying to compute your student loan interest rates is that you get to use the interest as a write off. So your effective interest rate isn't 6.38% after the write off (unless you and your wife are making too much money - 1st world problems right? lol)
I had the same issues as you two are having and decided to invest. I was not able to write off student loan interest my first couple years out of college because I made too much, but since becoming self employed and through the wonderful CPA magic that is "write-offs" i've been able to write the interest off once more! I would chat with a CPA as to what your income is relative to that threshold and keep in mind that mortgage interest and a few other things *may* (i'm not a CPA, i don't give tax advice, blah blah blah) help keep you below that threshold. I know, it seems like minutiae, but in my experience it's more about the effort and getting in the habit of taking advantage of everything at your disposal than it is to save an extra $200 per year.
@P.J. Bremner That is great info, I believe we maxed out the student loan write off this year (2500 or 4500?), I can't remember the exact number. But that is good to know. I'll be sure to ask our CPA about that for next year.
We are currently in AK for a contract but when we get back to Texas, I will be searching for a real estate minded CPA in the Houston area.
I'm not too sure, my loans were only $25k by the time I graduated and the carried interest is like $800 - $1000 per year. You guys definitely take the cake on student loan write-offs! It's great that you were able to use it at least. I missed out for at least 3 years :* (
On the CPA side of things, my best piece of advice is to get a CPA that is well versed in the area that you will be getting into. If you're strictly doing real estate and working (I'm ignorant of your profession, maybe they have CPAs that can work magic for that type of work?) then you should find a CPA that specializes in those two areas or is at least proficient. When I first graduated, I was working in the car business and used a CPA that specifically handled car business taxes (lots of bonuses and commissions). Once I started to accumulate some property and started an eCommerce store, I switched over to a lady that is a pro with business tax returns and does enough real estate to know 99% of that field. I can tell you, she is worth every penny! I found her through a referral with some old clients. They were high net-worth people that knew what they were doing so I trusted their advice without much vetting.
Like a lot of others, I would go the house hacking route. Of course, it depends on the market but I'd say in most areas you can live very close to free each month. If you're paying $1k/mo in rent now and can cut down your out of pocket to $400 by house hacking, you're $600/mo closer to paying off your debt. Not to mention, the $400 your paying each month goes towards reducing your mortgage vs $1k in rent is money you'll never get back.
On a 225k FHA purchase and some seller paid closing costs/prepaids, you should be able to keep your upfront costs to roughly $10k.
My wife and I are looking to settle into our first SFR or small multi fam this Fall but I'm curious over the long run what is the best solution. We are both physical therapists, make around 150k. Our student loan debt is currently 118K. We have been paying that off as fast as possible starting February 2016 when the balance was 197K.
Between now and Sept we can put away about 30-40K which we could use for either a down payment on a conventional SFR or FHA a multi fam (owner occ,) and house hack the units.
Or throw that 30-40K at loans, rent for a year, save another down payment and really delay REI for another 2-3 years.
We are both about 30 years old and looking to start a family in the next year as well. This would be in the Sugar Land-Stafford-Missouri City area of Houston.
Thanks in advance for your responses!
Looks like 100 people already said it but don't pay off your student loans. That's some of the cheapest money you can get. Use that same money to buy a property. Let the property and inflation pay off the debt.
@Ben Volkman -- To answer your question about leveraging one property into another. I can share about that, because I am in the process of doing it. Like I mentioned above I bought a 4 plex in 2013 for $53,000. This spring I refinanced it, this is after I have remodeled two units and rented them to higher paying tenants. My new appraised value came back at $120,000. That is less than 4 years after I bought. I pulled out $18,000 in my refinance. I am buying a second investment property with the 18K. My downpayment on my next property, because I am not living in it is 25% of the purchase price. In this case about 20K. My payment, --- that my tenants have paid for me since day one, --- is going up $100 to do this, from $500 to $600 on my original investment property. The new property will cashflow at about $500/month after all expenses. So it's a net gain instantly of $400 a month for me. I took out money from one property with a mortgage to mortgage another investment property. That is often called the Buy, Rehab, Rent, Refinance Method, or BRRR Method. Something I think BP coined. My investment property has cost money, but it has always brought in cash so its paying for its own improvements as I put money back into it and improve it and raise the rents, that raised the value when I went to refinance it. Good luck investing! 4 plexs are often good investments if you can find one!
It sounds like you have a lot of irons in the fire. It seems like you should prioritize your list. If having kids is more important, then have kids. If rentals are more important, then get ONE rental then have kids.
This is assuming that with a rental you are able to get a higher rate of return than interest rate you have on your student loans.
Now here's a question I had too. Current student loan debt is low-interest and I've kept up on it for almost 10 years now. Good to know looking at multifamily instead of paying it off is the wiser course long-term.
@Cody L. I think student loans are back by the government which is taxpayers money, and if you have student's loans, you should pay them and worry about investing when you have the student loan paid, and banks don't like to lend to anyone who not paid their student loans and get a 3rd job, cut the cable, get a cheap phone, don't eat out.
I used to be a debt collector calling on student loans. You know who I called most often? The people that I called most often came in this order.
1. Dropouts or useless degrees. Only went to school for the 'free'money.
2. People that busted their humps in school and tried to payoff the loans, and life threw them one bad turn that wiped them out.
3. Insane people.
Don't be number 2 if you can help it. I say, if the interest is low on those loans then it's almost free money. Pay it, but build equity and income outside the W2 system. It's my opinion that it's better to have added income and equity than nothing but be debt free.