Embracing debt at a young age

Personal Finance
8yFollow

Embracing debt at a young age

Travis Emerson
Madison, ME · Member since 2017 · 23 posts · 6 votes

I'd like to get some opinions on debt. I'm 23 and have 6 figures on school loans, which don't bother me a bit, matter of fact I refinanced them from 12 to 20 years to free up cash for REI (cutting my interest in half) and maine offers great tax breaks with school loans in my line of work.

I plan to house hack a 300k modular 4-plex this fall using an FHA 3.5 down. Adding my new truck into the mix that brings my debt total to around half a million at the age of 24. After I live in the 4-plex for a year I plan to buy a house I'll stay in for 10-15 years and will most likely spend 250k, bringing my total to 750k now at the still young age of 25. I should add I have a 6 figure income to support all this as well. Soon after the house, once I have the funds, I will buy another modular 4-plex, this time with 25% down. So I should be about 1 million in debt around the age of 27.

Some may ask why spend 300k on a new modular but the area I plan to invest in is the out skirts of a college town that's expanding and all my competition is new construction. (not relevant to the debt conversation)

So my question is, am I out of my mind here? I read a great book "the value of debt in build wealth" that changed my way of thinking completely about debt. I am not scared of debt at all, after all, my tenants with be paying it all not me, but I still can't help but think that taking on all that debt and then some before I turn 30 is crazy. I have to imagine though with a lot of the stories I read on here that this isn't necessarily uncommon?

0Reply
62 views

Most Popular Reply

Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
8y

Wasn't going to comment because it appears you have it all figured out and won't be open to the comments of others anyway, but I just can't help myself...

Extending the term of a loan from 12 to 20 years does not 'save on interest'.  It costs enormously more interest in absolute dollars.  The new and short sighted say it would save because their payment is less. The wise ask how much. Broke renters ask how much per month.  Think in decades.

New cars early on are a sign of immaturity and insecurity.  Impressing people at a stop light you will never meet. Is that the goal?  How about when you roll up and your future tenants figure you dont need the rent obviously, driving a truck like that.  What will that truck be worth in 5 years? Early on we can't afford a $20k hit to our balance sheet. What could you have done instead with all those payments?  Opportunity costs.

Anyway, enjoy your 20yr student loans and truck payments.  I'm way on the other side of al that but don't expect you to listen to me either.

12Reply
See this reply in the discussion

29 Replies

Jump to latestLatest
  • Edward B.
    Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
    8y

    @Travis Emerson,

    It's not uncommon for real estate investors. The only problem I see with your plan is the "new truck". But I have bought my toys in the past as well. I still own my "new truck", but it was not a good investment at the time. I love it, though. But I digress, as long as you focus on maintaining the cash flow to support the debt you should be fine.

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    It is not totally crazy but it does verge on lunacy if you have no idea what you are doing. Invest wrong and obviously you risk losing it all and spending the next 15 years trying to recover.

    There is a difference between being afraid of debt and understanding debt. You have a lot yet to learn.

    Your biggest mistakes are not paying off your student debt before you invest, buying a new truck and planning on purchasing a personal home in one year. All of those are bad debt and should be avoided entirely if you hope to succeed. 

    My guess is that there is a high probability your bad debt will sink you. Higher probability is that your plans are far to grandiose and you will not achieve them for many reasons the most probable being lack of financing.

    My advice would be pay off your student debts and get rid of the truck (buy a used vehicle under 10K) before you invest and then start planning to do your first of many house hacks. By that time you will likely have a better handle on finances.

    2Reply
  • Travis Emerson
    OP
    Madison, ME · Member since 2017 · 23 posts · 6 votes
    8y

    why pay off debt at 5% when I can invest and make 12-15%? you aren't going to convince me of that one, you aren't the first to tell me I'm silly for buying a new truck but I have a much higher income than most 23 year old and that payment is hardly a thought in my monthly budgeting. I'm not one to live as frugal as I possibly can because I set realistic goals while spending money the way I want.

    My DTI and credit score is in very good shape and will only get better the more cash flow I have so your lack of financing comment is interesting.

    0Reply
  • Kevin Coggins
    Spring, TX · Member since 2016 · 243 posts · 203 votes
    8y

    The new truck would have nothing to do with your income, it's all about opportunity cost.

    1Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    Travis Emerson I’m also 23, own multiple rentals and can share my opinion on debt. What you’re planning to do can work but we’d need more information. What are the rents on the 4 plex you’ll househack for example ? I would advice heavily against buying a new truck. The money you’ll lose to interest, asset depreciation and car payments is way to much. The number one reason Americans don’t built wealth is car loans. The only debt I want is real estate debt and even then I plan on paying it off early. Debt is good when used correctly. If you’re a million in debt by 27, I hope yo have a large income and cash flow because you will need it.
    1Reply
  • Nick Rutkowski
    Rental Property Investor · Ithaca, NY · Member since 2015 · 1k+ posts · 1k+ votes
    8y
    Millennials have an uphill battle dealing with our debts and RE investing. With the amount we owe, it’s like paying for a house. If the property cashflows and could help pay down your loan, then go for it. We need all the extra income we can get. Always have an exit strategy! In case this doesn’t work out. Good luck!
    0Reply
  • Account Closed
    Investor · Portsmouth, NH · Member since 2016 · 75 posts · 33 votes
    8y
    Travis Emerson Hi Travis, I wouldn’t let the “amount of debt” scare you. What should scare you is if your debt service coverage ratio drops below 1 for your combined real estate debt versus your total NOI. In that instance you wouldn’t be cash-flowing. Make sure it’s at least 1.2 to be safe. And if every property is 1.2 or better then your entire portfolio is in safe waters. House hacking should lend itself to a strong DSCR. If I had 10M of debt but a DSCR of 1.5 I wouldn’t bat an eye. My lender of choice won’t underwrite a deal unless it conservatively clears 1.2 on a new loan or 1.3 on a heloc/refinance To support earlier comments, I would opt for not getting a brand new truck and suggest living lean until you’re 30. Your ambitions sound on point so I think you’ll be cooking in 7 years. I hope that helps, Jon
    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    8y

    Wasn't going to comment because it appears you have it all figured out and won't be open to the comments of others anyway, but I just can't help myself...

    Extending the term of a loan from 12 to 20 years does not 'save on interest'.  It costs enormously more interest in absolute dollars.  The new and short sighted say it would save because their payment is less. The wise ask how much. Broke renters ask how much per month.  Think in decades.

    New cars early on are a sign of immaturity and insecurity.  Impressing people at a stop light you will never meet. Is that the goal?  How about when you roll up and your future tenants figure you dont need the rent obviously, driving a truck like that.  What will that truck be worth in 5 years? Early on we can't afford a $20k hit to our balance sheet. What could you have done instead with all those payments?  Opportunity costs.

    Anyway, enjoy your 20yr student loans and truck payments.  I'm way on the other side of al that but don't expect you to listen to me either.

    12Reply
  • John West
    Investor · Bath, ME · Member since 2017 · 97 posts · 29 votes
    8y
    I’m not going to condone or condemn, but here’s my two cents. Ultimately, I think you have the ambition and mindset to be successful. Just take a step back after each investment and make sure it’s going to cash flow and align with your plans the way you had planned. If you set aside money for vacancies, capex, repairs etc... a good investment in Maine here can yield $100/month/door. If it’s a grand slam $200. Given the latter and you live in one of the 4 units, that’s $600 a month in cash flow. Is that enough to cover your truck payment and help you pay down your student loans? Lastly, do you have realistic expectations for cost of construction? I didn’t until a few weeks ago. I was planning to build a large triplex for my family to live in. My family and I to live in the oversized first unit and the other two to pay the mortgage. After getting the first quote of ~$600k, I’m being forced to take a step back and reassess.
    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    8y

    @Travis Emerson, of course, the sooner you (wisely) borrow a million, the sooner your tenants can start paying it back. Being young helps, not hinders. (A million is small change, right?)

    Lovely to have a six figure income to play with. Looks like your college debt is already paying dividends! I hope you do have a good head on those shoulders! Good luck...

    0Reply
  • Travis Emerson
    OP
    Madison, ME · Member since 2017 · 23 posts · 6 votes
    8y

    I should probably clearify a couple things, first, I do not plan to buy a new truck the same year I buy a 4-plex and a house. I already have a new truck and was just simply adding that to my debt total which I was actually intending this post to be about. I bought it when I was 21 cuz, well, what else do 21 year olds do when they were making as much money as I was. It wasn't until around a year ago that I decided to get into REI but I like my truck and plan to keep a while so it is what it is. When I decided on REI I set savings goals and as long as I meet those goals and keep my credit in check I'm happy and I enjoy life the same way I always have. Just because I'm not as frugal as many of you think 23 year olds should be I don't think it means I will never make it REI, but many of you are very successful and I appreciate the input either way.

    @Steve Vaughan Also let me clarify on the school loans, when I said I cut my interest in half I meant %. I was paying 12% for 12 years. I refinanced at 5% and went out to 20 to free up extra money for REI, I hope to be at a point in 10 years where I can get done work, at that point I will plan work one extra year. Accomplishing 2 things, strictly living off my rentals to see for myself that it will be possible to do so, all while saving 100% of my w-2 income. At the end of that year if I decide I was comfortable living off my rentals while still saving to expand then I will pay off my school debt in full with the money I saved from my w-2 income and get done working. If I was to pay off all my school debt before I started investing it would take me 3-4 years. I would like to start investing sooner than later.

    @John West Those are interesting numbers, do you invest in the Bath area? I plan to invest in the bangor area, I've personally rented in the market up there in a bran new 4-flex 2 bed 1 bath exactly like the ones I plan to buy and paid $1100/month+utilities. I've talked with 2 modular vendors that have quoted me 225-250 for the building/install, add another 50k-75k for foundation, driveway, septic, well. That 600k seems very high to me, I'm new to investing but have worked in construction before. My units will all be 800 sq and be very simple, not sure how elaborate that triplex you had quoted was.

    100-200 a door also seems low, at 1100/month so 4400/month income once I move out. I figure around 2500-2800 for mortgage and expenses, leaving me in the 350-450/door range. These are all numbers I've gotten from local REI up there. I'm all ears if you see that I'm missing something here but I certainly didn't make any of these numbers up.

    0Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    8y

    At 24 you think you know it all. Debt is ok when used carefully. Buying a car on debt while holding student loans is a bad idea. Holding student loans for 20 years is a terrible idea (no matter what the interest rate). Getting mortgages for good Real estate while having enough cash for reserves and high enough income to service the debt is not a bad idea. You have the eternal optimism of youth. Thats ok to a degree. When it causes you to be reckless, it will eventually bite you in the ***. Life will eventually bite you in the ***. It does to everyone. Just depends how well your *** is padded at that time.

    3Reply
  • Travis Emerson
    OP
    Madison, ME · Member since 2017 · 23 posts · 6 votes
    8y

    @Account Closed thanks for the reply. I can see how I come off as a know it all but certainly not the case. I'm interested as to why you say school loans for 20 years is a terrible idea. I plan to pay it off in full in half that time but say I didn't, if I make 12-15% on that same money that's costing me 5%, I am up 7-10% correct? and that's 7-10% on a much larger number.  Assuming the school debt isn't effecting my borrowing abilities, is there a bad side I'm not seeing? It is also important to add I got a near $5,000 state income tax credit because of my school loans, paying a large potion of that interest.

    0Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    8y
    Originally posted by @Travis Emerson:

    @Account Closed thanks for the reply. I can see how I come off as a know it all but certainly not the case. I'm interested as to why you say school loans for 20 years is a terrible idea. I plan to pay it off in full in half that time but say I didn't, if I make 12-15% on that same money that's costing me 5%, I am up 7-10% correct? and that's 7-10% on a much larger number.  Assuming the school debt isn't effecting my borrowing abilities, is there a bad side I'm not seeing? It is also important to add I got a near $5,000 state income tax credit because of my school loans, paying a large potion of that interest.

      Because your math ignores risk. Student loan is unforgivable even in bankruptcy. What happens in the next recession and you lose all your highly leveraged properties? And you lose your job. Where are the loans? Still hanging over your head. See you assume everything will always be fine. Im here to tell you (with 30 years more on the planet) that life is simply not some linear constantly improving line. The longer you carry the risk, the greater the probability that you will encounter a negative event. Thats why holding the loans for 20 years is a terrible idea. Look at any 20 year period and see what has happened. Why do you think the next 20 years will be golden? 

    6Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    8y

    @Travis Emerson, "These are all numbers I've gotten from local REI up there"?

    There's a problem, right there!

    On another thread, someone wrote: " Never ask a barber if you need a haircut"!

    Of course local REI are going to try to keep your 6 figure income in their realm!...

    1Reply
  • Travis Emerson
    OP
    Madison, ME · Member since 2017 · 23 posts · 6 votes
    8y

    @Account Closed

    A very valid point, isn't there risk in everything though? I will not continue only because I try not to make a habit of arguing with investors with way more experience than myself but I do see it differently, thanks for your input

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    All you have to lose is money and there is always more of that to be made.

    Good luck, let us know how it all turns out over the next 10 years.

    1Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    8y
    Originally posted by @Travis Emerson:

    @Account Closed

    A very valid point, isn't there risk in everything though? I will not continue only because I try not to make a habit of arguing with investors with way more experience than myself but I do see it differently, thanks for your input

    Yes there is risk in everything. But you play the odds. Will you take all your cash and put it on black on a roulette table? Or on a 00? Probably not. Why? Because you know the risk of losing it all is high. Your mind can process that because it all happens in an instance. What your mind cannot process is long term risks. If I buy a property and hold it for 20 years, in that case too there is some risk. There will be a downturn but if I have the necessary reserves etc to hold on, there is a good probability I come out with a gain on the other side. Whats the point of holding debt? You face increasing risk of not being able to pay at some point and no real upside. Your 15% return is not guaranteed for 20 years. But your debt pretty much is.

    Of course you will not take advice. Its the folly of youth that the young can never understand. If people learned from other peoples experience the world would be a lot different! You have to go make your own mistakes. So go forth and make them! Good luck. 

    1Reply
  • Anthony Dooley
    Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    @Travis Emerson Many people have tried what you are proposing. It looks good on paper, but what you haven't experienced in your youth is that things never go exactly as planned. Making 6 figures doesn't make you rich. Your whole plan has one single point of failure, your job. What if you lose your job? When I was young, I wasn't afraid of anything either, but life has a way of teaching us to be wise. Best of luck.

    1Reply
  • Travis Emerson
    OP
    Madison, ME · Member since 2017 · 23 posts · 6 votes
    8y

    @Account Closed I understand what your saying and agree to an extent. You're forgetting what I said earlier where I only took it out to 20 years for the lower payment now, and hope to pay in full in 7-10 years. The scenario I stated earlier was hypothetical. I'm aware it's a risk but a risk I am going to take to get off the ground REI.

    It's easy to blame this point of view on my age but there are plenty of experienced investors that agree with me, that is after all where I got this mindset to begin with. If you asked me when I was a senior in college I had full intentions of paying my debt as fast as possible, but over the last few years I've decided different.

     Just because I am young and not nearly as conservative as you are does not mean I am wrong and clueless. I read a lot of books, spend a lot of time on BP, and talk to as many successful people as I can and then I form opinions of my own with all that information (many of them changing the more I learn). I'm sure we see eye to eye on many topics, this just is one I've gone the other way on but I truly appreciate all your input, I am listening, and I'm sure I'll make mistakes.

    0Reply
  • Ed Emmons
    Specialist · Milford, ME · Member since 2016 · 630 posts · 378 votes
    8y

     Interesting comments that everyone has posted on this thread and I think all of them are valid  particularly for a new  investor. Age is sort of irrelevant.  The question I have is what if you lose your job? And don't say it'll never happen.  When someone says they make a six-figure income that means nothing the number that means something is how much is left over at the end of the month.  Your passive income should cover all of your debt. Or at least that should be your goal. Counting on W-2 income is risky in today's world.  As many have read Rich dad poor dad you wait until your investment income exceeds the debt payment on your doodads before you buy them.  Remember everyone who has a lot of experience was young once. But noone who was is new as an investor has experience. 

    0Reply
  • Ivan BarrattBusiness Member
    Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    8y

    @Travis Emerson you already know the answer. At age 39 I'm over 100 million in "good debt!" Now I'm focused on 10x'ing it to 1 Billion of the same "good debt." 

    Keep your bad debt low or zero.

    You already know this but hopefully I'm giving you the reinforcement you desire.

    NOW GO GET IT DAWG!

    0Reply
  • Steve B.
    Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    8y
    Guys he read a book. Obviously he knows what he’s doing!
    3Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    @Travis Emerson

    It has been mentioned but I feel it is worth repeating. You have a high figure income. In todays world this means that you will likely lose your job every 5-10 years. Being high income finding a new job will possibly take 6 months to a year to replace if not longer. I see this regularly with friends and family.

    You must have significant reserves and positive cash flow to survive.

    0Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    8y

    My thoughts:

    1. If you're going to go in debt with RE, you're at the right point in life. The one thing we all have working against us is the Grim Reaper. If not for him (her?it?), there'd be no rush under any real circumstance. But the power of compounding takes time.

    2. If you can live 100% on your rental property income - that means paying for the truck, etc - and bank 100% of your W2 income - then you probably have a pretty good plan. Assuming you're right at $100k, even in your tax bracket that would have you banking 60-70k per year. 

    3. With that being the case, you should build one hell of a war chest and then get that student loan paid down pronto - as has been noted, your ability to carry doesn't properly weigh the risk of owning a non-dischargeable for so long.

    4. The truck is a fly in the ointment. You shouldn't have bought it if investments was your goal, but now that you own it, it really depends on what's left to pay on it and what it's worth. If you have significant equity in it, you should consider selling it and getting something way cheaper. If you are dead even on it, and it's reasonably low miles and say less than $10-15k balance, you have probably already ate the losses, so there's not a whole lot to be gained unless you're not going to drive any more. If you are under water on it, it depends how far underwater you are and how much longer you've got to go. If you are going to keep it, make sure you are paying the least amount of interest possible - whether that means paying it off as fast as possible, or refinancing it to get a lower rate. You want to spend as little as possible on something that can barely be called an asset, as it will eventually depreciate to $0. 

    If I was 30 years younger and just starting out, I would do what you want to do, minus the 6 figures in student debt and the expensive truck. Instead, I would live in my van, bankroll everything, until I had enough rental income coming in that I could continue to purchase investments with that income AND pay for my housing expenses. Meaning I'd probably buy rough houses, live in them while I repaired, get them rented, go back to the van, and repeat as necessary. 

    I think you have maybe the right goals but just need to shift your mind set a little bit. 

    Podcast Guest on Show #243
    Skyline Properties
    View Page
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free