Pay off Student Loans or Invest in Rental

13 Replies

I'm in the process of buying a bigger house and selling my current one. I have enough equity in the current house where I can do a 40% down on the bigger house. But instead I'm debating on doing only a 20% down, which will be a significant increase to my current mortgage on the smaller house, and use a good chunck of the 20%, to either pay off student loans ($65k, saving about $700/mo in payments that can be used to offset mortgage), or using it to put down on rentals (multifamily). Looking at the student loan payoff option, the ROI on that is about 14% but with no appreciation, where rentals may return 8-10% but has appreciation. Given the market right now, would it still be a good idea to bank on appreciation and cashflow, or is paying off the loan a better option?

I'd want to check your math (because ROI of 14% seems high on student loan payoff), but I'd take 14% guaranteed ROI all day long.

I think we'll see other opinions, though, as there is a 'personal preference' element to the question of reducing debt VS investing.

Best of Luck with Your Real Estate Investing!

Originally posted by @Paul Allen :

I'd want to check your math (because ROI of 14% seems high on student loan payoff), but I'd take 14% guaranteed ROI all day long.

I think we'll see other opinions, though, as there is a 'personal preference' element to the question of reducing debt VS investing.

How I came up with it was by taking the loan payoff amount and divided it by the (monthly payment times 12 months) I would not be making towards it.

Here's how I see it, if I used the money on the down payment of the new house, the PI would be about $400 less.  But if I paid the loan off, the loan payments are $700, which i can apply it back to the PI, bringing my payment down.

Originally posted by @Yeng Hawj :
Originally posted by @Paul Allen:

I'd want to check your math (because ROI of 14% seems high on student loan payoff), but I'd take 14% guaranteed ROI all day long.

I think we'll see other opinions, though, as there is a 'personal preference' element to the question of reducing debt VS investing.

How I came up with it was by taking the loan payoff amount and divided it by the (monthly payment times 12 months) I would not be making towards it.

Here's how I see it, if I used the money on the down payment of the new house, the PI would be about $400 less.  But if I paid the loan off, the loan payments are $700, which i can apply it back to the PI, bringing my payment down.

Your ROI when you payoff a loan is the interest rate on that loan. No fancy calculations needed.

I would personally rather be debt free or close to it when the time comes to start investing in real estate. I know you said you were already in the process of selling your current home. But if it's still possible, staying with a smaller mortgage payment while sinking the difference and any extra into student loans would probably accelerate your goals.

The student loans will always be a handicap and always be a loan that will never go away unless it’s paid off.  Also depending on your income, it may not be deductible so best to pay off student loans ASAP.  

As you’ve noticed, the real estate market has been super heated with rapid price escalation the past few years. This include the western states like CA, AZ, OR, WA, ID and even TX.    Since you’re in CA, homes I bought in Redding during the bust for 60k are now selling for 190k. Condos I bought in Natomas, Sacramento for 140k are selling for 350k. I realistically don’t see the my CA investments appreciate that much more in this market cycle. So my 2 cents, pay off the student loans and start accumulating cash. I’ve seen few boom & bust cycles in my lifetime and I feel this is no different.  

Hi @Yeng Hawj . I agree that it would be best to pay off your student debt, even if it means you wouldn't be able to put as much down on your new house. And I want to throw out another idea which people will have differing opinions on. Assuming you've paid your student loan off and put the rest down on your new house, at some point after buying your new house, you could take out a small HELOC to be used towards a future investment. My wife and I did this a couple years ago. We bought our primary residence in Sacramento in late 2015, took out a HELOC on our primary in 2016, then used it to fix up a new rental property that we bought in 2017. The beauty of it was that the HELOC just sat there with a $0 balance (no payment) until we needed it. Now the key to doing something like this is to make sure you use the HELOC for an investment that will more than cover the HELOC payment. And ideally you will eliminate the HELOC balance at some point by either refinancing into a fixed rate loan, selling the property for a profit, or by some other means. This can be a great way to ensure that you have "cash" ready to go when you need it. BUT I also want to emphasize that it should be done carefully with a well thought out plan, and hopefully a plan with multiple exit strategies.

@Yeng Hawj , You are calculating your debt as a reverse compounding effect.  I love that!!!!  The freedom you have when debt is paid off compounds your abilities.  That's not a common nor natural leap of thought.  Well done!  

Given that student loan interest rates in most cases exceed returns from the average rental property in todays market and given that student loans are not dischargeable in bankruptcy and that the govt can garnish tax returns to reclaim and that they very negatively affect your borrowing capability I'd pay those rascals off as fast as I could.

If we weren't closer to peak prices in the overall real estate economy, I'd say buy investment properties all day long. But because prices are high across the board, maybe pay the loan off now and then maybe by the time the next crash comes around you'll have all the money ready to jump. There are good deals out there right now, but I wouldn't bank much on appreciation just because prices are so high. 

Just food for thought. I don't have a stance one way or another....either one can be financially beneficial if you make it work.