Real Estate Agent · Morristown, NJ · Member since 2019 · 9 posts · 7 votes
Hello all
I am currently at a fork in the road! I unfortunately was very uninformed/uneducated when I made some decisions in terms of college. Because of that, I now am in 80k of student debt. I know this is asked often, but should I go dave ramsey style and take the next three or four years putting everything i make on paying off the dept or use the nice chunk of money (15k) should have saved up by this summer to invest in OOS (currently live in north jersey). I know what I want to do, but i also know that might not be the best financial choice. Trying to get financially smarter day by day!
P.s. might have interested partner in matching my 15k for this summer if I decide to go that route.
@Evan Dieffenbach I recommend paying about half of the $15,000 and keeping the rest for now as an emergency fund until you’re up and running making money at your job. Then I’d put the rest towards the debt and pay off the debt first.
My base salary is only $15.30 an hour but with overtime, savings and excellent credit (800+) I’ve been able to knock it out of the park recently with a mortgage I never thought I’d qualify for. $200,000.
But first I paid down $11,800 worth of credit card debt. Now the only thing I use my credit card for is purchases for supplies I need for the rental units and I pay them off the next month before any interest is ever due.
There's a few factors to consider. Money management is not as simple as looking at the math. Psychology, risk tolerance and self-discipline are involved.
If you have a track record of correctly tracking and managing your household expenses and maintaining a target savings rate for more than 1-2 years, then yes, I think the math leans towards investing in real estate (provided your student loans are at 4-5% AND your risk tolerance is in line with that decision). If you are projecting a goal annual savings rate (or paydown rate), but have not yet practiced managing a personal budget and maintaining a savings rate over time, I would advise you towards debt payoff. For most people, the debt payoff process mentally prepares them for transitioning to long-term wealth building, by way of developing the self discipline required to minimizing expenses and maximizing savings goals in the long run.
As others have mentioned, any lender will require you to put down 20-25% on SFH/MFH that you do not plan to personally live in, and the $80k in student loan debt may work against you as the lender considers your debt-to-income ratio. As a first time property investor, I would calculate your current DTI and ensure its well under 35% or so. That could give you a clear direction on what to do first. Finally, are any portion of your student loans federally backed? If so, the proposed Biden administration student loan forgiveness plan may come of use if/when it comes to fruition.
TLDR; If you are risk adverse, I would pay off loans first. If you are comfortable with risk and want to make your money work for you, you should invest in real estate. However, there are a few options for a middle ground which is what I ended up doing.
I went through this same decision last year. I left college with 35k debt total, 10k in private higher interest loans (at 7.5%). My fiance and I made the decision to pay off the private loans first and foremost and were able to do so fairly quickly. Then we were left with 25k of fed loans, at an average of 4.5%. Unfortunately the way the fed loans work, you can pay above minimum monthly for years and barely make a dent on your principal so we are taking advantage of low interest rates and refinanced to a private lender. We were able to bring the term down from 15 yr to 7 yr at roughly the same monthly payment. Doing that has allowed us to allocate a much larger chunk of our money to REI while also paying down student loans.
@Evan Dieffenbach One main factor that i haven't seen discussed. Where would your finances be after you invest the $15k? If the investment property suffers a CapEx issue early on, will you have the funds to repair the problem?
Personally, I was only a fan of the first few steps of Ramsey, and then I split once I felt my monthly student loan payments were manageable. For me, that was $200 a month, with only 4% loans remaining, because with $15k in savings I could comfortably continue payment in an emergency and I felt like I could beat that ROI.
With that being said, the largest payment I made on my student loans was thrift a company stock program that took 2 years to materialize.
Pay the debt.If you don't like the philosophy listen to the math. Paying off debt is a risk free return of 4.5%. The comparable risk free return on a bank deposit is 0.01%. On a turnkey IF things go well you may be lucky to get 8%. But to do that you are taking a LOT of risk. Do you have the reserves to pay tens of thousands extra in your first year if things go really bad? Think it won't happen to you? As the line from the movie goes "You feeling lucky tonight?". Its a no brainer. Pay the debt first.
@Evan Dieffenbach, you should definitely trust me the most, because we share the best name available. :)
At 4.5% and assuming it is still deductible on your federal taxes, I would say invest in RE. Let your cash flow from investments cover your student loan payments.
2. 4.5% isn't that high of a percentage to beat. Even if you get suboptimal returns of 5-10%, you'll be lightyears ahead of the person who thinks that all debt has to be paid off first in the journey of financial freedom.
@Evan Dieffenbach Certainly, we had one big reason. The price to enter the market. Both markets showed potential cashflow, Columbus wins out on appreciation but we care less about appreciation. I especially care less about appreciation when I feel the overall market nationwide has gone too high to remain rising. Toledo will not appreciate as much but rent is solid in good neighborhoods and will cost me less to invest. My investment strategy is about residual income, so rent over appreciation everyday.
pay your school loans at what ever the minimum is. then save for the next few years as much as you can. 15k is great but you want reserves. or say screw it and ago all in. cant make money with out risk
Hey Evan, my take on this is I think you should either keep trying to accumulate more and more cash (which may involve just making the regular monthly payment on your student loan(s) as you seem to have a very reasonable rate of interest) to eventually get to a point where you have some more capital to finance an investment via commercial financing (non owner occupied), or, to get into real estate investing sooner, use what you have saved up now (but make sure you still have enough left over for closing costs and reserves) and do a 3.5% down FHA loan and buy a multi family (2-4 units) that needs a bit of work and live in one of the units and try to increase rents in the other units as you go / as you make little DIY repairs to try to limit how much you have to put into repairing things, if you are handy, you can really create some sweat equity this way. With this strategy, you should be able to limit you housing expense and have the other units provide a bit of cash flow for you. Each state has FHA loan limits, for instance, on a 2 unit the max loan amount may be 600k, and for a 3 unit the max loan amount may be 700k, and so on (anything with 5+ units will not qualify for FHA). Keep in mind, the lender will include the rental income from the other units to see if you qualify for the loan and will not look at your income alone to determine how much you can buy)
If you want to chat more then feel free to send me a message! Always happy to talk finance/real estate.
Dont get me wrong. I will be franc enough to put my perspective and give my opinion. Please dont be offended.
15 k will get you nowhere in RE. You might by a crapy rehab and get in more debt ( if a bank find you suit to receive it) trying to shape it and rent it. Then you will receive some money and... booom. A roof needs repair, a/c or else... and you have no reserves...
So you could try to save up to invest...yeap, you gonna make a killing receiving 1% py and even giving a big chunk of that to uncle Sam, while your debt is at 4.5% py.
Let me get to the point. Pay your debt is your best alternative at mom. You reduce the debt, start saving more, and finish it quickly. Then with no payments you can save more to start your RE journey. With less debt the bank will find you more suitable to lend, and rates can be more favorable. You enter in the journey with monthly savings, that could help you in an adverse moment in RE ( that always comes).
My post is not popular, but i am trying to give you the best advise on your situation. Hope you understand...
@Evan Dieffenbach Pay off your debt and invest in real estate by learning the business. Your debt can be paid off quickly if you dedicate yourself to it.
Always invest from a position of strength.
Build your emergency fund. Pay off the loans. Buy a house hack and/or start investing in other properties.
The first thing I would do before paying one penny on my school debt is I would look 24/7 for a business opportunity that could make enough money to pay off my school debt. I totally disagree with paying off the debt first if you have what it takes.
Suppose, this virus ends, brats start going to school and you rent a 4 bedroom house you can sub rent to 8 college brats for $800 each per month. That should pay off your school debt real quick.
The part of your post that scares me is where you mention a partner. I can write for hours about the disasters that happen with partnerships.
Biden administration is likely to forgive some amount of student debt. Pay the minimum in the meantime. I don't like it, people should meet their commitments, but it's free money. It would be silly to pay it while millions of others are getting some debt wiped.