Investing with Student Debt

57 Replies

I am 23, just graduated from business school, I worked and played baseball so I only have about $8,000 in student debt. I am currently working a job making around 40K a year and am renting a place with some roommates. 

I am eager to get started but am hesitating because I kind of want to be debt free going into my first investment. I have no assets besides my car that is paid off. I have a 645 credit score so I guess I'm just wondering if I should wait or just go for it. 

I don't know if it makes sense to incur more debt or work on being debt free and try to establish a better credit score. 

I am looking at the East Lansing (MSU) and Lansing market because that is where I currently work and live.

Thanks for any help in advance.

Go for it but find a good deal. Student loan debt is the easiest debt to manage. You have all kinds of options. Don't put off your future in real estate. If your return is 20% in real estate who cares about 6% in student loan interest. I'll do that all day and on Sunday.

I disagree. It is not financially wise to invest when you still have unpaid debt. It's building your future on a shaky foundation. Will $8,000 student debt make much difference? Probably not but why risk it? You have your entire life ahead of you so why not start it off right?

Pay off the debt, then invest without additional risk or worry.

I appreciate it, I haven't talked to any lenders which I plan to do here soon, is it going to be tough to find a fair loan with no assets and a mediocre credit score?

Originally posted by @Nathan G. :

I disagree. It is not financially wise to invest when you still have unpaid debt. It's building your future on a shaky foundation. Will $8,000 student debt make much difference? Probably not but why risk it? You have your entire life ahead of you so why not start it off right?

Pay off the debt, then invest without additional risk or worry.

 I don’t understand, how does student loan debt make investing in real estate any more or less risky?

Any time you are indebted to someone else, you are at a higher risk. $8,000 isn't very significant so it's a bad example, but the principle is still true.

If he has debt then my guess is he hasn't built a safety net. How's he going to handle replacing a $4,000 furnace when it goes out? What if he loses his job and two days later learns the tenants have abandoned the property and left thousands of dollars in damages? These are common scenarios that could ruin him financially. 

He's 23 years old and fresh out of school with a new job. The wise choice is to become debt free as quickly as possible, save money for a downpayment, save even more money for a safety net, and then start investing from a solid foundation.

Or he can wing it like the average American and hope to get lucky.

@Jack Ropp I highly recommend you read "Set For Life" by @Scott Trench . It's a great book about setting yourself up for financial success and I think it's perfect for someone in your situation.

Both have valid points but I would err on the side of caution too. $8k in student loan debt shouldn’t set you back much, though you will need to start raising capital to begin your investing career. If you use a conventional loan from a bank that would require 20-25% down and that’s a substantial amount of cash. Talk to a bank so you can begin to ask questions and see what’s best for you.

Definitely read Set For Life and see how that changes your perspective on your situation, it’s the perfect book for where you’re at in life. In the meantime keep your eyes on deals, run the numbers and keep learning.

Originally posted by @Nathan G. :

Any time you are indebted to someone else, you are at a higher risk. $8,000 isn't very significant so it's a bad example, but the principle is still true.

If he has debt then my guess is he hasn't built a safety net. How's he going to handle replacing a $4,000 furnace when it goes out? What if he loses his job and two days later learns the tenants have abandoned the property and left thousands of dollars in damages? These are common scenarios that could ruin him financially. 

He's 23 years old and fresh out of school with a new job. The wise choice is to become debt free as quickly as possible, save money for a downpayment, save even more money for a safety net, and then start investing from a solid foundation.

Or he can wing it like the average American and hope to get lucky.

@Jack Ropp I highly recommend you read "Set For Life" by @Scott Trench . It's a great book about setting yourself up for financial success and I think it's perfect for someone in your situation.

 If he can’t afford the property and potential vacancies, repairs, etc that’s a completely different story. But having student loan debt has nothing to do with that. 

If he were talking about credit card debt then I might agree. But student loan debt doesn’t need to be aggressively paid off. 

I make a very high income and have plenty of cash and cash equalivents and I carry over $30k in student loan debt. Why?  Because it’s very low interest and I can do more with the money I would use to pay it off, like invest in real estate. 

If he can afford the investment, including the potential risks, the student loan debt should play no part at all in his decision. 

He says he lives cheap. 23 with roommates. He should be able to save 8 grand in four months or less. Listen to some Dave Ramsey and get after it. My wife and I had 20k in students loans and we paid it off first year out of college. Just live like a college student a little longer.

Good luck

Build your emergency fund, build some reserves, invest, then refinance your student loans to a lower rate when you have a couple years of work history.

No sense in paying it down before you start investing as long as you get your house in order.

I mean, what's your monthly payment on your student loans?  Probably not a lot only $8,000.

I still carry some student loan debt at a 2-point-something percent interest rate, and I just pay the minimum every month because the interest rate is so low.

I could enjoy a greater return than 2-point-something percent by investing.

@Jack Ropp - My business partner has over $60K in student loan debt. We closed over $10M in properties this past year. We went with recourse on several loans - $800K +. It shouldn't be a deterrent. You can get it done. Find ways to make it work.

Build up a safety or emergency saving fund of several months (6 months) to fall back onto if things get rough. Start sooner than you think you should. Action is necessary after you have done your homework. There are a lot of people on this forum who are in their 40s that wished they started sooner. Compound interest is crucial for wealth creation and your 20s are the best time to start. 

My first deal pays for my student loan payment every month. Now my tenant pays that bill. Onto the next one, or two rather. My education is my safety net. I'm young, you are young. If I spent my time this past year "building up my nest egg" and paying down the most flexible loan on the planet, I'd be in a worse position. I now understand real estate. My next acquisition will be even more lucrative as a result. If something breaks in the property and needs to get repaired, I figure it out. A ton of podcasts ask you to start thinking in terms of how can I do something rather than I can't do something. You'll figure it out.

First of all, thank you to everybody who has provided input, the wealth of knowledge on here continues to shock me!  

@Nathan G. I am going to check that book out as I have heard a few others mention that book as well and completely understand your point of view. I think it would be irresponsible to not have some money set aside to handle repairs etc. 

Looking at it the most logical way would be to continue to pay off student loans but setting aside some money for a down payment on a loan and reserves for repairs so I can invest as soon as possible with a safety net.

I think the most important thing is to start to understand this market. Figure out what is a good deal in your area. It takes time to understand what areas are good or bad in the Lansing area. Set a goal to analyze 5 deals a week. Pay that 8k off as fast as possible while saving money for investments. Why don't you work on the weekends for a real estate investor to get some side cash while you learn by example. Figure out what kind of value you can provide. Maybe you can fix up a house and learn some skills or analyze deals for someone else or check up on other people's property or offer to help show empty units. There are a ton simple things you can do for an expert and learn a lot in the process.

I would definitely start setting aside money for real estate and try and get approved for a loan as soon as possible. However, I would only look at multi-family in order to house hack. What are you paying monthly on 8K-- less than $200? Would you make more than $200 renting out a unit? For those with loans in the 1000s, I'd say no.

Speak with an FHA lender and get a game plan in place to buy a place. Then rent rooms to your roommates. I have several clients doing this now, and they are cash flowing quite a bit. I'd buy now rather than later. Rates will go up.

@Jack Ropp It sounds like you did a fantastic job setting yourself up to tackle this game of life right out of college. Graduating with so little debt, and with a business degree is awesome! 

Thanks for the mention @Nathan G. and @Ben Freiman ! I agree, and believe that your situation will naturally evolve into one that is well-poised to invest in real estate if you focus on saving as much as you practically can (while still enjoying being 23 of course) over the next 12-18 months. In that time period, on that salary, you should be able to pay off all that debt and be well on your way to having $25,000 in liquid, investable, cash or similarly accessible wealth. It is from THAT position that you will be easily able to purchase a first investment property (or house-hack) and begin the gradual acceleration of your savings rate in pursuit of financial freedom.

You are wondering if it makes more sense to work on being debt free or to try to establish better credit in the meantime. While I presuppose that you will be paying down the debt in the earlier paragraph, the fact of the matter is that this is not really the important part of the decision you face. Depending on the interest rate on the debt, your personal preferences, and the opportunities that present themselves, it may make sense to pay off the debt quickly, or invest elsewhere. Odds are, this decision will have a marginal impact at most on your ability to build meaningful (six figure, then seven figure) wealth over the next 5-10 years. What WILL impact that goal is your decision about whether or not to truly save a significant portion of that $40K salary and deploy it to the most profitable use as seems reasonable to you. If you focus on that, you will almost certainly move toward your goal expediently. 

With a high savings rate, and assuming you are paying even basic attention to all of your finances, your credit score will likely improve either way. Even if you take on more debt, just establishing more history, and a few accounts with great records will likely mean that your score moves into the 700s over the next 12-18 months. Again, assuming you do even an hour or two of research and just pay basic attention to the key factors once a month.

Hi Jack - You certainly are in an advantageous position! I would agree with the more conservative approaches that have been outlined in this thread. 

A couple of additions that I think deserve more emphasis are:

1. Your credit score. 

While there are are plenty of options for loans with a 645 credit score, you will find much better terms once you get that up to 700+. All it takes is consistent payment of one or two accounts over the course of 6-12 months (totally dependent on your situation, but from what I can tell, you would fall in this category). 

2. Your stage of life. 

You are uniquely positioned to be incredibly flexible. What I mean is you can do things like move to be close to work, so you don't have to drive (and thus avoid massive $$$ in expenses every year) or 7 roommates (maybe an exaggeration, maybe not!). Meal prep one day a week so you don't eat out the other 6 days. 

Once you get a house under contract, start telling all your friends and co-workers you are looking for roommates. Being 23, I will guess you have a lot of 21-25 yr old friends. Most of them have barely considered buying a home, meaning you have a network of friends that would likely love to have someone they know and trust as their landlord! 

If my first point is to wait for a while before investing, my second point is don't wait too long. You are in a fantastic window to set yourself up for a crazy amount of financial success long term. 

Your future is bright and the road you have started down has laid a great foundation, keep following the same principles and you will do well!

@Jack Ropp : while you're saving and getting your finances in order to start investing, what are some other ways you can get started in real estate to get the ball rolling?

A couple things that come to mind:
1) Keep listening to the podcast and reading Bigger Pockets to learn as much as you can.
2) Attend your local REIA meetings to learn and get plugged into your community.
3) As someone else suggested, see if you can help out another local investor in some way (help with a flip, help a wholesaler, do some research for an investor on a buy-and-hold, etc.).What value can you provide to others in your market? If you help them and they like you, then they will try to help you if they can in the future.
4) If money is a constraint but you have a decent amount of time, you could look into wholesaling as a way to get started. It's still a lot of work but usually requires less capital.
5) If you're planning to get your real estate license, you could do the course and pass your exam while you are saving.

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I'm 25 and have $18,000 left in federal student loans between 3-4% interest. When I graduated at age 22, I took a job with a base of $35,000 knowing that it was a long haul commission opportunity. I knew all along that I wanted to be in real estate, but I was pretty obsessive over building a cash cushion first. 

I was able to hit my savings goals of $10k by age 24, $25k by age 25, and when I turn 26 in four months from now, I'm pacing to hit six figures in savings (I've been fortunate enough to more than double my W-2 each year since 2014 at my sales job). Even with my savings, I still choose to pay the minimum on my student loans each month (usually about $180/month). 

I was paying rent until 5 months ago, when I bought a 3bed/2bath for 5% down (technically 3%, as my lender gave me a 2% grant) and started renting out the extra two bedrooms to pay the mortgage. 

Yesterday, my offer on my first investment property 20 minutes north of downtown was accepted, and I'll be putting 20% down on that. But it wasn't until I attained the savings that I have today that I became comfortable with putting 20% down on anything. My vote is that there's no immediate need to wipe out your student loans, but there is a need to save as much as possible before jumping in, and if that takes a year or two to accomplish, then that's still okay. 

@Jonathan Roper seems spot on. I have a buddy who does this. He's just slowly paying down his student loans while investing in RE. The student loan debt doesn't give him any issues at all in relation to REI. Go for it, bud.

Educating yourself on real estate investing and having the mindset alone can impact whether or not it's right for anyone. In my opinion, that's not a lot of debt but to each it's own. I wouldn't tell anyone not to invest. But real estate investing is not for everyone.

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Great question. I love this question because I've battled with it a lot in my first handful of years out of college.

My plan/perspective recently changed on this after reading Josh Dorkin’s most recommended book (based on podcast mentions), The Richest Man In Babylon. In short, 10% of the money you make is yours to keep/invest before student loan debt payoffs and other investable income and living expenses. I debated this for a long time myself and recently decided to allocate a portion of income to Debt Payoff while also setting aside 10% + per paycheck for investments and/or savings.

You mentioned your credit. I started there too and was able to bring it up quite a bit in the beginning by opening a gas card, i.e. Holdiday or Super America gas card. All I did was pay for gas and pay it off the same day... it helped build a foundation for credit. From there you could do the same with a BAC Visa card for groceries. From my observations, building credit is easiest and safest with predictable and regular expenditures (like gas and groceries). People get in trouble when they use credit cards to buy their toys.... don’t make that mistake.

A simple ROI calculation is hard to deny... look at your percentage of interest growth on your debt. Then look at what you could earn on that cash if you invested it. Compounding positive returns will grow exponentially and there will come a day where you can squash any remaining debt very quickly. Or pay as you go.

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