Pay off student loan debt or invest in real estate?

Question

My wife and I have close to 300K in student loan debt at 6.9% interest that we will starting paying on in June 2022.  We have two decent paying jobs where we will bring in between $180,000-$210,000 a year before taxes.  We are both 34 years old.

My original plan was to pay down this student loan debt in 6 years but over the past few months I have read several real-estate books and have listened to many different podcasts and I love the idea of passive income cash flow, deprecation, and having tax advantages.

It drives me crazy with how much we are paying the IRS in taxes each year!

I am trying to figure out the best way to built wealth over the next 5,10, and 20 years.

Would you pay off the student debt as fast as possible then invest in real-estate?  The fastest we could pay it off would be 6 years.

Would you try to pay down the student loan debt faster than the minimum payment and still invest in real-estate?

I have looked into the 25 year payment forgiveness program and I don't believe it is the right move for us.

Am I missing any other solid options?

Thank you in advance for your help!

Greg Scott · Answer

There is one simple question that unlocks the answer.

Do you think you can make more than 6.9% on your money in real estate? If the answer is "no" you should not invest and pay down your loans. If the answer is "yes" then you are better off paying the minimum on your loan and investing the difference. FWIW, when done right, it is easy to exceed 6.9% return on your money in real estate.

Dustin Drenth · Answer

Matthew, thank you for your post.  We purchased a house three years and have around 100K in equity.

No kids, maybe we'll have one in the next year or two.

All of our cars are paid for.

I have been in sales for 9 years, I will continue to make more money every year. My wife starts her engineering job in June, so she is at the start of her career and at the lower pay scale for now.

We also have a 3rd party Amazon store which brings in 2-3K a month in passive income.  Other than our house the only debt we have are the student loans.

Matthew Paul · Answer

Well answer some more questions , do you have a house already or do you rent ?  Kids already or soon ?  Cars paid for ?  Are you starting in your careers and you are in the lower pay scale or are you at the top ?

$ 300K is a big number . Your combined income is respectful , but if 1 is out of work for any reason thats a big hit . If you dont have kids and they appear from nowhere , you can watch money fly away . if your renting , first order of business is buy a house . Something small and affordable , this could then be a rental in a few years when you move up .

I am debt adverse , personally I would be getting rid of that loan ASAP , but thats just me .

With the current inflation and economy its hard to say which way to go .

Jonathan G. · Answer

@Dustin Drenth

Look into Refinancing your student loan debt. There’s a possibility you can get a much better rate than 6% in this market however you might have to shorten the term of the loan but either way, you’re saving a significant amount of money.￼

Tristan Pearrow · Answer

It's not out of the realm of possibility to both invest in real estate and pay down your student loans. You might not necessarily pay them off as quickly, but you can still come out ahead of schedule. If you make good real estate investments and the interest on your loans isn't too high, you could easily cash flow enough to continue to pay the loans down.

There's also the equity you'll acrue via your investments to to consider. That's future money that you can pull from your real estate investments to then generate more investments, and pay down the student loan debt further. The goal would be just putting off student loan payments long enough to get the investment ball rolling.

Nate Sanow · Answer

I’m usually really pro debt, especially with leverage in real estate. But that’s a massive student loan. Perhaps, one intangible is what’s it like emotionally, mentally etc having that student loan?

If you are ok with it, and it’s regular payment ignore what I just said.

Just keep in mind, as you get rentals there are months people don’t pay. There are months people need repairs. Yes it can be mitigated but it’s impossible to prevent 100%.

So all I’m saying is add in the extra potential debt payments into the picture and assume the worst but hope for the best.

Ps I say this in full support of using leverage, getting a loan to get an investment property, all that. I am simply also saying, keep this in mind. Good luck! Great income and huge potential for sure.

Dustin Drenth · Answer

Thank you for the input Greg, a lot of the research I have done when looking into single family and multifamily properties its common to make 9%-25%.

Matthew Paul · Answer

I would be looking at real estate then , run some numbers and learn your market . I would also try to knock some of the student loans down to get Debt to income down .  When a deal comes by you will know it .  Another thought is if the house you are in isnt grand , maybe look to move and turn your current house into a rental .

Pay off student loan debt or invest in real estate?

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