Over the years, many people have asked me this very question: should I pay off my student loans or take that money to invest in real estate?
This is a great question that really has no “right” or “wrong” answer. Ultimately, it depends on your financial goals and financial situation.
In the video below, I share my thoughts on this very important topic. I also discuss some important things to consider as you navigate this situation to determine what is best for you.
Pay Off Student Loans? Or Invest in Real Estate?
From those in college, to those fresh out, to those in their 40s, a lot of folks in America are dealing with student loans. They’re also wrestling with the decision about whether to focus on paying them off or start investing.
If this sounds like you (or someone you know who should watch this video), here’s what to think about:
1. Your Credit
The first thing you want to consider is your credit score. Your student loans can pull down your credit, especially if you’ve missed any payments. So check your credit.
Is your score super low? Do you only have bad debt? If you can’t show a good payment history, it’s likely dragging down your score. Make regular payments and show you’re a good debt payer.
Alternatively, maybe you just don’t have any credit at all. If that’s the case, go get some good debt, like a small credit card, to prove you can make on-time payments, and build up your credit score.
You need to be focused on having decent credit before buying real estate. Otherwise, you won’t be able to get a bankable loan. Talk to a banker to check your status or get more advice.
Related: How to Build Credit From Scratch
2. Return on Investment
Look at the return on investment (ROI) on an investment property versus what it costs for debt. (I learned how to do this playing Robert Kiyosaki’s cash flow game.)
Say I buy a piece of real estate that returns 15 percent. That 15 percent beats the ROI I get if I pay off my student loan at 6 percent. And I could even take the cash flow from my rental property and maintain my student loan with it.
So if I’ve got $20,000 I could use to pay off my student loan, maybe I’d be better off taking that money and buying a rental property with it (as long as I can qualify for a loan). I’d be coming out ahead in the long run—by a lot.
3. House Hacking
This is what I did. I bought a 3-bedroom/1.5-bath for my first rental property.
I got it for $150,000. My mortgage payment was $940. I bought it on a 3 percent down FHA-backed mortgage and laid down $4,500, plus closing costs. So all in, it was maybe $8,000 or $9,000.
Then I rented two bedrooms to friends for $500/month. They also each paid a third of the bills.
So I was living for free (and actually making $60/month), plus I had a pretty good job. In two years, I was able to pay off all my student loans and my credit cards.
Therefore, I highly recommend that you take the ROI equation and parlay it up with a house hack. Then you can take what income you’re earning and save yourself a housing expense while simultaneously drilling down on your debt.
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What do you think? What are the pros and cons to both options?
Let me know in the comment section below!