Should I Pay Off Student Loans First or Start Investing?
Thought this would be a good topic since it is a question I struggled to answer myself for some time. Before narrowing the scope to student loan debt, I would like to address some other types of debt you may need to consider in your overall decision of whether or not to invest in real estate.
If you have credit card debt, don't even think about any type of investing until that is paid off. In fact, the only investment I would recommend at that point is a "Personal Finance for Dummies" book. Auto loans are common for many Americans, and I can't really advocate against them as I'm a fan of leasing myself. I also don't think paying outright for a car is a great idea, as vehicles depreciate very quickly, especially in the first 1-3 years of ownership (but that's another blog post). You may already have an existing mortgage payment on your current residence, along with your monthly bills and medical expenses. This should cover MOST other debt categories, all of which should factor into your decision on when to start investing.
Now the question of student loan debt... It really boils down to the following questions:
1) How much do you currently owe in student loan debt?
Student Loan debt can be crippling... College is expensive and there is no way to avoid it (other than not going). Of course you can do things to minimize the overall cost of your education. For example, you could do your first few semesters at a community college then transfer. You could work a part-time job during college, or even take a semester off to do a paid internship. But the sad reality is that most graduates walk away from school with tens of thousands of dollars in student loans. If you're on the higher end of that spectrum (let's say $25,000+) maybe it's a better idea to focus on bringing that number down before life starts hitting you with even more expenses. (personal home, engagement ring, wedding, honeymoon, kids, etc.). If you are on the lower end though, perhaps your money could be better spent investing.
2) What is the current interest rate on your student loan debt?
Interest rates are always changing, so I recommend confirming your current rates that you are paying across all your loans. Chances are, though, it is somewhere in the 6-8% range. Rates will be higher for graduate schooling vs. undergraduate, and they change on a semi-annual basis. Either way, you will want to determine the interest rates for your specific student loans.
3) What ROI do you expect on your real estate investment?
This is a very difficult question to answer. It is extremely dependent on both the market and the specific deal that you are considering. For a point of reference, the stock market generally averages around 8%. Many people choose to invest in real estate with hopes of experiencing much higher returns. For flipping, many investors target 15% minimum. That being said, your ROI is very difficult to predict and dependent on many factors. Even then, it is just a prediction. You won't know your actual ROI until all is said and done.
4) What is your level of risk aversion?
Do you have a significant amount of money save in an emergency fund? Do you have a spouse and/or children that are financially dependent on you? Is it a buyers or sellers market currently? Do you anticipate any major expenses in the near future? These are all questions you need to answer before making a decision on when is the right time to invest.
So, now that you know what questions to ask, you need to make a decision. My personal opinion (for what it's worth), if you are young and don't have any dependents or a crippling amount of debt to worry about, then go for it. I waited until I was debt free to take the leap, but I consider myself to be very risk averse. If you have a large amount of student loan debt, it might be more beneficial to reduce that before investing. However, I would strongly encourage you to educate yourself regardless of your situation. There are, of course, risks involved with any type of investing, but the opportunity for rewards could be well worth the risk.
As always, thanks for reading. If you have further questions, please don't hesitate to contact us. Check us out on our social media account accounts below and be sure to subscribe! Enjoy your week and keep grinding!