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I’m a Real Estate Investor: Don’t Pay Off Student Loan Debt — Buy Properties Instead

andresr / Getty Images
andresr / Getty Images

In a recent YouTube video, real estate investor and marketing professional Joshua Baldovino advised graduates with student loan debt, “Do not pay off your student loans.”

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If you save or come into a large amount of money, your first instinct might be to use those funds to pay off your student loans. But it might not be the wisest investment since student loan debt typically has low interest, and you may even be able to defer payments based on your salary.

When Baldovino married, he and his wife had a combined total of $80,000 in student loan debt from their graduate degrees. To save money, Baldovino and his wife moved in with their parents for three years, and through frugal living and the absence of rent or mortgage payments, they managed to save $100,000.

“But we didn’t pay off the student loans,” he told viewers. “Instead, we bought rental properties.”

The rental properties, in turn, generated a positive cash flow of $400 each. “Instead of you taking that $100,000 and dumping it into your student loans, your tenants in your rental properties are now paying down your mortgage, they’re paying down your student loans, and the house is appreciating,” he explained.

Factors Working in Baldovino’s Favor

First, let’s dissect the many things that made Baldovino’s plan successful – with the recognition that only some have these circumstances. Baldovino and his wife:

  • Had the option of moving in with their parents, possibly rent-free, to save money.

  • Held jobs that gave them enough income to save money at a high rate.

  • Purchased investment homes in a market where real estate was rising in value so that they could build equity.

  • They were able to rent the houses quickly to generate cash flow.

Many factors are working in Baldovino’s favor to make it possible. That’s not to say the couple didn’t sacrifice and save, but not every married couple can live with parents – or would want to – to secure a better financial future. And only some couples earn enough after college to grow their savings steadily, even if they keep their monthly expenses low.

Can You Pay Off Your Student Loans Through Real Estate Investments?

The question remains: If you save, inherit, or otherwise receive a large lump sum of cash, should you put it toward student loan debt? We asked Dr. Mark Poole, founder of SmarterPropertyInvestment.com, what he thought of this wealth-building strategy.

Poole pointed out that you’d have to first “earn enough to meet the minimum payments on the student loans as well as having spare income to save towards rental properties.”

He acknowledged, “You will need significant funds, so you should be able to save relatively large sums each month.”

He noted that you will need at least a 25% down payment, closing costs, and, potentially, additional funds to rehab or renovate the property before renting it out.

“I would suggest a minimum amount of $40,000 to buy a $100,000 property and scale that amount to the purchase price of the chosen deal,” Poole said.

How to Get Started Investing

If you can secure this kind of money, you don’t want to approach real estate investing without any knowledge or mentorship. “Improve your knowledge base as you save up,” Poole advised. “Educate yourself through blogs, books, podcasts and other sources.”

He added that you should also network with real estate investors and agents in the region where you want to purchase property. Becoming friends with other real estate professionals gives you the guidance you need early in your career and may give you the upper hand in finding valuable investment properties.

“The best deals never make it to the open market,” Poole said. “The best deals are from motivated sellers who may accept a discount in return for a quick, secure sale.”

You can find these deals through word-of-mouth, “driving for dollars” (visiting neighborhoods where you want to buy and looking for homes that appear vacant or distressed), handing out flyers or investing in a direct mail campaign.

What You Should Know Before You Invest in Real Estate

Investing in real estate to pay off student loan debt may be a challenge for some, even if you have the capital to get started and a good credit rating to finance properties at a low-interest rate.

However, if you don’t have an aptitude for risk, Poole advised that you may want to steer clear. After all, there are no guarantees your investments will work out as well as Baldovino’s. “All investing is accepting some level of risk to earn a greater return than just having the cash in a savings account,” Poole said.

Finally, you must be willing to invest the time to learn and grow your investing business. “It is not completely passive income,” Pool said. “It takes time to find, project manage and get a property ready to let. However, the ongoing income, once done, can be relatively passive.”

He emphasized that REI is not a “get rich quick” scheme, but it can be a slow and steady route to wealth if you are passionate about the process.

“There is a lot to learn and things will go wrong. You need … the resilience to keep going, regardless,” he said. “The real gold in real estate investing is the long-term wealth accrued from the capital growth in the property, which traditionally has outpaced inflation.”

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This article originally appeared on GOBankingRates.com: I’m a Real Estate Investor: Don’t Pay Off Student Loan Debt — Buy Properties Instead

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