When people think real estate, they tend to think of stable investments and building equity. Investing in real estate is a tried and true way to build wealth. On average, the price of homes increased by 6.4% annually from 1968 to 2004, and more recently, US home value rose 5.16% year over year in November 2018. While growth in value will vary depending on the location and other factors, as an average, that’s not half bad!
It’s often a primary goal for many investors to get into real estate, but many young and middle-aged would-be investors find that one major obstacle stands in the way: student loan debt.
Many people aged between 20 and 50 are saddled with student debt, which cripples their buying power in many ways from starting a family, to buying new investments, to securing their first residential home. Most can’t even imagine participating in the high-cost investment arena that is real estate when their student loans are already such a hassle.
Student loan debt is certainly a barrier, but potential, student debt-ridden investors should consider ways to invest in real estate while paying back the debt. Not only is it possible, but it may be a smart move.
Why Should You Consider Investing with Student Debt?
Many student debtors probably don’t want to part with the cash they have left after their loan payments—especially for something as expensive as real estate. However, you might want to give it some consideration. Remember, you don’t have to be buying million-dollar mansions to benefit from real estate appreciation.
Consider the interest rate on your student loan. If the return on investment in real estate in your area is greater than the capitalization or interest rate on your student loans, it may be worth investing alongside student debt repayment. Why? Because you are earning more from your investments than you’re losing with your loans.
In addition, buying real estate earlier in your life can maximize your lifetime returns; this is the power of investments. A buyer 20 years younger than his or her investment competitors has two decades longer to generate income and watch his assets appreciate, meaning that he bought lower but sold just as high as his peers. Compare this benefit with the lifetime cost of a student loan and the money saved by paying it off earlier; real estate investment just might win out depending on appreciation.
And that’s not all. While real estate sometimes being more lucrative than paying back loans is a great incentive to hop into the market by itself, further down the road, real estate can be turned right back around into passive income that may even help with student loan repayment and retirement savings.
Keeping Your Student Loan Debt in Check
This all sounds good in theory, but how do you actually free up the money to start investing in real estate when you’ve got student debt to wrangle? There are several ways to approach student loans if you’re trying to free up cash on a monthly basis. Check your options with the following strategies and see if you can shave down the burden that student loans are putting on your budget.
Ask Your Employer About Repayment Benefits
Some employers offer their workers company benefits for student loan repayment. Over the past couple of years, more companies have recognized the usefulness of these benefits as a tool for attracting and retaining younger employees. In fact, 86% of employees claimed they would stick around for five years or more if their company offered such a benefit. Ask your employer if they’re offering or considering a student loan repayment benefit.
How would this help? Taking advantage of these can free up cash on a monthly basis. For instance, some companies offer between $1,000 and $2,000 annually, and one company, Nvidia, offers up to $6,000 a year. There are limits to these benefits; company benefit caps typically range from $5,000 to $10,000 (or $30,000 for Nvidia).
Income-Driven Repayment Programs
An income-driven repayment (IDR) program will reduce your monthly payments to a percentage of income – usually 10% to 20%. This will free up cash to be devoted elsewhere such as investing in real estate. When opting for an IDR plan, you can expect to make payments for 20 to 25 years. After this term, the remaining balance will be forgiven.
Forgiveness after 20 years sounds ideal, but it comes with a catch. If your income is low, then capped payments may not effectively pay down the principal balance after covering interest. This may significantly drive the lifetime cost of the loan and be a costly tradeoff for lower monthly payments. However, wise real estate investments can still outstrip this cost with solid lifetime returns, but keep in mind this could be especially costly.
Student Loan Refinancing
Student loan refinancing is a loan product offered by private banks and lenders. If you are approved for a refinance loan, you use it to pay off previous federal or private student loans, effectively consolidating your student debt. You make payments on this new loan with a new underwritten interest rate, effectively refinancing your debt. Ideally, this new interest rate is lower than the weighted average of your old student loans.
Aside from lower interest payments, a lower student loan rate could better justify investing in real estate alongside student loan repayment. You increase the odds of your investment return outstripping the cost of the loan. However, student loan refinancing may be hard to qualify for. Private lenders and banks are more likely to approve applicants with high income and great or excellent credit; furthermore, only highly qualified applicants may be able to secure the lower interest rate that makes it beneficial to an investor.
Federal Consolidation Loan
A Federal Consolidation Loan allows you to pay off several federal student loans, leaving just one payment on the consolidation loan. You have the option to extend the repayment term up to 30 years which will reduce your monthly payment. Lower monthly payments can free up cash to be used elsewhere.
While extending repayment will lower your monthly obligation, it also drives the cost of the loan. Interest will have more time to accumulate on a balance paid down more gradually. Ideally, the return on investment in real estate would justify this tradeoff, but it depends on your new weighted interest rate compared to the rate of return.
Conclusion
You shouldn’t just assume investing in real estate is a pipe dream if you have student loan debt. Starting early can maximize returns, so it’s important to review your budget for potential ways to kickstart your real estate portfolio. This often starts with managing your current student loan payments.
Thankfully, there are ways to mitigate the monthly costs of student loans—whether it’s through refinancing, student loan relief programs at work, or switching payment plans—all of which will free up money each month that can be funneled into long-term real estate goals.
Keep in mind that many of these methods can increase the lifetime cost of student debt, but ideally, the return on investment in real estate may outweigh the additional cost. Of course, all of this sounds easier said than done. It takes hard work to both invest in real estate and pay back student loans; a sure requirement is to have a consistent income starting out.
Don’t give up on investing in real estate just because you’re also saddled with student loan debt. With careful consideration and strategic planning, investing in real estate can set you up for a prosperous and secure future that outstrips the cost of your student loans and provides a source of passive income to your benefit down the road.
This article has been contributed by Andrew Rombach, Content Associate at LendEDU, a consumer education website and online financial product marketplace.