One of my college professors once told me: “Your life’s biggest investment is yourself.” Now I’m sure she meant it figuratively, but who are we kidding? College fees really are a huge investment. And who of us hasn’t struggled with paying off student loans? They are, after all, one of the largest debts average Americans go into. Whether you just graduated (congratulations!), or are still paying off your student loans at 35, real estate investing can be a way to relieve those debts. While it’s true that buying a rental property means you’re getting into more debt, it’s actually a great way to generate income.
So what should you be doing? Check out the advantages of each of the options to help you decide whether to invest in real estate or pay off debts.
5 Reasons to Buy a Rental Property First
Cash Flow
One of the major benefits of investing in real estate is the fact that it provides you with a source of positive cash flow. In real estate, cash flow refers to the money generated from investment properties in the form of rental income. And if you rent out your property on Airbnb or traditionally, you’ll be receiving that cash flow in the form of monthly rental income in the case of traditional investment, or daily/weekly in the case of Airbnb investment.
When considering cash flow, it’s important to have expected values for the income you’ll be making per month. This will help you know what your debt-to-income ratio is, and the percentage of your mortgage payments that your rental property will help you pay off. Mashvisor’s rental property calculator can help you better predict values such as expected rental income, CoC return, cap rate, occupancy rate, and more. To learn about your options for signing up for our services, click here.
Steady Income
When owning a rental property, if you have a “fixed” resident/tenant, you can know for a fact that you have a steady sum of rental income entering your bank account every month, (or daily in the case of Airbnb). To ensure high occupancy and steady income, make sure to follow these simple tips.
Related: How to Calculate the Occupancy Rate for Rental Properties
It’s a Fit for Multiple People
Buying a rental property is not only a real estate investor gig. Anyone can invest in real estate, whether you’re a fresh college graduate investing in your 20s or an accountant with 10 years of experience. It’s never too early or too late to get into the industry.
You Also Don’t Have to Be an Expert to Invest in Real Estate
What’s great about real estate investing is that you don’t have to be heavily experienced to become a real estate investor. With the right research and set of skills, you can invest with no prior experience. In fact, starting out young in real estate can be beneficial, as you can build up experience.
Related: How to Get Into Real Estate with Little Money and No Experience
Real Estate Investing Can Be a Passive Form of Investment
This is another factor to consider when asking yourself “Should I buy a rental property or pay off my student loans?” A passive investment is one that generates passive income in a manner that can be described as “hands-off” That’s not to say that you shouldn’t be present at all, but it can be less time and energy consuming than your regular 9-5 job.
The degree of “passiveness” depends, for the most part, on the type of investment property, and the number of properties you choose to invest in. If you’re buying a single property and renting it out traditionally though, you’re involved in a more passive income than, say, if you were renting out two properties on Airbnb. And because real estate investing can be a passive form of investment, you can be working another job to secure more income on the side, and further contribute to paying off your student loans.
Related: Burdened by Student Debt? Consider Investing in Real Estate
Bonus Reason: Student Loans Don’t “Ruin” Your Credit Score
Student loans are not a major factor in your debt reports. Student loan debt is not as “bad” on your credit rating as other types of debt. That’s because student loans have longer repayment terms and typically feature lower interest rates. Mortgage lenders will understand this, so your credit won’t be highly affected by student loans, and you’ll be able to secure a loan for a rental property.
3 Reasons to Pay Off Your Loans First
While some individuals may jump at the opportunity to invest in real estate, others may prefer to repay their student loans first. Here are some reasons why:
Financial Stability
Paying off your loans first will provide you with a sense of financial stability. There’s a certain ease of mind that being debt-free provides for people, and many like to enjoy it before jumping into another investment.
Less Risky
Speaking of financial stability, paying off your students loans first means that taking out a mortgage is a less risky investment. Several factors can affect one’s risk tolerance, including age, income, current life stage, etc. And depending on your personal risk tolerance, you can decide whether or not you can take up two debts at a time.
Is Your ROI Higher Than Your Loan Value?
One of the best approaches to answer “should I buy a rental property” is to do the math. It would only make sense to invest if the ROI a property generates is higher than your loan percentage. So if your loans are 8%, it wouldn’t make sense to invest in a rental property unless it is generating an ROI of 8% or higher.
It’s simple math – if the numbers add up, then you should definitely consider buying a real estate property.
Can You Do Both at the Same Time?
It’s definitely possible.
In reality, investing in a rental property will provide you with a source of positive cash flow which will allow you to pay off parts of your student loans. So if you’re making enough in rental income, you could dedicate part of it to pay off your mortgage, and part to paying off your student loans.
The best of both (debt) worlds!