Student loan debt is at an all-time high, with many college graduates walking away with a diploma in one hand and a six-digit student loan in the other. Considering they’ll be making large monthly payments for years to come, many opt to avoid making any kind of investments.
But let’s suppose a graduate wants to invest in real estate despite having a student loan.
Is it possible? Is it too risky? How should they go about it?
These are great questions. First, understand the difference between bad debt and good debt. Bad debt includes debt that has high interest rates, such as credit cards, car loans, or personal loans. Bad debt doesn’t do your credit rating any good and doesn’t really do anything good for your financial situation long-term.
Good debt is the type of debt that has lower interest rate and come tax time, you can get tax breaks on it. When considering real estate investments, it’s considered good debt because of the lower interest rate and the tax breaks. In addition, the investment is considered an asset that will increase in value over time.
- Look at your options
If you want to invest in real estate and you’ve got student loans, look at alternative forms of lending. Going to the bank and getting a traditional loan, while carrying large student loan debt, probably isn’t going to be your best bet. There are alternative forms of lending today that don’t take your student loans into account. There’s crowdfunding, private money lenders, home equity loans, and hard money lenders.
- Income-driven repayment program
Chances are if you’re carrying a large student loan, your debt-to-income ratio may be lopsided in a way that doesn’t give you bonus points. Is there a way you can make your large debt look more favorable on your loan application?
There is. Consider an income-driven repayment program for your student loans. By doing this, you can get your student loan monthly payments down considerably low for a period. During this time, you’ll be more apt to quality for a mortgage loan.
- Pay on bad debt aggressively
While using the income-driven repayment plan may be good for securing a mortgage loan, you may want to get back to paying on that debt aggressively as soon as you can. Paying the minimum means you’ll be paying on that loan for many years. But if you become aggressive in paying toward your student loan, you can have it knocked out before you know it. You may have to take on extra work and work more hours, but if you really set your intent to pay off that student loan in a shorter time frame, you’ll be freeing up your money to begin investing in property.
- ‘Subject To’ loans
Consider purchasing property using a ‘Subject To’ loan. This way, you’re not actually taking a loan out on the home, as the loan stays in the seller’s name, but you get the title. Then, you simply work on a lease purchase with a new buyer and you put cash in your pocket without having to go to the banks for a loan. This is an excellent method to pay off your student loans and I go into great detail on how to do this with my book, How to Invest in Real Estate Without Banks.
Student loan debt doesn’t have to hold you back from investing in property. If you are strategic in your budgeting and spending, going after properties that produce income can help you pay off your student loan and build wealth over time. Be wise and if you have concerns, consult an investment professional or financial mentor for some solid advice.