Investing in Real Estate to Pay Off Student Loans: Yay or Nay?

Can you invest in real estate to pay off your student loans? Sure! But should you? That depends.

While real estate is one of the more reliable targets for your investment dollars out there — depending on what you’re investing in — it’s not a sure thing. Your student loan servicer expecting payment? That’s a sure thing.

So, unless you have the wherewithal to be able to continue making your payments if your investments aren’t paying off, then I wouldn’t even think seriously about investing in real estate or penny stocks or pork bellies or FanDuel or anything else to pay off a student loan.

Let’s not be rash with our assumptions

I’m assuming the investment in question is a small one, whether over time or a lump sum. Otherwise, you likely wouldn’t have student debt in the first place or would have paid it off already.

There are many exceptions, of course. Just one example in my family: A young physician graduated med school with about $250,000 in debt. Five years later, this doc now has an income that could justify some significant investment outside paying off that debt. What have they chosen to do? I don’t ask.

But you also may suddenly have a slammin’ job that pays enough to give you a lot of disposable income right out the gate, or maybe you have an inheritance.

Essentially, it’s best not to make assumptions, because there are many factors at play. In fact, let’s not even assume you’re fresh out of college. After all, the highest total of student debt was in the 35-49 age group, according to this Motley Fool article from earlier this year. Those are folks who hopefully are well along in their careers.

Pay your bills first — your credit score will thank you

All those musings aside, here’s some free advice: Pay your bills first. Don’t invest if it would endanger your ability to keep up with your student loan payments. Being pursued for back payments is no party, and the damage to your credit score could be real and costly next time you want a mortgage or need to borrow for a car.

Plus, the payment may not be that high, relatively speaking. According to The Institute for College Access & Success, “More than six in 10 college seniors (62%) who graduated from public and private nonprofit colleges in 2019 had student loan debt and they owed an average of $28,950.”

At a typical rate of 5.25% for a 20-year loan, that’s $195.08 a month. That would seem pretty manageable if you’re also in the position to invest in real estate or the stock market or anything else tangible like that.

But if you must, here are some considerations

So, bottom line, can you pay off your student loan by investing in real estate? Well, first you have to make some money on those investments, and in that regard, real estate investment in its many splendiferous ways can be a great way to do that.

You can always go into some sort of real estate crowdfunding venture where a smaller amount of investment can buy you a stake. But there can be issues of liquidity and transparency there.

You can use your income and cash on hand to buy and flip a property. Or keep it as a rental and use that income to pay off your loan. But the residential market is really hot right now in desirable locations, so finding a bargain will take some skill and luck.

You can buy a real estate stock. Real estate investment trusts (REITs) would make the most sense here, especially those with a good history of paying dividends. That gives them some price stability and growth potential.

The Millionacres bottom line

But finally, let’s look at it this way.

If a REIT pays 5% a year on average, you would need $100,000 invested to generate $5,000 a year. Divide that by 12 and you get a monthly payment of $416.67. A $62,000 student loan balance in the form of a 20-year note at 5.25% would be $417.28 a month.

So, if you have $100,000 to work with here and a $62,000 balance, you could pay off the loan and have $38,000 left to invest. That’s not a bad place to start. Speaking of not a bad place to start, consider a rock-solid choice like Realty Income (NYSE: O).

It’s a big favorite of seasoned investor and Millionacres/Motley Fool writer Matt Frankel, who recently said this: “Realty Income is one of the most rock-solid REITs of any kind (not just retail). It pays a 4.9% dividend yield and has a phenomenal track record. Since its 1994 NYSE listing, the company has increased its dividend over 100 times and has delivered 15.3% annualized returns, handily beating the S&P 500.”

So, pay off the loan first. Or, if you can’t do that, keep current on the loan payments and invest equal amounts in solid plays like Realty Income. You’ll be dollar-cost averaging while building a nest egg, reducing your debt load, and keeping that credit score nice and high, all at the same time.

Or talk to investors and brokers in your market to look for straight plays into real estate, but make sure they’re people you trust.

And most of all, pay your bills first. It’ll help you sleep at night.

The Motley Fool has a disclosure policy. Editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from Millionacres is separate from The Motley Fool editorial content and is created by a different analyst team.

You probably know that real estate has long been the playground for the rich and well connected, and that according to recently published data it’s also been the best performing investment in modern history. And with a set of unfair advantages that are completely unheard of with other investments, it’s no surprise why.

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