Invest in real estate to lower monthly budget or pay down student loan?

[vin574]

Hi all,

Our son recently graduated college. He was hired immediately and moved out of state in to a rental, near his work. Of course his student loans are coming due. We have informed him that it was our intention to pay off some of the loan principle as a gift. He has asked us if we would gift him that money for a down payment on a property, instead of paying down his student loans. His thoughts are that he could lower his monthly cost of housing and dedicate that extra money towards paying off his student loans quicker. This would also allow him to gain equity in a property. He is looking to buy a property with a mortgage to save at least $500 in monthly housing cost.

I like the idea, yet I don't know much about how student loans terms.
I'm questioning if this is sound, not knowing much about those loans?
What are the views on this idea?

TIA

These are the #s

Salary 70k
Student loans 80k between 4% and 7%
No other debt
Monthly rent 1,500
Gift 20k
Property cost aprox 150k

[asdf]

There are too many unknowns as I can tell for me to endorse this plan at this moment.

--Your son has moved out of state--has he lived in this state for a long period of time? Do you know he enjoys it enough to make a property commitment there?
--Will his job be stable? If he loses it, will he have to move to a different state again?
--Where will his romantic status take him? The special person may sway thoughts in a different direction.
--What kind of shape will this property be in? Hidden maintenance could make the costs be more than it seems.

The interest rates are high enough on the SLs that it's doubtful that there's going to be another investment on the market that will beat that out. At this point, I'd be trying to get rid of existing debt before taking on more debt.

Also, what is his living arrangement right now that has his rent at $1500? Could he knock that down by bringing in a roommate or two?

[breathemusic]

Does your son have another $10k to be able to make a full 20% downpayment on a property? If not, he should wait to buy a house until he can put down enough to avoid PMI.

Are all of his loans consolidated? If they're not, that $20K might pay off 1 or 2 of the loans, which would, in fact, bring his monthly expenses down by some and allow him to pay off the remaining loans faster.

I'm not saying that investing in a house is a terrible idea, but i think we'd probably need a bit more info to say for sure one way or the other (breakout of loans and their interest rates for starters)

The other thing to consider is whether you're a co-signer on his loans (if so, I'd definitely pay off some of the loans and reduce your own financial risk).

What's his credit like? Given the amount of debt he already has and his income level, it might be worth paying off some of the loans to reduce his debt if that might improve his credit score to get better financing on a home loan.

[TheKayla]

Are all of his loans consolidated? If they're not, that $20K might pay off 1 or 2 of the loans, which would, in fact, bring his monthly expenses down by some and allow him to pay off the remaining loans faster.

I like that idea a lot better. With that much student loan debt, you should just take a chunk out of them now. That will already save him a lot of interest and hopefully like the mentioned above, if theyre under several loans, lower his overall payment to all of them creating similarly to wants. He may just have the just-graduated bug and really wants to settle into a house, I know I wanted to, with a very similar thought process to my own loans -- but just think about all of the additional maintenance and insurance and taxes, all that and you still don't have 20% down. I'd definitely put it towards the loans, it will be the fastest way to get out of debt overall.

[vin574]

He has enough of his own cash to add to our's and make a 20% down payment.

His loans are not consolidated.

Good credit and has already been pre approved for mortgages.

As far as job security and commitment to stay there, who can really know the future. I can only go with these facts, he was recruited right out of school by a 100 year old Fortune 500 co. for his dream job.

I don't have the break down on the loans yet.

I am a co signer on two.

[TheKayla]

He has enough of his own cash to add to our's and make a 20% down payment.

His loans are not consolidated.

Good credit and has already been pre approved for mortgages.

As far as job security and commitment to stay there, who can really know the future. I can only go with these facts, he was recruited right out of school by a 100 year old Fortune 500 co. for his dream job.

I don't have the break down on the loans yet.

I am a co signer on two.

That makes it far more affordable since the 20% is covered, however still keep in mind all of the other costs. In the end it's only your decision. However, I always have the theory: why take on more debt when you still have debt to pay off? You have to consider will his equity and savings in housing costs after everything out-do the interest rates on his loans?

Also, could he get roommates that could share the mortgage and other costs with? -- in that case it'd be a really smart financial move because he could potentially live close to free or even make a slight profit long-term and have that investment while paying down the debt. That would be awesome, but the prior without roommates is really just trading one type of debt for another, and it may be more of a personal choice of if he really wants a home (and to not do it only for financial reasons).

[breathemusic]

He has enough of his own cash to add to our's and make a 20% down payment.

His loans are not consolidated.

Good credit and has already been pre approved for mortgages.

As far as job security and commitment to stay there, who can really know the future. I can only go with these facts, he was recruited right out of school by a 100 year old Fortune 500 co. for his dream job.

I don't have the break down on the loans yet.

I am a co signer on two.

If I were in your shoes I'd at least use the $20k to pay off (or towards) the 2 loans that you're a co-signer on. Sure, he's your son and you love him and he's responsible and he'll pay off his own debts. But everyone probably thinks that before they end up on Judge Judy. Those 2 loans aren't just his debt, they're your debt too. Do yourselves both a favor and pay those off. If those 2 loans are less than $20k and you want to let him use the balance of the money to put toward a downpayment, then he can go for it.

I'm generally of the mind that if you're going to gift money to a family member like that, you should be willing to do it with no strings attached. So if he wanted to use it for school loans, or a house, or a car, or a vacation, that's his choice. But since you're tied to some of that debt, I'd say clear that out first. Then let him do what he wants (though giving your financial opinion/guidance is your choice)

[snafu]

What is your son's plan for the house he would like to buy? Would he be taking in roomies/tenants to help pay the mortgage, utilities, insurance, property taxes, repair and maintenance costs? If he wants to reduce his current expenses, he can likely find a house share within reasonable distance from work.

The fact that you have co signed some of son's SLs drives me to the conclusion that the money you have available [$ 20K,] is wiser used to clear as much as possible of those balances. As a young, new graduate, DS has a wonderful opportunity to clear the remaining SLs and then save for 20% DP. Meanwhile he can learn some of the skill sets needed as a home owner.

You haven't mentioned that you've fully funded your retirement, that is most important of all.

[moto017]

I am a first time home owner with a somewhat similar situation. I purchased a house and rented out the rooms eliminating my housing payment. It makes sense that I would be 1000 dollars richer every month on paper since that payment is paid for through the 2 room rentals, however, I found that I am more broke than ever haha.

A new house means new projects: upgrades, maintenance, new furnishings, decorations and a million other things as you would know. It does make sense and if planned and properly executed, it would pay those loans off sooner, however, from my experience, doesn't always work that way

[disneysteve]

We have informed him that it was our intention to pay off some of the loan principle as a gift.

Gift 20k

I am a co signer on two.

Absolutely use the 20K to pay off the two loans that are in your name. That is your debt every bit as much as it is his debt. If those total less than 20K, let him use the remainder as he wishes though I'd strongly encourage him to use it toward loan repayment. Paying off loans will lower his monthly expenses. Plus if the loans have rates as high as 7%, they're costing him a lot more than a mortgage so it doesn't make sense to borrow more and keep high interest debt longer.

Forget about buying a house for now.

[Rboone]

Sometimes the dream job does not necessary be what you perceive it as to be. I would wait at least a year and let him adjust to his new lifestyle 1st with him leaving out of state. It also will allow him to get a better field for where he would like to buy a home at in his new city. Depending on his job title or the industry he works in his loans maybe forgiven after 10 yrs of payments. You may want to look into that. IF this is the case. Put the $20K in an account and put the student loan on auto-pay. He then can put the student loan payments he would have been making into a savings account and create a bigger down payment when he ready to buy.

[Rogerthat11]

Hi all,

Our son recently graduated college. He was hired immediately and moved out of state in to a rental, near his work. Of course his student loans are coming due. We have informed him that it was our intention to pay off some of the loan principle as a gift. He has asked us if we would gift him that money for a down payment on a property, instead of paying down his student loans. His thoughts are that he could lower his monthly cost of housing and dedicate that extra money towards paying off his student loans quicker. This would also allow him to gain equity in a property. He is looking to buy a property with a mortgage to save at least $500 in monthly housing cost.

I like the idea, yet I don't know much about how student loans terms.
I'm questioning if this is sound, not knowing much about those loans?
What are the views on this idea?

TIA

These are the #s

Salary 70k
Student loans 80k between 4% and 7%
No other debt
Monthly rent 1,500
Gift 20k
Property cost aprox 150k

It comes down to where the property is and if it is in a growing market. For the alternative can happen and he can lose value in the home. The thing is with putting your money into a property you actually have that 20k in equity. The loan would lower your principal balance. If he is fully responsible of managing a property and after the properties expenses still come out saving money, i say go that route. And maybe later down the line he can use his HELOC to pay off the student loan and lower his payments a lot more by amortizing it over a longer period of time. As long as he still plans on paying it off just as fast and not accumulate interest on it, I say go with the property. But this doesn't take away from the fact that it needs to be a GOOD property, in a HOT location. The value wont just go up.

[dczech09]

I would not do the home deal. Here are the reasons...

Moving to a new area and going right into a home commitment may be a bad idea. What if he is there for only one year and realizes he does not like the place, the location, etc? I moved to a different area after college as well and I am extremely glad that I did not buy a house but chose to rent.

Rent may seem more expensive than owning, but ownership has MANY hidden costs. Insurance is more expensive, maintenance is your son's responsibility, and let's not forget about taxes. Also, the interest on a mortgage is just as "thrown away" as rent money, so don't buy the myth that renting is just throwing money away.

He has a $70k income with an $80k debt load! That right there is a mess. He needs to focus on paying down those loans; that is not a small amount of debt, especially in comparison to his income. It will take him a few years to clean up that debt load.

Assuming a $120,000 mortgage, 4% APR, and 15 year term (I do not recommend 30 year mortgages), the payment on mortgage would be about $887 per month. And his rent is $1,500? Clearly the two properties are NOT equivalents in terms of size. My guess is the rent option is a luxury apartment. If one can buy a house for $150k in that area, then there are certainly more affordable rental options. This is without any shadow of a doubt; it is simple supply and demand economics that suggest this. Example: houses in my area go for about the same amount; my rent is on $729 per month (including heat, internet, cable, and a garage). There is a HIGH correlation between rental prices and property values.

The general consensus (and I agree with everyone else) is that you should put the gift towards the loans that you cosigned. Your son should rent someplace less expensive and work on paying off his student loans. Luckily, he has a $70k income which is an OUTSTANDING income for a college grad!

Before he even considers home ownership, he should make sure he will be there for AT LEAST 5 years, has little to no student loan debt leftover, can put down at least 20%, and the payment on a 15 year fixed does not exceed 25% of his income. He also needs to have a 3 to 6 month emergency fund aside from the down payment.

Another thing to consider is that a $20k gift towards a house MIGHT be subject to gift taxes. I am not a tax expert, but there may be a tax implication. Please consult a tax expert to be sure. If you put that $20k towards student loans that you cosigned for, the I believe any tax implication would be eliminated because you are just as liable for those loans as he is.

Bottom line- no he should not go for a home deal like this. I do not want to sound like a "Negative-Nancy" but I predict trouble will come his way if he goes into home ownership at this time.

[dczech09]

I would not do the home deal. Here are the reasons...

Moving to a new area and going right into a home commitment may be a bad idea. What if he is there for only one year and realizes he does not like the place, the location, etc? I moved to a different area after college as well and I am extremely glad that I did not buy a house but chose to rent.

Rent may seem more expensive than owning, but ownership has MANY hidden costs. Insurance is more expensive, maintenance is your son's responsibility, and let's not forget about taxes. Also, the interest on a mortgage is just as "thrown away" as rent money, so don't buy the myth that renting is just throwing money away.

He has a $70k income with an $80k debt load! That right there is a mess. He needs to focus on paying down those loans; that is not a small amount of debt, especially in comparison to his income. It will take him a few years to clean up that debt load.

Assuming a $120,000 mortgage, 4% APR, and 15 year term (I do not recommend 30 year mortgages), the payment on a mortgage would be about $887 per month. And his rent is $1,500? Clearly the two properties are NOT equivalents in terms of size. My guess is the rent option is a luxury apartment. If one can buy a house for $150k in that area, then there are certainly more affordable rental options. This is without any shadow of a doubt; it is simple supply and demand economics that suggests this. Example: my rent is only $729 per month (including heat, internet, cable, and a garage) and houses of similar space would be in the $150k range. There is a HIGH correlation between rental prices and property values.

The general consensus (and I agree with everyone else) is that you should put the gift towards the loans that you cosigned. Your son should rent someplace less expensive and work on paying off his student loans. Luckily, he has a $70k income which is an OUTSTANDING income for a college grad!

Before he even considers home ownership, he should make sure he will be there for AT LEAST 5 years, has little to no student loan debt leftover, can put down at least 20%, and the payment on a 15 year fixed does not exceed 25% of his income. He also needs to have a 3 to 6 month emergency fund aside from the down payment.

Another thing to consider is that a $20k gift towards a house MIGHT be subject to gift taxes. I am not a tax expert, but there may be a tax implication. Please consult a tax expert to be sure. If you put that $20k towards student loans that you cosigned for, then I believe any tax implication would be eliminated because you are just as liable for those loans as he is. It would be no different than you paying off some of your own debt. Either way, that sounds like a better option!

No, absolutely do not do the home deal.