I want to expand on yesterday’s post.
As far as my wife’s student loans, we basically have two options:
1. Pay off her student loans as soon as possible, become debt free, and then buy a muli family home.
2. Pay the minimum amount per month (which is mostly interest), continue to save our down payment, buy a multi family home, live rent free, and then pay off her student loans in one fatal swoop.
What should we do?
A friend suggested that I think of it in terms of ROI (return on investment). Anything over our minimum amount goes straight to our principle (no interest). If my wife has a 7% interest rate, every extra dollar paid will save us 7% in interest. If a penny saved is a penny earned, that’s kind of like a 7% ROI. Keep in mind we’re not making a profit, we’re just avoiding interest.
He suggested the decision might be more simple if I compare that to the ROI I can get from real estate.
So I did some research.
My wife’s student loans are in 4 different groups. The interest rates are:
Clearly, I can get a better ROI with the FHA loan. I can leverage a $21,000 investment into $600,000 and…look at these numbers:
ROI = [(payback – investment)/investment] x 100
Let’s say at a 100% occupancy rate, we bring in $1,400 for units 1 and 2 (we live in unit 3, which saves us $1,400). If we want to count that $1,400 in savings (a penny saved is a penny earned) and combine it with the $2,800 we’ll generate from the other two units…that’s $4,200 per month or $50,400 per year.
ROI = [($50,400 – $21,000)/$21,000] x 100
That, my friends, is a 140% ROI! Of course, as mentioned in the plan, I know not to expect a 100% occupancy rate.
Even at an 80% occupancy rate I get a 92% ROI.
$50,400 x .8 = $40,320
[$40,320 – $21,000)/$21,000] x 100 = 92
What if I think in terms of months instead of an occupancy rate? What if I can fill the units for 10 collective months within my first year of ownership?
$4,200 x 10 = $42,000
[($42,000 – $21,000)/$21,000] x 100 = 100
A 100% ROI aint’ too shabby.
(Just a point of reference: you’ll be lucky to get an 11% ROI in mutual funds.)
I mean, come on. Am I really going to worry about 3.4%, 4.5%, 6.8%, and 5.6% interest rates?
This is why I love real estate.