Real Estate vs. Student Loans

by Dual Income No Kids on April 14, 2009 · 0 comments

As regular readers are aware, we’ve been saving to buy a place in Portland, Oregon.

The original thinking was to use some extra cash from my savings while in Afghanistan to buy a place that we could eventually have as a starter place in Portland. We are both originally from Oregon and dream of moving back at some point. Buying an apartment or starter home would, in our thinking, give us a place to move back to and link us further to the area.

We’ve saved $4ok to make this deal happen, and have been actively looking at real estate in Portland since August.

At the moment though, we would be a good example of changing plans based on the current economic situation. Given the real estate market and overall financial outlook, it just doesn’t make sense to buy a place in Portland.

There are a couple of different factors that play into our thinking:

  1. The real estate market and overall economy are no longer in our favor. This includes a flood of luxury real estate, a drop in rental markets overall, the economy is also showing its w on issues cropping up around HOA dues.
  2. The risk to return ratio also doesn’t weigh up. Under the current conditions we could expect that a place in Portland would give maybe a hundred dollars of monthly cash throw off from a rental. Though the real estate market is having issues, from what we have found there really aren’t good deals – most places in Portland, both condos and small single family homes, would be lucky to do better than breaking even.
  3. Considering our options, paying off student loans makes more sense. My student loans, conveniently just under $40k, will soon come out of deferment status. At an interest rate of 6.8% there would be a 14% effective return on the first year (the cost to carry the debt per month, over the total debt). In terms of cash flow this would approximately free up around $500 in monthly expenses.
  4. The long term economic situation also comes into consideration. The current economy obviously insn’t pretty. On the horizon we would project that when things do turn around, it will take awhile. With this in mind we could continue to save and consider buying a place in a couple of years would mean that we wouldn’t likely miss a big boom in real estate, but we would have less of the risk of the current market. Our long-term wealth building has to be taken into consideration and we don’t want to tie up our money in case a good money making opportunity comes along.
  5. Objectively speaking. This is always a hard one in finances. Though we would all like to be rational in making financial decisions this isn’t always the case. Even though we were somewhat emotionally committed to getting a place in Portland, looking at it objectively it is clear that it isn’t our best option. While it is good to have goals, it is also good to reassess from time to time.

So there you have it. Based on the current analysis it makes a whole lot more sense for us to pay off my student loans then to get any additional real estate at this point. We do hope to one day have a place in Portland, but it makes more sense at a later date.

The bottom line for paying off student loans versus buying a rental is a guaranteed return with no risk, and no hassle, in comparison to great risk and hassle for a rental.
This is a page we won’t be seeing as often. This is the real estate listing from our agent, Kristin Winters, with Realty Trust Group. It maps out your favorites and was a great tool to have. Looking at real estate daily will be missed.



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