Money Rehab with Nicole Lapin - "Should I Buy a House or Pay Off My Debt?" Listener Intervention

Episode Date: June 27, 2023

How do I pay off student debt? Should I buy a house? These questions are tough enough to answer alone… but when combined? That’s next-level tough. Nicole talks to a listener who is in exactly this situation, albeit, with a pretty great leg-up. Plus, a stellar real estate financing tip from Scott Trench, CEO of the real estate investing platform BiggerPockets.

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Find a co-host at Airbnb.com slash host. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. How do I pay off student debt? Should I buy a house? These are tough questions enough to answer alone, but when combined, that is next level tough. We got an email from listener Abby, who is in exactly that situation, albeit with a pretty great leg up. In this intervention,

we make a six-figure decision. Plus, when Scott Trench, CEO of the real estate investing platform BiggerPockets, was on the pod last week, he had some great suggestions on this topic too. So you'll hear from him at the end of the episode and he shares some little known financing hacks that you can expect to see get super popular in the coming years. But first, here's Abby. Abby, welcome to Money Rehab. Thank you. So happy to be here. I am so happy that you're here. So what is your question? So about over a year ago, my parents were gracious enough to give me $100,000 for a down payment on a house. After many attempts, I was living in San Diego and it just was impossible to buy a house.

So I ended up giving up on that. So now I just have this money sitting in my bank account. And I also have about $68,000 of student loan debt. So I'm just wondering if I should use the money for a down payment to pay off my student loan debt, but would also hate if the market were to change and then I've lost my down payment. So just looking for some advice on what to do with this money. It's a great question. And you have very nice parents. And I'm available for adoption if they are so interested. So hold on.

You've just had $100K sitting in your bank account for a year? Yes. Abby. I know. And you listen to the show daily, I hear? Yes, I do. OK. All right.

So we'll leave that aside because you know what I'm going to say about that, I assume. OK, I do. Okay. All right. So we'll leave that aside because you know what I'm going to say about that. Yes. Okay. What is the interest rate on your student debt? Well, so it's been deferred for the last couple of years. Payments will start in September. I believe it's going to be around 7%. So you know that like the payments were deferred, but you could still pay against the principal? Yes, I was. I was. Oh, you did pay. You were paying. Not I wasn't paying as much as I probably should have, but like I still have sixty eight thousand dollars left. OK, but during the pause, you were still picking away at the principal. Yes. Go you. Yeah. So I'm just like, OK, interest rates are going to come back.

Do I just like get rid of it before it does? Well, have you started any mortgage process? Do you know what you're approved on? Do you know like approximately what your rate would be there? So I, not recently because I was going through it like a year ago and I was like, you know, going $50,000 over asking price and I'd still be 15th in line. And it just was so crazy. Oh, it's bananas. Yeah. So I have totally put that on pause and I don't, I mean, I still live in San Diego. I plan to be

there for a while and I don't know if the market's going to really change there. So I don't know. Do you have any other kinds of debt? Nope. Okay. And you know, there you probably do from listening to the show, because I'm all about trying to update on what's going on with student loans. A Supreme Court decision about Biden's student loan relief plan is going to come out. It should knock up to 20 grand off your student loans. If you received a Pell Grant up to 10 grand, if you didn't to qualify for that 10 grand, you must also have federal student loans and earn less than $125,000 annually or 250 for household. Does that fit your situation? Yes. Oh, yeah. So I've been waiting for that too.

situation yes oh yeah so i've been waiting for that too okay so interesting so you could have like a third of that knocked off okay so the thing about comparing interest rates of debt and getting a house means you're going into more debt just to be clear i'm assuming you're not going to pay for it all in cash like you're not looking at a hundred thousand dollar, I don't know what you would get in San Diego for a hundred grand, maybe a trailer or maybe not even that. Yeah, literally. So you would be going into debt, more debt, right? You would be getting a mortgage. You'd have two really big, important bills to pay just so you'd like that's in your situational awareness of how your lifestyle is going to change you're going to have to tackle those two big bills even though they're considered good debt right

because it's an investment in yourself and your future it is still debt just like avocados are considered good fat but you don't want to gorge on guacamole all day long right so the thing about comparing interest rates is that if you have a higher interest rate that you are paying, then you want to get that tackled first. Seven percent is higher than I might have expected for your student loans. And that's hovering around what a mortgage rate would be, with some exceptions that we'll talk about in a minute. So it might be more advantageous to knock out your student debt, especially while you can still pick away at the principal. We're going to get the Supreme Court ruling ideally before early July. So I would wait on that decision for the portion that could be forgiven, but potentially knock out, you know, the 48 grand that would be on top of that. Right. Okay. What do you think about that? Yeah, I agree. You know, and I, I've also

been lucky enough to like not have a car payment, which I probably will need one in the near future, you know? So it's like, at some point I'm going to have all these bills and then still my student loans. So is it better to just like get rid of that payment first, you know? Yeah. I mean, if you get some money knocked out that day, that's awesome. Let's not miss out on that opportunity. Okay. But I would say once that decision is made, then definitely act. If you know you can get 20K forgiven, you're still going to have to pay 48 grand. I might say knock that off your plate. And then if you're not going to do anything with the other 52K, then at least put it into a CD. CD rates are really high right now until you can figure out what you want to do with it next.

Yeah. That's the thing. I'm like, okay, well, I don't want to put it into something and not be able to take it out just in case I do want to put a down payment on. So it's just been like, every day I'm like, what do I do with this money? It's just sitting there. I know it needs to go somewhere. Yeah. Do you have any investments right now? Yeah, I do have some in a Vanguard. I have a Roth IRA with Vanguard. Then I have a high yield savings account as well. So I've been putting some of it in the high yield savings account just in case I need it. How high are we talking? How high of a yield? It was, I think it's like 4.3 or something right now. Right now. Yeah. I don't hate it.

And where's the rest? In my checking account. Well, no, my savings account. I know. Wait, in the high yield savings account or in a different savings account? No, no, no. In a different savings account. Just like my bank. Why? I don't know. Can we change that like today?

Yeah, we can. Okay. I know. I've always been like very cautious and just I'm not like a high risk taker. So I've just been holding onto it. I have this conversation with my girlfriends all the time. They have all their money in their checking accounts and they've made a ton of money or they've had liquidity events or whatever, windfalls of some sort, which is just a fancy term for like getting an inheritance or selling a company or whatever. And it's just chilling in their checking account. So you are not alone. But like, let me ask you, what is the risk in a high yield savings account? None. Listen, you just have to let those scary monsters in your head speak. If they're saying, you know, you could have to let those scary monsters in your head speak. If they're saying, you know, you could lose that money. Let's talk about it. Could you lose that

money? We're not talking about going into like some wild crypto investment. It's a high yield savings account. So if you have more than $250,000 in there and your bank goes under, If you have more than $250,000 in there and your bank goes under, then maybe we have a problem. But you don't. Do you? No. So we're good. Hold on to your wallets.

Money Rehab will be right back. I love hosting on Airbnb. It's a great way to bring in some extra cash. But I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with Airbnb experience that can take care of your home

and your guests. Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host, so I can still make that extra cash while also making it easy on myself.

Find a co-host at Airbnb.com slash host. And now for some more money rehab. So the game plan is we're going to wait for the decision. If you can get some money off your student loans, amazing. And then what's going to happen after that? Well, if I can get money off, amazing. I mean, if not, I'll probably try to knock most of it out before the interest comes back in September. Okay. So if we step back on the home buying process, what has your history been like there? Have you been renting? Do you live with somebody? What's the story? I rent, I live by myself. I rent in San Diego. Actually, my rent is $1,900

a month, which is actually not too bad for San Diego. So, and my landlord is awesome. He's not going to raise my rent from what I know. So why do you want to buy? Well, and that's the thing. It was like, my parents kind of came into this money as well. And then they gave it to me and I was like, Oh, okay. I have money for a down payment. And that was like, let's just do it. But at the same time, like it would be nice to have an investment. And, you this point I've been in my apartment for just over a year and it's fine. I'm like, I'm happy. I'm okay. I'm like, maybe I can just rent for a long time until maybe I want to settle down. And who knows, maybe I'd want to move out of California at that point. Okay. That's an important factor here. Yeah. I'm from Massachusetts

originally, my whole family's there. California is just so expensive for everything. So if like raising a family there, I don't know, it could be hard to kind of like having the life that I grew up with, you know, it would be tough to do that in California, I think. So you don't really want to buy. Yeah. Yeah. It's at this point, I'm kind of like, oh, maybe I don't need to. Because that's what you thought you should do. Yeah. And you never really questioned it. And that's okay. And that's what happens to a lot of people. They're told they need to do, usually buy a house. And they just accept that as gospel. And maybe, by the way, that is the answer. Maybe if you said to me, hey, Lapin, I want to stay in San Diego forever and ever at the end. I'm never going to move. This is exactly what I want. And whatever. It might be a different story.

But if you really unpack the reasons behind why you would want to buy a house, it doesn't seem like a slam dunk with what you should do with the money. No, you should not leave it in your checking account. And then, you know, ideally you would grow it for when you are more sure about where you want to live long term. Right. And then you'll be in a better financial position. You might have a bigger down payment at that point. You might have more clarity around the other variables in your life. You might meet the love of your life. Who knows? Tomorrow, it could all change. But Abby, when you are ready to buy a house, there are some financing options you should consider,

especially if you do decide to stay in California. I recently caught up with Scott Trench, CEO of the real estate investing platform, BiggerPockets, and I brought up your question. Here's what he said. My favorite tactic for housing is what's called the house hack, or I also like the live-in flip. So what I did, I didn't have student loan debt to this tune when I got started. What I did is I bought a duplex and lived in half of it and rented out the other half. And that was my starter home, if you will. And that enabled me to get on a real estate investing trajectory. If you've got the gift of $100,000 down payment, why not look for a four, five, 600,

it depends on what your market, right? If I say four or five or 600,000, a lot of people think that's crazy high in some markets and a lot of other listeners think that that's crazy low and there's nothing. She was in San Diego. So I think it's crazy low, but yes. Fair enough. So $100,000 down payment in San Diego. Yeah. That's, that's tough. I, uh, I think in San Diego, I'd be looking, I still might be looking for a property like a, like a house hack. I know that in California and in many of those markets, they're allowing you to build additional dwelling units on property. So if you have a single family home- Like an ADU.

An ADU, yes. An additional dwelling unit, an ADU. That might be a great opportunity that I would be interested in exploring there is, can I put that $100,000 down? Can I get a 203k loan, for example, and help me construct this additional dwelling unit, get a lot of rent, and that will help cover my mortgage. And if you loan, for example, and help me construct this additional dwelling unit, get a lot of rent, and that will help cover my mortgage. And if you can live for free, you can attack that student loan debt in a really, really rapid succession there. But you're going to have to get increasingly creative in today's environment. Another thing that I'd be encouraging this person to look at is because there's $100,000, there are a subset of mortgages in this country that are assumable.

there's $100,000, there are a subset of mortgages in this country that are assumable. So a VA loan and an FHA loan are assumable in the sense that I can take over the seller's existing mortgage. The catch is if that property is, let's call it $700,000 in San Diego, and that person has a $600,000 mortgage, VA mortgage or FHA mortgage. I know there's a lot of VA mortgages in San Diego in particular, for example. I got to bring enough cash to cover the spread between the purchase price and the existing mortgage balance. So the fact that this person has cash might enable them to buy a property at today's prices in San Diego with 2021 financing from perhaps a sailor, for example, who's getting stationed to a new duty station. That would be a place I'd encourage this person to go looking. And that might make a major

difference in their cost of living and again, enable them to free up cash flow to pay off that student loan debt. Let's talk through a little bit more of assuming that mortgage. So should we put easy numbers on it, like a million dollar property. What you're saying is that in today's environment, the cash that you would have to put into the property to assume the mortgage is lower. So there's an existing mortgage on the property. And let's say in this case, it's $900,000, right? So this is a sailor who somehow was able to get a million dollar VA loan, which is one of the assumable mortgages in that market. And they bought it with 0% down two years ago. It's appreciated, but come down a little bit. So they have $100,000 in equity.

This person, this listener we were talking about would bring their $100,000 down, pay that to the seller, and then take over their existing mortgage by assuming that mortgage, the VA loan again, could be transferred from that military service person's name into our buyer's name here. And they could take over that payment perhaps at three, three and a half percent. Would you take that $100,000 if the sailor bought it at 900K, then the equity in it would be 100K. And so that's what you would be paying for essentially. Yes, that's right. That would be the transaction. So that's the catch with this is if you want to assume a mortgage, you got to bring the spread between the purchase price and the existing loan balance.

So you need cash. Cash is king in this environment. The more cash you have, the easier everything else is in buying a home property. And that's what this person has. I think it's queen. Queen. That's right. Yes.

Cash is queen. So let's get technical here for a second. If you want to finance properties without using a new conventional mortgage, let's say you're an investor or a home buyer, you can basically do one of three things without going through the Fannie Mae program or a bank. One, you can assume the mortgage, which we just talked about. That's a VA or FHA loan. You need a special type of mortgage that is assumable to do that. That's about 20, 25% of loans in some markets.

It would be a greater percentage of loans in a market that has a big military presence like San Diego, for example. The second type of thing you can do is what's called subject to. That's where you take over the payments of a conventional mortgage, which is what most people use to buy properties. The problem with that is that you're not actually taking over. The mortgage is not transferring into your name. You're just taking over payments for that person. So there's a lot more risk there. There's a little bit more,

less comfort. There's risks that involve the due on sale clause. That would be for a more advanced investor, I think, to pursue that path. And the last avenue is what's called seller financing. So a big portion of homes in this country are owned free and clear. So they don't have any mortgages on them at all. That's one of the reasons why we don't, that's another reason why we think the market is not crashing right now is there's a lot of equity in a lot of properties. People are relatively lightly leveraged. When they are leveraged, they're leveraged with low interest rate debt. And a lot of people own their properties completely free and clear. So let's say you own a house worth 600 grand and I want to buy it from

you, but I don't have $600,000. I might say, hey, Nicole, would you be willing to lend me, I'll pay you $150,000 down. Would you be willing to lend me $350,000? I'll pay you a 5% interest and I'll pay you back over the next 10 years. You might say, I don't really love that. But if your next offer is for 550 or 525 with a conventional mortgage, all of a sudden you might be like, hmm, that's actually interesting. Let me think about that and get back to you on that one. And so that's, I think we're going to see a lot more of that coming about because there's no rules governing what you can do with a seller finance note or there's, it's really whatever you want to work out with that person. That buying a property subject to and buying with seller financing are what I would call need to be done by advanced investors. The assumable mortgage is what I would recommend to first-time homebuyers to be looking into because you have to live in the property to assume the

mortgage. So an advanced investor is not going to be able to move into a property for a year at a time to buy multiple properties. So it's really only available to your early stage investors and or homebuyers to do this assumable mortgage. The catch is, again, you have to have the cash to cover the spread between the purchase price and the existing loan balance. And then how would you go about doing that? I mean, you can't just go on Zillow or something and be like, assumable mortgage. I would like to get a sweet deal. How do you even approach people like that? So I think this comes back into your overall purchase strategy. You're going to start seeing more and more now, even if you go on the MLS likely in your hometown right

now or Zillow or these other places, you're going to see ads for these properties talking about whether they have assumable mortgages on them. Folks are, it's not totally common yet, but because of the extraordinary advantage, like I can pay way more for a property. If I can get a three and a half percent mortgage on it, then I can't, if I'm going to get a six and a half percent mortgage or a 7.2% mortgage, right? So sellers are realizing that these loans are assets that can drive the value of their properties up. It's not happening a ton yet. It's still in its kind of infancy, but I think you're going to see a lot more of this. And it's going to see the adoption of these techniques increasing over the

next year or two as folks kind of become more and more comfortable with it. You haven't needed to do this for the last 40 years because rates have been coming down steadily essentially that entire time. Now that rates are going up, now all of a sudden this tactic that essentially no home buyer that's buying right now has ever remembered being a thing is starting to come back and be a tactic there. So that's one. And then I think you talk to your agent and ask them, make sure that any property you're looking at, you just ask, hey, is there an assumable mortgage on this thing? Is that a possible thing? But I think you're going to see ads for it. And then you can talk to your agent and you can know your market, right? In Denver, not that many VA

loans. Some in Colorado Springs, just south of us, big Air Force base, lots of VA loans. Right? San Diego, lots of VA loans. Yeah, Pendleton. Yeah. Yeah. LA, not so many VA loans. So just know your market.

FHA is probably going to be pretty consistent across most markets. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Levoy. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok

at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.