Pay Off Student Loans or Invest in Real Estate

Dave :
According to us census data. About 43 million Americans have outstanding federal student loan debt. That’s about 13% of the US population. And when you factor in other types of consumer debt, whether it’s credit card debt or auto loan debt, Americans generally speaking have a lot of debt. And for some, this feels like a major obstacle when getting started investing in real estate or just buying a primary home. And there’s no one size fits all answer to this. Some people think that you should pay off your debt before you invest in real estate. Other people think the opposite. They should invest in, use your profits to pay off your debt. While there’s no right answer, there are some tips and tricks you can use to figure out what’s right for you. Today we’re going to talk to a guest who has done these calculations for himself, and he’s going to share with you his story about how he got started investing in real estate, even with student loan debt.
Welcome to the BiggerPockets Real Estate Podcast. I am Dave Meyer. Today we’re talking with investor Tom Keating, and in our conversation we’re going to focus a lot on how Tom got started investing in real estate just a couple of years ago, even when he had student loan debt. And he’s going to share with you why he still has student loan debt, even six years into his successful investing career and why he thinks that this might make sense for a lot of other investors out there. And Tom is also going to share with us a pretty cool system that he has developed for picking markets to invest in. Tom has a lot to share, so let’s bring ’em up. Tom, welcome to the podcast. Thanks for joining us.

Tom:
Thank you for having me. Happy to be here.

Dave :
Before we start talking real estate, I want to hear a little bit about your overall business experience. What was your first foray into entrepreneurship?

Tom:
So I actually grew up not that far from a golf course. I get off the school bus at the end of the school day. I drop off my books because who needs those? And I’d grab my backpack and I’d go back out to the woods surrounding the golf course and I’d pick up some golf balls, I’d throw ’em in my backpack and I take ’em home. I clean them, sort them, grade them, and then set up a stand or go on eBay and sell ’em back to the golfers. So that was kind of my first foray into entrepreneurship.

Dave :
I love it. It’s just pure profit, right? You’re just taking something that you find for free and max profit, is that right?

Tom:
That’s exactly right. Very, very low overhead.

Dave :
Great. And did that set you on a path towards future entrepreneurial endeavors?

Tom:
Yeah, absolutely. In college I tried out a meat delivery business delivering coal cuts to local delis that failed, but studied business in college and eventually found real estate, which is my true passion and I feel the best way to get into entrepreneurship.

Dave :
I don’t know if you know this about me, Tom, but my Instagram account is called the Data Deli because I love sandwiches and I love cold cuts. So just tell me a little bit more about this business that failed.

Tom:
Yeah, so I got a van and I went and picked up a bunch of cold cuts and I would go down around to different delis and restaurants in the area knowing that they sold frozen foods and I would sell it to ’em and then they would actually cook ’em there, prepare ’em there and sell ’em to the end user. So it was a tough business to get into, don’t get me wrong, and I was certainly going into some sketchy areas to sell the product, but it taught me a lot about customer relationships, not being afraid to be told. No, I certainly look back on it as a positive experience for sure.

Dave :
That’s so true of entrepreneurship, even the ones that fail, I’ve started businesses that fail for sure, and you learn just as much or more from those types of businesses. And so I think just trying something and having that entrepreneurial spirit really is beneficial to you for the long-term career, especially when you get into real estate investing. But after college, what’d you do after college? You went into finance.

Tom:
Yeah, that’s exactly right. So I graduated college and I ended up going to work for a bank. It was a leadership program, so I got exposure to different areas of the bank, which was a great opportunity to start and kind of learn a little bit about debt and loans. So that was my first job out of college.

Dave :
So how did you go from working in finance at a bank to becoming a real estate investor?

Tom:
So when I was working at m and t Bank, I thought I wanted to be some sort of bank executive and climb up the corporate ladder. So every day I would leave the office and I’d go to the local Barnes and Noble or the local library and I’d just sit in the business section and read different books. And one day I picked up a book. I was Brandon Turner’s book, actually, the book on rental property investing, and I picked it up and I started reading and he mentioned the BiggerPockets podcast. So I started listening to that every day when I would go to the gym or drive to and from work and I was like, wow, this real estate thing is really cool. Three months later, I had my first property under contract, so that was kind of my transition from banking to real estate.

Dave :
But you picked up the book before you even knew about real estate investing.

Tom:
That’s exactly right. Yeah, it was sitting in the business section, it was right on display. I would pick up different books, didn’t really know what I was picking up. I was just like, Hey, I want to learn about business. I’m passionate about business. So I turned out that it was his book that was on the shelf that day and he recommended the podcast and I’m so thankful for it. Really.

Dave :
I love that. I mean, that’s not the usual story we hear. Usually people hear about the podcast or picked up Rich Dad, poor Dad, maybe. But I love hearing that you found one of our books first and then came to the podcast. That’s a cool story. So what year was this?

Tom:
This was back, I had graduated college, the year prior was about 2018.

Dave :
Okay, so you’re in 2018, you find Brandon’s book, and from that you go to the podcast and you said within three months of picking up the book, you had a property under contract. Tell us how you did that so quickly.

Tom:
I started looking around, fortunately that first year at the bank, as I mentioned, it was a leadership program. I was traveling a decent amount for work and I was living at home when I wasn’t traveling for work, so it allowed me to save up a small amount of money and I was like, okay, let me go house hack. Lemme go find a property to live in one unit and rent out the other. Unfortunately, I found a property that worked from a cashflow perspective, but it didn’t probably work from a personal lifestyle perspective. It wasn’t the neighborhood I wanted to live in, so I decided to buy it putting 20% down, 80% finance and just rent out both sides. And one of the benefits of that was I got to keep my FHA loan or my owner occupied loan, so I was able to use that later on.

Dave :
I mean, it sounds like a great deal. It sounds like you thought it through really quickly. Did you have any hesitations before pulling the trigger on this first deal?

Tom:
Oh, it was so nerve wracking. Everyone around me told me how risky it was. It was terrifying. Don’t get me wrong, and to this day, anytime I go close on a property, I still do get nervous.

Dave :
We all do. Tom, whoever said, anyone who says otherwise is probably lying, or at least for me, it’s true too.

Tom:
Yeah, no, it was definitely a stressful experience, but I’m certainly happy I did it. Now that first property is one of the best investments I ever made.

Dave :
Okay, so now we know how Tom found real estate, but how did he build up the 12 property portfolio he owns today and how did he start investing even with student debt? We’ll get into those questions right after the break. Welcome back investors. I’m here with Tom Keating. Let’s jump back in. I understand that when you were getting into this, you still had some significant student loan debt at the time. So how did you make that decision? You’re saying it felt risky, you’re nervous. Did the fact that you had other outstanding debt factor into your decision at all?

Tom:
Yeah, so my thought process behind that, and luckily I did have that good finance background was my student loan interest rate was I think about four or 5%. And when I calculated the cash on cash return of that very first duplex, it was coming in at 10% plus. Right? Wow. So my theory was I could get a 10% return here or pay 4% here. So the spread would be, I guess the benefit to me in addition to things like appreciation and principal pay down as well.

Dave :
Yeah, absolutely. I mean, if the cash on cash return by itself is greater than the interest you’re going to be paying, that one seems logical, but tell me a little bit about the scale here. Was the down payment or at least the cash that you had to put into this deal enough that you could have cleared out all of your student loan

Tom:
Debt? Oh, it was more than that for sure.

Dave :
Didn’t some part of you? I mean, I probably would’ve made the same decision to be honest, but I just want to know, did some part of you just want to wipe out that debt and sort of be clear from that?

Tom:
Yeah, I was definitely a little bit concerned about the debt as anybody would be. I wanted to stay logical and realize that the end goal here is to increase my overall net worth and protect my future and save for retirement. So I ultimately decided that this was the best decision and decided to go ahead and start my foray into real estate.

Dave :
I imagine that this is a question that a of people in our audience have, whether they’re making their first investment or subsequent investments, most Americans carry some sort of debt, whether it’s student debt, credit card debt card debt, whatever, it’s so given your background in finance, can you tell us a little bit step-by-step tactically, how did you make this evaluation and think through what the best use of your capital was, given the fact that you wanted to be in real estate, but you did have some existing debt?

Tom:
I would say the biggest thing for me was knowing the interest rate on the debt that I am carrying. If you have credit card debt that’s maybe at a 20% interest rate, it might make more sense to pay that off first. However, if you have student loan debt that’s at 4% and you’re going to get higher than 4% with your real estate investments, maybe it makes sense to go ahead and start your foray into real estate.

Dave :
Yeah, let me just explain this with some numbers here. For everyone listening, just imagine you had a nice round number, like a hundred thousand dollars to invest and you had that amount in debt. If your interest rate like Tom’s was, let’s just say 4% on that a hundred thousand dollars, you would be paying $4,000 per year in interest to the bank. That’s not something you generally want to do, but if you were to able to get a cash on cash return of 10%, like Tom’s, you would be earning $10,000 per year on that a hundred thousand dollars. And so in theory, you could pay off that $4,000 in interest to the bank plus profited additional $6,000 per year, not to mention the amortization, the appreciation, the tax benefits. And so that is why it made sense for Tom at that time, and it’s a calculation that I think hopefully most people who find themselves in the situation can make for themselves. But Tom, that 2018 was a different time. So I’m curious, has your thinking about this changed one because cashflow is harder to find now than it was six years ago and interest rates on student loans or most forms of debt have gone up?

Tom:
Yeah, absolutely. So I think there’s different things you have to take into account in today’s environment. Maybe you could find a single family home as I’ve done and convert it into a duplex. The rental income on that single family home might not be high enough to cover your mortgage taxes, insurance, and maybe some repairs. But if you convert it into a duplex and you’re now collecting two rents, even if each of them is just slightly lower, the total rental income, there could be a little bit higher. Things like adding bedrooms on student rentals, sometimes students charge per bedroom. You got to get a little bit creative, but if you’re willing to dig deep and do some work and research, I think it could definitely be done.

Dave :
Yeah, that’s great point. I am curious as Todd, given these changing dynamics, have you paid off your student debt? Do you still have it?

Tom:
I still have some of the low interest rate debt, yeah.

Dave :
Okay. All

Tom:
Right. To me, it just doesn’t make sense to completely pay it

Dave :
Off. Nice. So have you basically just stayed on the plan you were on from right out of college and continue to just pay as agreed or did you accelerate at any point? Did you accelerate the payoff of your student loans?

Tom:
Yeah, so I think you have to take it day by day and you have to understand what the best opportunities are at any given time. For me, real estate has always provided the strongest return amongst my portfolio, whether that’s stocks paying off debt or other investments. So I’ve continued to invest in real estate given the low interest rate on my debt.

Dave :
Got it. Very cool. Well, I respect the fact how much analysis you put into this and really thinking about resource allocation, this is so important for real estate investors is there is an opportunity cost in everything you do, whether it’s paying off debt, taking on debt, making one investment versus another one sitting on the sidelines. And Tom gives us a great example here of how you could do really, honestly, pretty simple math to figure out what are wise decisions, what are data-driven decisions you can make about how to allocate capital within your portfolio. Thanks for sharing that, Tom. Fast forward to today, six years later, what does your portfolio look like?

Tom:
I have some super small multifamily in New York, Poughkeepsie and Albany as well as Florida, and actually just recently made my first acquisition in Charlotte, North Carolina. And then outside the active stuff, I do have some passive investments in things like self storage, campgrounds and obviously multifamily as well. Okay.

Dave :
Let’s dig into that. But what is super small multifamily? Do you just mean a duplex or is it physically a tiny unit?

Tom:
No, it’s physically they’re a decent size. I would call them an average apartment. I do mean those two to four unit properties for the most part for sure.

Dave :
Okay, so we’re talking about residential multifamily here, and just for everyone listening, anything under four units is considered residential. Everything above that is commercial. Correct me if I’m wrong, but you said you started in upstate New York, near Albany, then you went to somewhere in Florida.

Tom:
That’s exactly right. Yeah, I had moved down there for a job and bought a single family home there.

Dave :
Okay. And now you’re in Charlotte. Are you still working full-time, by the

Tom:
Way? No, so that’s actually the reason I’m in Charlotte, North Carolina. So I was able to leave my full-time job in Florida, and then my plan was to go stay in Airbnbs, go stay for a month here. I was going to go to Dallas. I was going to go to different cities across the country and just travel and explore and see what city was best for me because now I have the ability to work from anywhere with wifi and a cell phone and my laptop. It turned out that I came to Charlotte and I loved it so much. I never actually continued on that journey, but I do plan on doing that at some point in the future.

Dave :
Nice. Very, very cool. And so you fell in love with Charlotte or did you know you wanted to invest there prior to going to visit?

Tom:
Yeah, I mean Charlotte is one of the areas in the southeast that’s, I’ve been on an incredible real estate run recently. The rent has been strong, appreciation has been strong, but I think the biggest reason I’m here in Charlotte is because I have friends and family here that I really enjoy. And the lifestyle is good for me personally.

Dave :
And I’m curious about your approach because this is a common question or challenge that people face. It’s like should you double down or just keep investing steadily in a single market, which is what a lot of people do with a lot of success. It seems like you’re doing a bit more of a diversification play. You have somewhere in the northeast, you have Florida, you have North Carolina now. Where are your passive investments, by the way?

Tom:
Yeah, so the great thing about the passive investments is you don’t really have to be local to it. It doesn’t really matter where they are. The most important thing is that you trust the operator and the deal looks good from a financial perspective. Those are in primarily the southeast United States, Florida, North Carolina, yeah, mostly the southeast.

Dave :
And so why did you decide to spread your capital and your investments among multiple markets?

Tom:
Yeah, I think of it as it’s diversification. Just like in your stock portfolio, you don’t want to have a hundred percent of your investments, your 401k in one individual company. You want to diversify that. So I like to do that with my real estate portfolio as well. Investing in different markets, investing in different asset classes, I think are important for your total investment portfolio.

Dave :
And how do you sort of come up with the right balance, right? I would imagine that the return profile and characteristics of a place like Albany, which I hear great things about, never been, but I hear great things about and somewhere like Florida are probably pretty different. I am just going off the top of my head, so if I’m wrong here, please correct me, but I would imagine Albany is somewhat more affordable, more of a cashflow centric kind of place, whereas Florida a little bit more expensive. I don’t know where in Florida you are, but more generally, Florida is more expensive, high appreciation potential. So are you doing that on purpose?

Tom:
Yeah, absolutely. So you hit it on the head, right? In Albany, I could get strong cash on cash returns, but the odds of those properties are going to increase in value significantly are not very high, and you also have higher maintenance costs. Oftentimes the buildings are a hundred years old. When you move to places like North Carolina and Florida, it’s more of an appreciation play. The trends all show that people are moving from the northeast, from California to the smile to cities. If you look at the United States map, you could see a smile at the bottom. It goes from Phoenix and Denver down to Texas and then up through the southeast United States, and that’s where people are moving. So the trends also that rents are increasing there, the population is increasing there, and that’s good for real estate. So different play one’s an appreciation play, one’s a cashflow play for sure.

Dave :
Yeah, it is kind of similar to what I do personally. I started investing in Denver, which is a high appreciation market recently it’s been pretty tough to find deals that pencil in Denver for my particular strategy, which is passive, not passive, but more turnkey. I’ll do cosmetic rehabs, but I’m not doing big heavy value add things from afar. And now I’m sort of trying to balance that out with a market that I started investing in recently in the Midwest. It still is solid appreciation potential. It’s a good market population growth, but it offers cashflow MLS deals. So I think that to me creates that kind of diversification. It sounds like we sort of think about this similarly that we want to try it, different types of markets that have different types of profiles.

Tom:
Yeah, 100%.

Dave :
And it sounds like you go even further, Tom, in that you’re looking at different asset classes, so it seems like your direct ownership mostly small, multifamily, residential, multifamily. When you talk about your passive deals, is that still housing like multifamily or are you into other types of commercial real estate?

Tom:
Yeah, I would say it’s a majority multifamily and then self storage as well. And then interestingly enough, I have one investment in campgrounds as well, so I try to diversify from that perspective as well. I think the most important thing is know who you’re working with and who you’re investing with, and as long as you trust them, that’s the most important, most important thing. Just like in the duplex and the triplexes, it’s super important to know your realtor, know your property managers, because ultimately real estate is a game of relationships and trust. So if you find good people to work with, you’re going to be doing okay.

Dave :
Yeah, I would imagine that people listening to this are thinking that in some ways you’re diversifying, you’re doing different asset classes, and the general wisdom is that diversification mitigates risk in investing, but in real estate it’s a little different because real estate in many senses is entrepreneurship. You have to run and operate businesses in each of these places. So do you think it is mitigating risk or is it exposing you to some additional risk by doing all of these different types of strategies?

Tom:
Yeah, it’s hard to become an expert in a lot of different things. I definitely understand that perspective for sure. So if you’re partnering with right people who are experts, that’s one thing is I will say, in working in different markets makes it difficult to have your hands on, have a hands-on approach. Definitely getting started, I would focus on one specific market, then you could understand what your rents are going to be, who your best person is for maintenance and repairs. Getting started out, I would focus on one market, know it like the back of your hand, and then go from there as you grow your portfolio in the years to come.

Dave :
Okay, we have to take one more quick break, but stick around. We’ll hear Tom’s foolproof method for choosing a location for both cashflow and appreciation right after this. Hey everyone, welcome back to the BiggerPockets Real Estate podcast. Let’s pick up where we left off. Alright, great. That’s great advice. Tom, could you maybe drill down for us and give us an example of how you’ve done this maybe with your most recent property in North Carolina? How did you figure out where you wanted to buy, given that you were, it sounds like relatively new to the area.

Tom:
Yeah, absolutely. I moved to Charlotte and I didn’t know where my local grocery store was. I didn’t know anything about the area. So one of the things that we did was create an overlay map. So with all the new development coming into those cities, we talked about in this smile Charlotte being one of them is development causes home values around the development to go up. So if someone’s building a brand new shopping center, or if someone’s building a large multifamily apartment building with a couple hundred units, the value of those properties around it are going to increase. Another thing that causes property values to increase would be transportation services, so like a train, a light rail, something like that. So we created an overlay map that shows all the development coming into Charlotte, North Carolina, and then tried to buy properties that are within that area that all the developers are building.

Dave :
When you say we created an overlay map, I would imagine a lot of people don’t know what that means. So first of all, who’s we? Is it just you? Do you have a team?

Tom:
Yeah, great question. So that was my intern. He is way better than technology than I am. I could barely open up Microsoft office. So he was able to kind of create an aerial view, like picture a helicopter going up in the sky and taking a picture of the land below it and he saw the parcel lines and was able to put it on a map where all the development was coming. And I said, okay, well this seems like where all the developers are buying. This is the area that’s going to have the most appreciation. Why don’t we buy there?

Dave :
This resonates with me personally. This is the type of stuff I love doing. I used to do this kind of thing in Denver. They were building out light rails, all these different developments. I would go to community meetings to learn about where the government was investing and I wasn’t super sophisticated, not some GIS architect making these maps, but I would just sketch them out and be able to do that and just look into that. But just for everyone listening, I understand not everyone is going to go and do that. And if you do want to just sort of get background information about good markets and places where you can invest and learn a little bit about it, BiggerPockets does have a market finding tool that will give you background information on all of the biggest metro areas, actually all of the metro areas in the United States.
So if you wanted to just go into Charlotte, learn about what’s going on in Charlotte, what strategies work there, what things are doing there, you can absolutely do that. Go to biggerpockets.com/markets, you can do that for free. And then if you want to drill down more and get real nerdy with it like Tom and I sometimes do, then you can kind of go from there. So that makes sense. Sort of like what you were doing with this map, but how did you find that data? How do you find where developers are building and where did you get the source material for this map system you created?

Tom:
Yeah, absolutely. So there’s a couple different places that you could go. I would say the first and most easiest thing to do is call your local planning and zoning office. If you don’t know how to find them, you could probably find it on your local county or city’s website. They’re happy to talk to you, they’re happy to answer the phone, and you either how you could find the information or just tell you a little bit about the development there. That would be my first suggestion.

Dave :
Everyone, please listen to what Tom just said. Honestly, local governments and local business organizations have so much information. If I’m investing in a new syndication or in a market where I’m going to buy directly, first things I do is yes, go to the government website, just see what kind of programs they have, what kind of, and sometimes they have incentives for people or they have different opportunity funds, and even if you’re not eligible for them, you can see where money is starting to flow in a city. I also always subscribe if they have a business journal or a chamber of commerce to their newsletter. I pay for the subscriptions a lot of the time just to know what businesses are doing, where investments, where businesses are closing. That information is not something you can really readily Google. It’s not something that’s just black and white binary yes or no, but it’s just basic reading and research that you can do that will tell you so much about a particular market. Even if you’re not at the level where you’re going to be creating your own maps, it still will inform your understanding of this market and help you figure out within a market what neighborhoods you may want to invest in. Alright, so Tom, have you done this model in other markets or is this in North Carolina, was the first time you did this?

Tom:
I had done it in a previous job, but I had never done it for myself. So this was the first and it was a great experience, honestly. Okay,

Dave :
And how long ago

Tom:
Was this? This was within the last two or three months.

Dave :
Okay, so probably too early to tell if the system is working.

Tom:
Yeah, the reason I decided to do this was actually because other markets within the southeast United States who other developers have developed and it has caused appreciation in those markets. The home that I bought here, a similar home was purchased in a neighborhood that the same developers built just a couple years prior in other markets and those properties have seen those depreciations, so hopefully fingers crossed, we’ll see similar things in this neighborhood within Charlotte. And

Dave :
Once you had this map built out, I imagine that there wasn’t one X Maersk the spot precise location where you wanted to buy. Sort of imagining you have this corkboard up there, all the police TV shows where the red lines are all going around. Beautiful mind thing going on. How did you pick, once you had everything spotted out, was it then just like, okay, we’ve narrowed down neighborhoods and now we’re going to just find the best deal that we can within one of these five neighborhoods or whatever?

Tom:
Yeah, so I think what you got to do, especially if you’re local, is get in your car and go driving. So once you’ve identified which neighborhood and just start driving around, see what’s there, boots on the ground are huge and I try to spend a few hours each week just driving the neighborhoods, seeing what opportunities may come about. Sometimes you may see a four sale signs somewhere. Sometimes you can go back and try to figure out using a website called Polaris who actually owns that property and you could find their contact information as well and you could reach out directly that way.

Dave :
Nice. It’s classic driving for dollars, finding good deals that way. So Tom, it sounds like you’re happy in North Carolina right now, but you’re fresh into a full-time, real estate investing career. It sounds like you’ve got a lot of flexibility. What are you thinking comes next for you?

Tom:
Ooh, that’s a great question. I think I love what I do. I want to continue to build this real estate business. One thing I would love to do in scale two in five years is to be a little bit more hands-off, bring on someone who could help with more of the day-to-Day property management issues that come up some of the posting units online to even become more passive. So I could be traveling the world or on a cruise somewhere without wifi completely unplugged and not be involved in the day-to-day of the business.

Dave :
Well, that brings up another question. How many hours a week are you working on your real estate business?

Tom:
Yeah, so the short answer is it depends. There’s some weeks that I’m working 40, 50 hours looking for new deals, trying to deal with tenant headaches, maybe a hot water heater just went out and I’m trying to get someone in there to fix that. And then there’s other weeks where just a month or two ago I went to Hawaii and I completely unplugged for all but maybe 10 hours. And then just really focused on the tasks that were absolutely necessary. So the great thing about doing this full time is you create your own schedule and you just have to keep yourself motivated and work hard. But if you do it the right way, you could be flexible and you’ll never miss a game that you want to go to or a concert that you want to go to. So it’s the best decision I ever made was doing this full time.

Dave :
Well, great. Congratulations to you, Tom, and thank you so much for sharing your story and all of your advice with us here today. For anyone who wants to connect with Tom, learn more about what he’s doing, we will put a link to his BiggerPockets profile in the show notes below. Tom, thanks again and best of luck to you.

Tom:
Thank you, Dave.