rent home to pay debt

Should I Rent Out My Home to Pay Off My Debt?

Q: I purchased a two-family home after I graduated with the intention of building equity and eventually selling the house so I could pay off my student loans quicker. I always planned to sell my home in about 5 years.

But several people have advised me to hold on to the house for at least the next 20 years so that the mortgage will eventually be paid and I will get the full value of the home when I do sell. Is this a smart thing for someone who pays $600 in student loans every month?

A: I don’t agree with the advice you’ve been given. I think it represents old-time thinking.

Gone are the day when people had to (or wanted to) keep a home forever just for the sake of having a having a home that was owned free and clear. Don’t get me wrong: It’s still great to have a mortgage free property. But in your case, this sounds like a rental and perhaps not your primary residence.

Even if you do live in one part of this two-family home, it sounds like the whole point of why you bought it was to pay off those student loans as quickly as possible. In other words, this property was an investment. Pure and simple. So you shouldn’t get emotionally wrapped up in it and feel like you need to keep it until it’s paid off.

Neither do you need to wait until the 30 year mortgage is paid off in order to get the financial benefits of property ownership. So if your goal is to quickly rid yourself of those student loans, by all means, I would encourage you to look into selling the property.

One caveat applies, however: You said you bought it with the hopes that it would appreciate and then you could sell it. I don’t know how long you’ve owned this home. But if you bought in in the past 2 to 5 years, it’s possible that it may have done the opposite of what you’d hoped — not appreciated, but actually fallen in value.

If this is the case, your equity may have been diminished or wiped out completely, making a sale difficult. Under these circumstances, I would advise you to hold on to the property for a year or two longer – or at least until the real estate market turns around.

Here’s what to do right now. Get a local real estate expert to come see your property and give you a comprehensive market analysis, which will tell how you much you could likely sell the home for in the current market. If the home isn’t “under water” — meaning you own  more on the home than it’s worth — then you can consider selling it.

If all works out, and you reap a chunk of money from your real estate sale, you’d be wise to pay off those student loans, or at a minimum to knock out a huge part of your college debt.

Keep some money from the sale of your home, if you can, just to have some extra cash in the bank. It’s always good to have additional savings, because you never know when unexpected circumstances may arrive that force you to tap into your emergency fund. Also, if something unanticipated happens – such as a job layoff – you’ll have some savings to tide you over, and you won’t wind up in credit card debt.

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