Paying off debt vs. investing in LTR - Thoughts?

Dallas, Texas
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Paying off debt vs. investing in LTR - Thoughts?

Alex Kosley
Member since 2023 · 5 posts · 3 votes

I am a 29 year old male, married, with joint income living in Dallas. My wife and I bought our first home in Feb. 2020 for 360k (4bd/2ba), worth roughly 500k now. We were fortunate to save enough to buy a new primary home this summer and upgrade (850k - better schools, neighborhood, location, etc.) and are now renting our first home for 3k a month to a young family with kids (roughly +$500 cash flow/mo). The first home was a 10/1 ARM at 3.39%, we anticipated paying off the home in 10 years so we took the lowest rate at that time. We currently have the below "bad debt" positions:
Student loans - 50k (6%)

Car loan - 29k (7.09%)

2nd lien (current primary home) - 80k (6.08%)

401k loan - 30k (9% - paid to yourself)

401k loan - 20k (9.25% paid to yourself)

Household income of 267k (not including bonus), roughly 100k cash currently and save around 6k a month not including yearly bonus's (33k + 14k = 47k net/yr) + 72k/yr (6k/mo x12) savings = 119k total net savings per year (rough estimate not including current rental)

Should we pay off existing debt with the exception of our home loans (not including 2nd lien) or invest in a 250k townhome* that can rent anywhere from $2,000-$2,750/mo? My goal is to be financially free and ultimately leave my W2 through scaling rental properties to manage/invest full time. I am fortunate to be in this position as is, but want more for my (now growing, first kid on the way) family to give them the best. 

What are your thoughts on what I should do?

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Travis TimmonsPro Member
Rental Property Investor · Ellsworth, ME · Member since 2021 · 1k+ posts · 2k+ votes
3y

If your goal is to become financially free and ultimately leave your W2, the $850k home and the accompanying lifestyle is going to be your biggest obstacle. If you want to really go for it and speed up that process, downsize your life. Smaller house, cheaper cars, delayed gratification. I understand if you do not. Nobody ever goes backwards in lifestyle unless they are weird (that's a good thing, not an insult), have an ambitious goal worthy of sacrificing for, or are forced to downsize bc they overspent and are in trouble financially. 

You're also printing money at $267k per year. You can afford that lifestyle with your income if you want to. If your goal is to stop working sooner rather than later, scale back, live off of less, pile up cash, and accumulate cash flowing, appreciating assets faster. It just depends on your priorities and timeline.

You make enough money to knock out those 401k loans quickly. It's a guaranteed return of 9%+. Take that all day. It also takes away the risk of forcing you to pay it back if one of your loses your job. I'd prioritize paying off the car after that. I just don't love the idea of paying interest on something that goes down in value. The speed at which you pay off the student loans and 2nd lien is more of a judgment call to me. That's the point where you walk and chew gum at the same time (invest and/or pay down debt at your discretion).

Lastly, remember that personal finance is as much dopamine, cortisol, and serotonin as it is ROI and calculation. Emotion, happiness, and lower stress levels are part of the equation and decision making process as well. I have two daughters (7 and 9) and a wife that I really like and love. My career, financial, and lifestyle decisions are now mostly centered around what gets me the most time and memories with them. I don't want to be the richest guy that I know, but I do want to have more memories with my wife and kids than anyone I know. I'm also 40 and spent a lot of my 20s and early 30s doing nothing but working to get to this point.

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  • Scott WolfPro Member
    Lender · Boca Raton, FL · Member since 2014 · 1k+ posts · 959 votes
    3y
    Quote from @Alex Kosley:

    I am a 29 year old male, married, with joint income living in Dallas. My wife and I bought our first home in Feb. 2020 for 360k (4bd/2ba), worth roughly 500k now. We were fortunate to save enough to buy a new primary home this summer and upgrade (850k - better schools, neighborhood, location, etc.) and are now renting our first home for 3k a month to a young family with kids (roughly +$500 cash flow/mo). The first home was a 10/1 ARM at 3.39%, we anticipated paying off the home in 10 years so we took the lowest rate at that time. We currently have the below "bad debt" positions:
    Student loans - 50k (6%)

    Car loan - 29k (7.09%)

    2nd lien (current primary home) - 80k (6.08%)

    401k loan - 30k (9% - paid to yourself)

    401k loan - 20k (9.25% paid to yourself)

    Household income of 267k (not including bonus), roughly 100k cash currently and save around 6k a month not including yearly bonus's (33k + 14k = 47k net/yr) + 72k/yr (6k/mo x12) savings = 119k total net savings per year (rough estimate not including current rental)

    Should we pay off existing debt with the exception of our home loans (not including 2nd lien) or invest in a 250k townhome* that can rent anywhere from $2,000-$2,750/mo? My goal is to be financially free and ultimately leave my W2 through scaling rental properties to manage/invest full time. I am fortunate to be in this position as is, but want more for my (now growing, first kid on the way) family to give them the best. 

    What are your thoughts on what I should do?


    I would pay off the debt first, especially the 9%+ from the 401k.  That's a guaranteed return without the aggravation of being a landlord.  Unless you find some opportunity that will pay a 20% return, that would be my first thought.

    1Reply
  • Becca F.
    Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes
    3y

    @Alex Kosley

    I agree with the above comments to pay off 401k loans and the car loan and your $850,000 home being a large expense and obstacle.

    What other investors have told me is to reverse engineer and figure out when I want to quit/retire early from my W2 job (with an option to work on a contract part time basis) then determine what I need to do to as far increasing rental income, buying rental properties, decreasing expenses, etc. 

    I also agree on reconsidering buying a townhome especially if it has high HOA fees. That will eat up your cash flow. I sold a condo I bought in the San Francisco Bay Area because of the ever increasing HOA fees (increased 3 times in over 2 years to $605 a month) - really wanted to keep it because it was in a good location for commuters but the numbers didn't work.

    Congratulations on your growing family! Your savings is impressive! Great job!

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  • Steve Harlow
    Investor · Irvine, CA · Member since 2014 · 81 posts · 30 votes
    2y

    Pay down or off the car loan. I like cars and I invest in them but not daily drivers.  pay off the 401K loan.  It starts to get hard to earn a return when you have to get more than 9 percent.

    You did not mention it but stay away from buying that bigger newer home.  Its a money trap.I live in the smallest home I can get by with in the best neighborhood. 

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