Pay off car loan or house hack?

Question

I am at the very beginning of real estate investing. I am 20 years old and currently still living with my parents. I have a $17,000 car loan with a 6% interest rate (looking to refinance soon) but I am looking into house hacking a multi family home. Should I save up to buy my first multi family home or should I pay off my car first. Dont have much saved up yet but that can change soon and was wondering where I should put my money. I have great credit as well. Currently working 2 jobs and working on building my own business to save more and to increase my income.

JD Martin · Answer

Pay off the car loan first. You really should be in the black before you try to become an investor. You owe $17k on a depreciating asset. Get back to zero first and go from there.

Alecia Loveless · Answer

@Austin Byassee Hey Austin, you’ll likely need a minimum of 2+ years in your current field to qualify for a mortgage. 2+ years in the same job is even more desirable.

I’d recommend paying down the car loan first. Then focus on real estate.

Peter W. · Answer

There are essentially two schools of thought here--and you are seeing answers from both.

The first is that debt is not good, expensive and risky so you should pay it down first (note that paying down debt typically yields slightly higher than the interest rate because more of your future payments pay down principle rather than interest).  •Debt is expensive, assuming 5 year amortization on your debt you end up paying 19.5k instead of 17k or 15% more on your car. •Debt is a bad habit, if you rely on debt to purchase things, especially consumables, you end up in the habit of paying significantly more for all of your purchases and life if more expensive than it would be if you avoided it in the first place. •Debt--especially non real estate debt, will reduce the amount of credit you can get for future real estate purchases.•Finally, debt creates future liabilities which may prohibit your options in the future.  For instance, if you saw an opportunity to start your own business, it would now be $350/mo harder to do so because you have the car debt.

The other side of the coin is that debt is a tool which can help you get better returns.  In particular, when you have debt which is "good" debt (low interest and favorable repayment terms e.g. student loans and mortgages) you shouldn't pay it off early because you can get better returns elsewhere collecting the spread (which is the difference in the debt interest rate vs. the rate of return on your investment).  Let's pretend you have 17k and could pay the car loan off today.   One option is to put it in a house hack where, for the sake of argument, you'll get a 15% return.  In 5 years, you'll have 34k in house hacking equity less the 19.8k you need to pay off the loan, so about 14k total.  Conversely if you paid off the loan, you would have the savings in interest which is 2.8k, you did much better investing the money at a higher rate of return (5x better specifically), than you did paying down the loan.  This doesn't count the risk--what if your return isn't as good as expected--but it illustrates how using debt correctly can put you in a significant better financial position.

Ultimately with your position, I would probably pay down the car loan (I don't know how much you make, what your typical monthly expenses are).  Buying houses requires significant liquid reserves for when things break and you don't have that yet.   To me the difference in investing in an index fund and your loan rate isn't high enough to make sense to me, but I am pretty conservative on these things.  If you are saving ~$1000 a month on top of debt service for the car, my answer changes.

Caleb Brown · Answer

Others gave great thoughts. I would work on getting rid of the car. When you own a property there is expenses and things that can come up. Having consumer debt on top makes it tough to save and get ahead. 6% is not a terrible rate but if you can bust your butt I would focus on getting that gone then saving up.

Theresa Harris · Answer

It is good that you are thinking about this now.  Start by going to a bank and seeing how much of a loan you qualify for.  If, and how much, they will lend you money depends on your income level and in part how long you've been working there. While having your own business may sound great, banks generally aren't a fan of business owners as the income is unreliable.

As others mentioned, your debt to income ratio is also important and will affect how much you can borrow.  Again talk to a bank and find out.

Joaquin Camarasa · Answer

Reach out to a lender, see how much you qualify for and check your total monthly expenses in the event you'd purchase a property. The numbers should speak by themselves.

JooYung Choi · Answer

Hey Austin,

I would opt for buying the MFH, but it depends. If the car loan is taking up too much space on your DTI to be able to buy a deal, then it would have to go there first. If you can buy the home you want without paying it off, then go for the MFH. The asset could pay your car loan every month!

Pay off car loan or house hack?

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