My wife and I most recently bought our first personal house and I've been educating myself on real estate investing ever since. When making a few repairs, we had taken out a personal loan for about 5k @ 9.9%. We clear a bit more than 1k every month after bills and other living expenses from our jobs and by November we should have enough to payoff the balance of the 5k loan completely.
My question is, should we pay this off as it is the highest interest debt we have or use this money to finance the downpayment of an investment property sometime later on? Closing costs are a bit high since we live in Pennsylvania and I've yet to go beyond just educating myself in the world of real estate (as I've just started a few months back). Thoughts are appreciated.
FWIW - we would like to have another child sometime next year and daycare is not exactly cheap.
@Brad Kirkwood Payoff the loan. Then, when the property is still cash flowing for you that $1000/month, you can accumulate the funds then to buy your next property to cashflow. Since you will have paid off the 5k loan, your cash flow will be higher without the monthly payment from that bill,
if you had to take out a loan for repairs to your new house that likely means you don't have an emergency fund for living expenses or a reserve fund for future investment properties. You need to have these in place before buying because there are going to be roofs to repair, Hvac to replace, a bad tenant, a prolonged vacancy etc ..,
@Joe Villeneuve I don't believe he was talking about having an investment property cash flowing $1000/month. He mentioned having bought his personal residence and having about $1000/month left over at the end of the month. That said, it does not really change your advice one way or the other.
Now, the question really is a matter of your priorities and your tolerance for risk. A couple of months ago I would have said to pay off the loan, but today I would lean more towards using that to fund some real estate transactions first. In your specific case, I would be most likely to try and find some wholesale or flip opportunities if this is of interest to you at all. The reason I suggest this is that it seems you are in more need of seed capital at this point that you are cashflow. One successful flip can not only pay off that $5k loan, but can also put some money in the bank to start using as seed capital. Obviously though this has a great deal to do again with your personal preferences, risk tolerance, and skill set.
Good luck with whatever you decide.
Do you have equity in the property? Have you explored a HELOC? And just as a strategy, I keep a revolving loan active with a bank for retaining high credit. I take a low interest personal loan for $5k and deposit in a checking account and set up EFT payments. The loan pays itself and reflects positive on your credit score...the only minor cost is interest.
But I think I would pay the loan off. Once you pay it, you demonstrate to the bank your ability to settle debt...you are building a relationship with a bank and can take out larger and larger loans with better interest rates to invest.
I agree that you should pay the loan off and try to save up some cash. Once that $5k is payed off, start saving for some emergency funds. Once you have maybe $5-10k for emergency funds, start investing. Being over anxious can get you in trouble sometimes. Use the time you are saving to educate yourself and study deals. There will always be deals out there, and when you have the cash saved up you will be ready to grab one.
Thank you all for the replies and insight. I am still very new to things and by all means do not want to rush into something just yet. I listen to the BP podcasts during my daily commute which has proven an invaluable way to spend otherwise worthless time. My initial angle once I do enter the investment world would be probably along the lines of what @Scott Nipp was referring to with generating seed capital before pursuing other endeavors. I believe I'm most interested in a buy and hold investment strategy but more education may change my mind.
Do any of you all have a suggested first book that you felt really helped you out with the field of real estate investing? I've read the UBG, Rich Dad, Poor Dad, and am almost finished with Building Wealth One House at a Time by John Schaub so another book is to be on my radar soon. Thank you all again.
I would pay off the debt over time, building up the credit score and at the same time you build up cash reserves.
For me to feel comfortable in buying the next buy-and-hold property, I need an emergency fund, and I save up to 25% for the next down payment for the next property, as well a couple thousand in reserves for make-ready, marketing, and vacancy on a new purchase.
I've also bought houses where I didn't need the 25% down, as with the few sub2 deals I bought, but these had different costs such as a marketing budget, and most every one needed significant repairs and upgrades.
I'm at the phase where I want to save up for the next two or three long term holds, and then pay them all off. In the past, we have used annual tax return funds, work bonus payments, an inheritance, and have cashed in one IRA in order to buy the next property.
As far as good books:
Mike Summey's Weekend Millionaire was a very good start for me.
And Keller's Millionaire Real Estate Investor has been my go-to upper level book.
Have you drafted a business plan? A book recommendation is contingent upon which direction you want to head. The guides on this site from Brandon Turner are invaluable...but otherwise, what is your focus?
I see myself wanting to flip a few houses at first to generate some initial revenue then move towards a buy and hold/land-lording focus. A short-term goal (1-5 yrs) would be to acquire 10 - 15 units with a cash flow of $200/ea. Longer term, I may envision myself acquiring more units and shifting from working "in" my business to working "on" my business. I am most interested in the Pittsburgh, PA market as it is in my backyard and I know very little about surrounding markets (as I'm still learning about the dynamics of the Pittsburgh Region).
You didn't state whether or not you have an emergency fund? If you have an adequate EF, I suggest putting the $1k/month toward paying off the loan. If you do not have an EF, use that money to start one.
I do have an emergency fund though it is 2-3k from where I really want it to be at the present time. I have always played things very conservatively with my personal finances and debts. How does beginning investing in real estate change the dynamic of the concept of an emergency fund? That is, are you always trying to have 4-6 months worth of cash set aside for your own personal residence and primary obligations and then a fixed $$$ amount per investment property?
I would definitely recommend paying off the loan first, then save up a lot of cash and consider buying your next home with cash.
It is difficult for me to speak to the REI aspect because I am just getting started as well. That being said, I would imagine it makes it even more important.
Although my wife and I didn't have a personal loan, we did have the extra income and the option of build our EF or pay down our mortgage. We decided to focus on building the EF. When we got to the point where our mortgage balance dropped below our EF, I wiped out our EF and paid it off.
Although it is not the conventional approach, our Roth IRAs now double as our EF.
Pay off the loan first. You're at almost 10% interest. Then take the money you're paying on that each month and put it directly to your EF. Build your EF to 6-mo living expenses. In the meantime, put together your business plan. Keep educating yourself. Determine your goals...short-term, mid-term, long-term...realizing they may change over time, but you need a roadmap. Identify your target market(s) and learn them...everything about them. I mean nail them. Know what the average price/sq ft is for a house in each neighborhood within your farm market. Learn what finish levels are expected by neighborhood. Learning this up front, while you're getting your finances where they need to be, will save you a ton of time on deal analysis, once you launch your plan. It will also help you stay focused on the economics of the deals, instead of doing deals just be doing a deal. And, network...network...network.
@Brad Kirkwood I think it is easy for us to offer guidance that is outside the scope of your initial question. I think paying the loan off is good, but you still want to invest...and you just assumed a mortgage on a primary residence. So, HELOC is likely not an option, and re-fi is likely not an option (if you don't have equity, none of this matters). If the only thing you have is $1k cash a month, it makes sense to me to think about a marketing campaign for the purpose of wholesaling some properties to generate cash for the buy and holds. And eventually the income from the buy-and holds pays for daycare:) Show 81 with Michael Quarles on the BP Podcast is a good show to develop a further understanding of marketing/wholesaling...best of luck.
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