Debt or no Debt

37 Replies

 So I feel like when my wife and I are ready to make our first investment happen that I will have this thought in the back of my head like "what am I doing? I still have debt on 2 vehicles and a mortgage."

How do you overcome this or should we wait until the vehicles are paid for?

By the way we are looking to flip a property when this time comes.

Don't wait until you pay off your two vehicles.  If you're serious about investing in Real Estate and doing it with a sound financial footing, there is another way to start with no automobile debt.

Sell the two cars before the end of July.  Buy two cheaper vehicles, for around $3K-$5k each.  Buy your investment property.  Maybe buy a second one.  Then rethink your financial situation and see if you are in a better position to afford two high monthly car payments.

Good luck.

For what it's worth, I have two vehicles, both 2004 models, and zero car debt. I also have three SFR for income properties that I own with no debt, I'm a part-owner in a REI group, and I plan to purchase two more SFR by the middle of this fall.

You have to prioritize.  You can wait until your current auto loans are paid off.  Is that one year?  Two years?  Four years?  Just realize you're crippling your ability to invest in Real Estate.  Then again, maybe your income is so great that you can overcome high car payments and begin investing in RE immediately.  I have to keep reminding myself that not everyone is in the same boat as I was/am.

If you're not nearing retirement, and you're using the money to purchase cash-flowing assets, borrow until you develop physical symptoms of stress over the amount you owe... or the bank cuts you off.  Money is basically free right now.  That can't last much longer (I've been saying that for 3 years so one of these days it'll be true).

@Josh Gevedon For most people I think it's more of a peace of mind thing to have most/all debt paid off before beginning real estate investing. My wife and I also wanted that peace of mind so we started out buying an cheap HUD property as our primary residence. We lived there for our required 12 months living very frugally and paid off all vehicle, credit card, and what little student loan debt we had left then moved out and it became our first rental. For us it was a great way to ease into REI.

@Josh Gevedon ,

The biggest problem with a home and car loan is that they limit your ability to finance another mortgage because they increase your DTI. If the car loans are crushing you, then perhaps you should consider getting rid of one?

The investment deal should be generating good returns, so as long as your current debt isn't completely out of whack you should be fine- or even better off with the additional cash flow. 

I got into the anti-millionaires club this year, over $1M in debt! Which would have terrified me early on, but not now. I realize all that borrowed money is working away for me, each dollar I borrow (that's not for the damn house or car) is making me a decent return.  I contribute $2, the bank will give me $8, and I'll make 7% on all $10?!  Yes please. That's what I love about real estate.  

Hi Josh,

It will depend on a lot of things- how much do you owe on the cars and how long will it take to pay them off at the current pace?  How are you planning to finance your flips and what impact will the extra debt or less cash have on that?  Can you sell the cars and get into some that you don't have payments on, and maybe even pocket some cash in the process?

I am a big fan of having no debt aside from real estate (your home and your investments) but if you are going to miss out on this market while you wait to pay things off, it might be wise to rethink that strategy.


This forum is amazing! I love the different perspectives on this topic. The car loans are not a burden to us, its more of the simple fact that it is car debt. Then again we are still very new to the real estate investing world and this was just something that was weighing on me.

Thank you guys for your responses!

@Tyson Taylor

 Congrats on your new negative membership.  Recently joined the same one and looking forward to joining the positive membership with you sooner than later.  

@Josh Gevedon

The above posters have great suggestions.  If you can give more details about what the car payments are, you'll get a more specific response on which direction to head.  You really can't go wrong selling the vehicles to downside into something less expensive.  As far as when to start your first rehab: best time to plant a tree is 20 years ago.  If the flip doesn't go as planned, maybe turn it into a long term rental?  Good luck!

Let's look at a really simple vacuum example for educational purposes.  Let's say you have 100k cash.  You want to get into real estate and you're not sure whether or not you want to use leverage.

Say you find a house with a 10% IRR. For math's sake, let's say this house costs 100k and you get 10k after expenses every year.

You also have an option to take out an 80k 30-year mortgage @ 5%, putting down only 20k of your 100k, monthly payment on this loan would be $429.46.

Here's a side-by-side comparison of your cashflow over the 30-year term of your note, assuming you sell the house for 100k at the end of 30 years.

In the leveraged scenario, you get the easy math return of 10%.  In the leveraged version, you are able to take advantage of the spread between the rate of return of your property and the interest rate of the mortgage to accelerate your earnings.  You are also able to immediately go buy 4 other houses just like this one with the cash you didn't have to put up into the house.

What's the difference between 10% and 24% IRR? If you find more houses just like this one and keep reinvesting your money without leverage vs with leverage:

Scenario 1: you're pretty comfortable

Scenario 2: you're debating between a 100ft yacht or a 120ft yacht

Moral: you get rich by taking leveraging other people's money (in this case, the bank's), not your own.

Please note that in real life, things are usually not this rosy and someone who promises you 24% over 30 years will probably be in jail at the end of year 3.

@Joseph Sherer our car payments are about $550 out of about a $4500 per month income. We also have a 950 mortgage and daycare at about 550. Those are our biggest expenses. I probably am just over analyzing which is a habit I probably will need to work on to be successful in flipping.

Hi Josh,

I'm sure you're going to get a lot of responses, most of which will be favorable to mortgaging as much as you possibly can, while others will tell you cash purchasing or low leverage is the way to go. 

The truth is, there is a single, right answer, and that answer is....Whatever allows you to sleep well at night.

Leverage will allow you to buy sooner and buy more, but also exposes you to the risk that if things go south, you're in big trouble. Everyone seems to forget the real estate market of 5 years ago, but I suppose my memory isn't quite gone yet. Buying conservatively allows you to slowly but surely build wealth.

This decision needs to be carefully thought out and discussed with your partner so you can decide what is right for you. If you would feel better with your cars paid off first, do it. If you think you're OK without it, I'm sure you can manage that as well, but don't give into the pressure of having to buy 'something'. Buy the right investment, at the right price, and at the right time.


@Josh Gevedon , how are you planning to finance your flip?  Do you have the cash necessary for the purchase+rehab, or do you plan to get a loan from a bank?  Or, do you plan on using some combination of cash, loan, and maybe even credit cards?

I ask because if you plan on getting a loan, banks will pay close attention to your Debt To Income ratio. The amount they agree to loan will be based, at least in part, on your DTI. When I shopped for a loan to help complete my first purchase, I made sure we had no family debt except for the mortgage for our primary house. We had zero automotive debt, nearly zero credit card debt, and that's it. The difference between what I might have been approved for with a car payment (or two) and without a car payment was the difference between starting at a very opportune time marketwise or having to postpone my first purchase until a year or two later.

If you haven't done so already, you have nothing to lose by going into a bank (or two or three) and presenting your request now.  I approached my credit union before I thought I was really ready, just so I could get an idea of what was realistically possible.  It doesn't hurt to see if they feel the same way you do about your plans.

My credit union offered a little less than I had planned on.  So I reassessed my options, looked at different properties, and bought before I thought I would have.  All because I went in early and presented my request.

Good luck.

@Randy E. Thank you for your response! I would be looking at a combination of a bank loan and some personal money. At least in my head this is what I am considering. I was actually wanting to head over to the bank and get pre approved. Kind of cool that I am on the same page as you in that regard.

Once again thank you for your response, I appreciate it

@Christopher Brainard you are correct! A lot of responses with all kinds of strategies. I love it though! I enjoy hearing what has worked for you guys. I think maybe it comes down to your personality. Me personally am conservative and would more than likely take a slow approach to my first deal. I want to be 100% confident in my first investment and have no unanswered questions.

My wife and I have decent jobs that we enjoy so we are not looking to take the investing world by storm. However we are 100% committed to having a very successful first flip. 

Interestingly enough the word risk has only been used once thus far in this thread.  It is a huge factor and shouldn't be ignored ever.  

So, 12% of your income going to car payments? If it were me, I would not be happy about that. But I'm not a car person - my car doesn't bring me joy or personal satisfaction/status- I just want it to be reasonably comfortable and reliable. I would go with  @Randy E's advice. Scale down the cars- it will save you on insurance as well.

BTW I drive a 2000 Mazda Protege. Totally boring car, lol. But just fine for around town. If I take a long road trip I rent a nice car- I get the comfort and carefree aspect of a new car, but I only have to pay for it for a week or two! 

If it's possible to get cheap cars, like $5k but reliable, for a few years while you ramp up the business it'll definitely help. I definitely would say have some cash reserves before going all in on a flip or getting your first rental. Also with the mortgage of $950, is it possible to house hack and sell your place, live in a duplex and live for free? Kentucky is pretty cheap for multi's and that would take away your biggest expense. Reading some articles on house hacking here might be your golden ticket.

@Josh Gevedon you and I can start an over analyzer support group because I am in similar situation I paid off my car debt in preparation for my first purchase and I am still finding ways I can get in over my head.  But I keep taking mini steps and I will get my first flip hopefully two done before year's end.

Good luck

@Frank Jiang , nice. Your quick spreadsheet makes it easy to see what I've been trying to explain.  

@Josh Gevedon you need to get rid of your car debt as soon as possible.  You also need to move forward on your first rental property.  The debt to income ration is one reason, another is having the ability to make a loan payment on a rental, and get on a budget that will accelerate your move into the investing world.

One thing to consider is will the cash flow from the investment properties cover your payments on your vehicles? I had this same debate with my wife a week ago and she insisted that we pay of my truck before investing even though the properties we are purchasing will cover the truck payment and then some. Depends on what your preference is and what you want to do, but sometimes you have to lose some arguments to win others!

Originally posted by @Josh Gevedon :

@Joseph Sherer our car payments are about $550 out of about a $4500 per month income. We also have a 950 mortgage and daycare at about 550. Those are our biggest expenses. I probably am just over analyzing which is a habit I probably will need to work on to be successful in flipping.

 Keep the cars, sell the kids. Kids are just going to get more expensive.

Plus, in 18 years once they've bled the adoptive parents dry, they'll look you back up anyway, Win win.

Very simple analogy but it is true.

Debt on Assets pay you, Debt on Liabilities pay them.

All the posts are excellent advice.  

If you have not read this book then please give it a try.  Total Money Makeover, Dave Ramsey.  FYI: Read it from a money management standpoint then seek prudent counsel on ways to leverage asset debt in real estate.

End goal:  Who pays Who and Who owes Who...

Keep up the hard work and it will pay off

I know for me and my family, it was important to be out of debt.  I wanted to be able to have the peace of mind that having no debt brings to my family.   I know that no matter what else happens, my house is paid for and I have cars that are mine, I don't have to decide which debt to pay first.  I will leverage money to buy real estate, just not doing it on my house.  I know many think that is stupid and I can buy a ton more if I used the equity in my home to purchase more, but I am not comfortable with that risk.  

Study after study of the first generation, boot-strap wealthy has concluded that nice cars and car debt had not place in their journey.  Most millionaires have never bought a new car.  I'm going with best practices here.  You can have your car payments if you want. What other large purchase's value drops like 'a rock'?

I've been driving my squeaky 20 y-o minivan for 10 years.  It gets me to my portfolio of rental property just fine.  Extreme? Maybe, but it works for me.  Without payments you will have options.  I could buy a new/different car or another house.  Since May I've chosen house.  Twice.  Make you choice, bud!

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