Paying down debt vs investing

17 Replies

Hello all-

What is the general opinion with regards to paying down debt vs investing in properties?  I will be receiving a bit of cash here in the near term and cannot decide whether to pay off my existing credit card debt or invest in a rental property.

Welcome to the forum!
I believe the general rule is to invest the money if you can get a higher return than the interest of the debt.
For example:
If you can borrow at 3% and use that money to make a 7% return on investment then investing will make sense.
But if you are borrowing at a high rate on CC, say 15% then paying that high interest debt will make sense since there aren't many investment with a guarantee return of over 15%.

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Is that credit card debt holding you back? Is it lowering your credit score and keeping you from being able to get a loan? Are the monthly payments unmanageable? Is it the only debt you have? Are you looking to househack or is this strictly an investment property?

There are lots of different scenarios that could be played out depending on the answers to those questions. The right answer for a bachelor living in an apartment might be different than for a family living in a small apartment. Likewise the answer would be different for someone living in an apartment looking to live in their own home vs. someone who already has a primary residence. Or someone who is weighted down with lots of debt and barely able to handle all the minimum monthly payments may benefit more from getting rid of some of that debt first as opposed to someone who just has one credit card balance and has no trouble handling the monthly minimum +extra and wants to jump in on their first sound investment. 

So I would recommend you take some time and balance your checkbooks and evaluate your budgets and figure out what scenario is best for you with this money that is coming in. And ask more questions as they come up while you are going through this exercise. 

Good luck! And I look forward to seeing you around the forums. Have a great day. :-)

Invest, snowball the cash flow from investments and then you can pay off everything from your investments which will continue to pay you after your debts paid. Pay off your cc and you're not collecting a check afterwards, you're just without cc debt.

@Luis De La Fuente I'd have to agree with @Kaz M. on this one.  If you have high revolving cc debt you have no business investing in real estate or any other business for that matter.  The returns that you may make on real estate are going to be null once you factor in the interest rate and fees that cc companies are charging.  Pay off high interest cc then invest or you can also use 0% introductory offers from cc but make sure you pay them off within the timeframe allowed.  Happy Investing!!

With interest rates at record lows, I would consider leveraging as much as possible right now. Interst rates will definitely NOT stay at this level for much longer; I believe Japan just raised rates. The Fed left rates alone in Sept, but will likely raise them in September. 

To answer your question, I would try to recalibrate your debt balances, trying to get them at current rates. If they're already at solid, low rates, rather than paying down with cashflow, continue to leverage and grow your business. 

You really should pay off your credit card before investing in real estate. There are many RE investors that underestimate the risk of RE and if you have credit card debt you have no business investing in it. Just trying to be straight with you so you don't ruin your life. 

If you ever do decide to borrow money for the purposes of investing, the existence of credit card debt may get in the way.  Lenders take a dim view of unpaid credit card debt.  Some believe that it shows a lack of fiscal discipline.

I would make it go away first.  Business debt is much more tolerated than consumer debt.

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Let's start at the very beginning.

You have CC debt. Are you RIGHT NOW both paying down your debt every month AND setting money aside in savings and thus getting ahead, or are you slowly sinking in debt because your in-come and your out-go don't match? IF you are rapidly paying down CC debt that occurred from a one-time event you might consider setting the windfall cash aside to invest, carefully. If your debt is just dragging along then invest in yourself, pay off your debt, & start saving money to invest with.  Investments are ALWAYS a gamble - any investment that claims to be "Zero risk" is always 100% scam!

Suggestion; Set a decent chunk of money aside to cover emergencies - $3-5k. Pay off the CC with the rest. If you aren't able to pay off the CC debt don't worry - having lowered the debt should allow you to pay it off more quickly. Just a comment; an emergency=car repair, hospital trip, tooth abscess. NOT an emergency = a sale on something you "really, really want".  If money always burns a hole in your pocket, put all but $1k toward the CC debt. Put the $1k in a DIFFERENT BANK than you normally use, and start saving with an automatic contribution to that account, so your subconcious doesn't "see" the money in your account and figure that it needs to be spent.

Interest rates; yes, mortgage interest rates are likely to go up in the future, but so will your CC interest rates. CC rates are always based on the federal reserve rate plus a certain amount ( ie Federal reserve + 22% = 23.9% if the current fed rate were 1.5%).  Seconding other's advice -- if you have the option, use a 0% offer to pay off the CC debt, but make sure to make aggressively pay it down rather than using it as an excuse to slide on payments and fritter the money away. Also read the small print CAREFULLY to make sure that you understand ALL the terms (ie new purchase accrue interest immediately and are only paid off after all 0% interest amounts....). Credit Unions are often best bets for fair CC terms.

 

What's critical is to pay off the debt within the intro time periods. The 0% typically lasts 6 months to 9 months. Then jumps to 9 to 12%.

Let me know if you need any more details.

Also, make sure to not get caught in up front payments for the 0% cards. There are solutions with 0% that require no upfront fees. The requirements are pretty straight forward:

680 FICO and above

You must have an LLC or corp entity

No sales are required.

These cards work for start ups

As far as the amount you can get. It's typically like this:

If you already have a card with $5000 line of credit. We can get you 5x of whatever your current limits are. So if you have a $5k credit card, we can get you $25k. If you have $10k in card limits, we can get you $50k etc. Up to $250k.

Here's a link with more details: http://24hourapprovals.com/

Originally posted by @Luis De La Fuente :

Hello all-

What is the general opinion with regards to paying down debt vs investing in properties?  I will be receiving a bit of cash here in the near term and cannot decide whether to pay off my existing credit card debt or invest in a rental property.

 Pay off the debt.  But you have debt in the first place on CC's so you need to have a behavior change. You should pay off the CC debt and cut the cards up so you never get in to high interest CC debt again.  That will keep you in the middle class. Then have a plan of how to live and save and work towards your goal to invest in real estate.

Good luck.