To save up to buy first property or pay off debt first?

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To save up to buy first property or pay off debt first?

Justin Miest
Cannon Falls, MN · Member since 2018 · 7 posts · 5 votes

Hello everyone,

I've been spending the last 2 Months or so listening to as many BP podcasts as possible and reading recommended real estate books. There is a lot of information to take in so I just wanted to get some input at this point I'm at right now if anyone is willing to give me some. My Plan currently is to to take the Scott Trench approach somewhat from his Set For Life book. I am planning to try to pay off all "bad" debts that my girlfriend and I have. (student loans, vehicle, ect.) this will take us around 9 months to a year. We have very cheap housing lined up for this 9 months to a year to help us do this. (to be completely debt free) Along with this we will save up enough for a down payment and some extra reserves. Then I Plan to buy a 2-4 unit multi family and "house hack" in it. (preferably a 4 unit with some value add available) After this we will save up again and purchase as many more small 2-4 unit properties as we can via traditional financing until our debt to income limits us. Then I plan to switch into private or hard money and try to go for bigger properties. 

My main questions 

1. Is paying off all "bad debt" the smartest move or should I instead buy a rental property as soon as possible? (We both have 740+ credit and decently paying jobs. (100k+ per yr between the 2 of us.)  I've worked full time for 3 years she just started. w-2 incomes) Curious on people's overall opinion on this. I'm extremely torn because I want to buy a property that makes sense as soon as I can (especially with interests rates seeming to go up) but I also don't want to deal with student loans or other debts like this going forward or get into a property with insufficient reserves. 

2. What are some recommendations on posts/books/resources to really get good at "running numbers" on properties? I have used bigger pockets tool and run numbers from that along with what I have picked up from books and the podcasts but I still don't feel confident I am correct with my numbers.

3. What is the repair extent that I should look for in a property? I have time to dedicate to the the work and am reasonably handy and able to learn but have minimal experience with home repairs outside of basic things. I'm Basically just curious what people think are too big for my first property?

Thanks for any input!

Justin 

Minnesota 55009 multifamily small red wing Hastings Cannon Falls Minneapolis St.Paul  Lakeville 

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Jordan MoorheadBusiness Member
Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
8y
Generally I think paying off all bad debt is the way to go. Being a college dropout after community college and having no student loans that was relatively easy for me. With lower interest student or auto loans sometimes I don’t think you need to pay them off, although they will affect your debt to income ratio and therefore what you’re able to buy. I’d talk to a lender. I always recommend starting with a househack because not only can you build wealthy you can also save a ton of money, which can help with paying down more debt. Light repairs or cosmetic issues are the best way to start when you’re new. They can still add up fast and what seems like a little work can be a lot of time and money.
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  • Jordan MoorheadBusiness Member
    Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
    8y
    Generally I think paying off all bad debt is the way to go. Being a college dropout after community college and having no student loans that was relatively easy for me. With lower interest student or auto loans sometimes I don’t think you need to pay them off, although they will affect your debt to income ratio and therefore what you’re able to buy. I’d talk to a lender. I always recommend starting with a househack because not only can you build wealthy you can also save a ton of money, which can help with paying down more debt. Light repairs or cosmetic issues are the best way to start when you’re new. They can still add up fast and what seems like a little work can be a lot of time and money.
    [email protected]512-888-9122
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    WebsiteView Page
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  • Amber Gonion
    Real Estate Broker · Hugo, MN · Member since 2016 · 688 posts · 596 votes
    8y
    I would look at househacking. My husband used this method 20 years ago to help pay off debts. It allows you to reduce your housing expenses while investing. Send us a colleague request and we can show you how
    2Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    You didn’t post amounts of your debt or the interest rates but my favorite thing to do is to pay off all debt besides mortgage debt
    3Reply
  • Matt Schuberg
    Financial Advisor · San Diego, CA · Member since 2015 · 51 posts · 37 votes
    8y

    To me this all comes down to personal preference. Personally, I'd prefer to buy property as soon as possible to then pay off that bad debt. This is the riskier choice as you'll likely be taking on more debt when you purchase that property. I'm willing to take that risk because the risk is far outweighed by the opportunity cost. 

    If you have bad debts that have low interest rates (cheap debt), to me it makes much more sense to invest your money somewhere with higher return potential. I have trouble justifying paying down debts at an interest rate of 3-5% when I know that I can earn 10% or more by investing that money. That's a big opportunity cost.

    Now, if your bad debts are much higher interest, that may change my answer. 

    It really all comes down to your risk tolerance and how much debt you're willing to carry. The important thing is not to over-leverage yourself and to do whatever makes you sleep better at night. It's not worth it if that extra debt is going to constantly stress you out.

    3Reply
  • Justin Miest
    OP
    Cannon Falls, MN · Member since 2018 · 7 posts · 5 votes
    8y

    Thanks for the replies! None of our debts are above 5% interest rate and we never carry credit card balances or anything like that. Only subsidized student loans, a few sub 5% auto loans and a personal loan that basically is interest free but has to be paid back by a certain date. Around 50k total in debt between everything. (currently paying 4-8xs the minimum payments) I'm leaning towards paying everything off as aggressively as possible and saving more for reserves over the next nine months to a year. Being completely "Bad debt" free would definitely make me less stressed i'm guessing going into my first Property. I most definitely will be house hacking for my first property. I just don't want to wait and have interest rates skyrocket or something like that but I guess people made it work even when rates were over 10%. As long as I get into a property where the numbers work the interest rate is much less relevant i feel like.   

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  • Dawn BrenengenBusiness Member
    Moderator
    Real Estate Broker · Raleigh, NC · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    @Justin Miest  It depends on your interest rates.  I would try to pay down anything expensive (credit cards), but I wouldn't worry about cheap student loans or car loans

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  • Dan Vleck
    Deerwood, MN · Member since 2014 · 184 posts · 122 votes
    8y

    I’m curious how you intend to invest with your girlfriend. Seems like a bad idea.

    I paid off debt first.

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  • Dan Vleck
    Deerwood, MN · Member since 2014 · 184 posts · 122 votes
    8y

    On your other questions, I think the best way to learn to run numbers is keep practicing.  You get better with experience. Insurance is tough at first, but easy to get quick quote from an agent. Key is to keep track of estimated numbers versus known costs, and try to get them more precise before closing your first deal.

    For my first property, I bought one that just needed cleaning and painting. Now I do my own flooring, sheet rock, and many repairs. You’ll learn as you go. 

    Good luck

    2Reply
  • Tim SwierczekPro Member
    Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
    8y

    @Justin Miest  and sounds like you could pay the debt off quickly which is cool but it’s also very difficult in this market to find a great buy. Tou must be ready to pull the trigger I personally recommend that you save enough to buy first and then while you’re waiting to find the right property continue to pay down debt.  If you house hack, you should be able to Still be able to easily pay the debt down quickly. There are some benefits to the strategy which include being able to buy your second property quicker and being more flexible in purchasing your first property, limit you intest rate risk, and lock in your purchase price  all of which are very important in this market. 

    2Reply
  • David Waldy
    Lexington, SC · Member since 2018 · 20 posts · 10 votes
    8y
    Justin, if you want to follow Scott Trench’s plan, you need to have a secure “financial runway”. My wife and I are in almost the exact same situation as you, however we have spent the last three years cleaning up $50k plus in personal debts. We are a few months away from being completely debt-free other than our mortgage and will be able to build a significant emergency find prior to our first acquisition. Patience sucks, but to be sitting where I am today makes the process 100% worth it. Having debt payments on existing loans and then adding to your debt load with ZERO margin is a recipe for disaster, foreclosure, or even bankruptcy. I’ve seen it happen to people I love dearly. If you are going to forgo paying down your debt, you need to at least have some type of emergency fund/contingency savings. Everyone assumes that they are smarter than the system and unfortunately the talking heads tend to be the ones who are the anomalies. Just keep in mind that life always happens. People REALLY lose jobs. AC units REALLY do go out. Vacancies REALLY occur. Relationship REALLY do fall apart. Don’t get me wrong. I don’t mean to come across as a negative Nancy. However, I think most people tend to be overly optimistic as it pertains to real estate and often make decisions without looking objectively at the actual numbers. I will echo what others have said about it really coming down to your acceptable level of risk. Just keep in mind any number of small setbacks could be “catastrophic” with regard to your financial situation if you don’t have an accessible capital short of earned income. Granted, smaller risk means small reward. That said, risk is a very real part of life and unexpected things can be mitigated when you expect the unexpected by having a proper cushion and plan. Obviously, we can’t plan for everything. However, Scott Trench clearly outlines in his book that the first two parts of his teaching involve building a solid financial runway PRIOR to building your assets. If you maintain your existing debt load and then take on more debt and have anything go sideways, you will be required to go further into debt to handle those issues thereby incurring additional debt payments which ultimately is taking you in the opposite direction of your goals. Best of luck!
    2Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    8y

    @Justin Miest

    1. Pay off all your bad debt first. You will be surprised how quickly 9-12 months will go by and then you will be debt free. Interest rates are going up, but in a year even if they are at 6%, that is still really low by historical standards.

    2. I would suggest finding a deal and put the numbers in a forum post. Ask others to review your numbers and try to poke holes in your analysis. Interacting on the forum is a better learning tool than any book.

    3. Sweat equity is great when starting out. For your first property avoid something that needs substantial rehab. I have done just about every kind of repair. Here is a list of repairs in order of difficulty in my opinion. You can learn how to fix anything on Youtube:

    Cleaning

    Painting

    Screen repair

    Some appliance repair 

    Blow insulation in attic

    Light fixtures

    Outlet or light switch replacement 

    Flooring (tile or laminate)

    Kitchen / bath faucet

    Bathroom vanity and sink

    Replace sump pump

    Toilet

    Sheet rock repair (harder only to make it look good)

    Install dish washer

    Door replacement

    Window replacement

    Kitchen cabinets

    Water heater

    Shower replacement

    Roof (I have not done this)

    Garage door (I have not done this)

    HVAC (I have not done this and you need to be licensed in most cities)

    2Reply
  • Justin Miest
    OP
    Cannon Falls, MN · Member since 2018 · 7 posts · 5 votes
    8y

    @Dan Vleck I wouldn't invest "with" her until we are married just getting her on the same path as me so when that day comes we can utilize both of our scenarios.  And I definitely agree Practice will help Ill just keep running numbers as much as possible. 

    @Tim Swierczek I Think I will at least save enough were if I find an "amazing" deal I can jump on it and then focus on paying debts short term. I do think that If I could find an amazing deal and house hack I could actually still pay debts rather quickly while building equity as long as I can swing major issues that may come up.  

    @David Waldy I really agree with everything you said in you reply. I think its is a lot of risk vs reward and at this point in my life I can afford to wait a year or so to be completely debt free and have more resources to back me in my first deal. I know that I would like to buy a property as soon as possible but if I make a mistake or something big $$ wise comes up it could take many years off of my investing "plan." I just need to have some more patience which is hard when i know what i want but it will be worth it if I can buy a place that works and have no debt to worry about. 

    @Joe Splitrock I really appreciate the list on repairs! Also the idea on posting on the forums I think I will do that as soon as possible to make sure that I am on the right course with my numbers. BP is most definitely an amazing resource no reason no to use it. 

    Thanks for all the replies!

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  • Eric Nelson
    Bemidji, MN · Member since 2018 · 31 posts · 14 votes
    8y

    We paid off school loans of $170k before we invested, but that's only because my wife was not confident in it.

    Looking back I would have rather used some of that money to go toward saving for a property than loans.  Mostly because your rent is now being half taken care of and the rent you do pay is going on your loan.  

    Sometimes the hardest part is getting that first deal.  

    I'd say pay off debt slowly, save for down payment, then jump when the deal comes around.

    After you're in it, you can knock out your debt while you pay less in rent

    0Reply
  • Dain Boelter
    Rental Property Investor · Las Vegas, NV · Member since 2014 · 22 posts · 8 votes
    8y

    Pay off the debt first to ensure you have a stable base in order to start taking on more debt and risk. Making that kind of income you should be able to budget and get that debt paid off in no time. Making small sacrifices and not wasting money on things you don't need adds up very quickly.

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