Pay down debt or reinvest?

42 Replies

If you were to make $20K on a real estate transaction would you use it to pay down existing debt such as a car loan or credit card debt, reinvest it into another deal, or a combination of both?

If you have credit card or other high interest debt, I'd pay that down. If you have low interest debt, it's up to you based on opportunity, but most likely reinvest it.

^^ This. I carry as little CC debt as possible, I try to keep it at zero. Car loans and everything else though I don't bother with. The interest rates are so low that they're not worth paying off/down. Everything else gets reinvested/banked for reinvestment later

I don't like car or cc debt, but we really need more info. Rates and terms of the Joneses debt and if you can easily replicate a $20k RE payday?  Spill the beans!

If you were using your seed money, I would say invest it, but you're not.  Since you're using your profit, and you should be able to regenerate this from your seed money again, I say pay off the lowest balance of all the debt listed.

Why the lowest?  3 reasons:

1 - It quickly eliminates that debt completely
2 - You've eliminated a monthly payment forever, which is the equivalent of buying a rental property but without the 3 T's...and, you reduce the amount of cash flow you need to pay your monthly bills.
3 - The cash you were using for the monthly payments of debt you paid off you can now use to accelerate the payoff of the next in line of the "bad debts" you mentioned.

You get the trifecta. 

@Skye Anderson I agree with Joe as to pay off lowest debt. Another reason why you get a sense of accomplishment of having one less debt and that will transfer to a great feeling which intern push you to strive to pay off the other debts quicker. Put that money you were paying on that debt that you just paid off into your next lower debt you have to increase it payoff sooner. Good luck

I don’t mess with car loans or credit cards, but I am currently splitting a profit from refi into 1) reinvest into a property and 2) money for rehab on a new deal.

I would always try to pay down debt aggressively and think that is a great idea, but if you happen to come across an awesome deal, you might consider pulling the trigger as long as you have thoroughly analyzed the deal and done all of your homework. Sometimes opportunity knocks and you just have to take advantage as quickly as possible if you are sure about it.  

Thanks everyone for the feedback! Here's a bit more info @Steve Vaughan .

First off, this is hypothetical at this point. I haven't yet made the $20K. But here's the scoop. Earlier this year I purchased the car I was leasing (mistake probably) and I owe $24K at 4.24% interest. I have about $13K in credit card debit yet the majority of it is between 0%-5.5% interest (these are introductory rates and will go up at some point). And finally I have about $40K in student loans, some at 3.03% and some at 6.55%. Because of the plan I'm on, it would not be as beneficial in monthly savings to pay off the students loans, even the ones at 6.55% interest.

My goal is to replace my current income with passive income. And my initial intent was to begin acquiring rentals. Yet this is not going to help me pay down my debt quickly. So I've been talking with someone about partnering on a flip. He suggested I could possibly make $20K but when I told him I might use it to pay off my debt he said I wasn't thinking like an investor, that I should reinvest it.

But from my perspective, if I paid off my car loan, I would eliminate a payment of $379/month, which is likely more than I would get in cash flow from a rental property I put $20K down on.

20k in an investment is money you have. Paying off 20k means you no longer have it.

Pay off all your bad debt. Figure out how much time your introductory rates are good for, and divide the amount you owe by that to figure out how much to pay off each month.
Stop using the CC’s altogether to get them paid off.

You could sell your car for a cheaper one, and save money there.

Be aggressive in your savings, and wise in your investing. :)

Originally posted by @Skye Anderson :

Thanks everyone for the feedback! Here's a bit more info @Steve Vaughan.

First off, this is hypothetical at this point. I haven't yet made the $20K. But here's the scoop. Earlier this year I purchased the car I was leasing (mistake probably) and I owe $24K at 4.24% interest. I have about $13K in credit card debit yet the majority of it is between 0%-5.5% interest (these are introductory rates and will go up at some point). And finally I have about $40K in student loans, some at 3.03% and some at 6.55%. Because of the plan I'm on, it would not be as beneficial in monthly savings to pay off the students loans, even the ones at 6.55% interest.

My goal is to replace my current income with passive income. And my initial intent was to begin acquiring rentals. Yet this is not going to help me pay down my debt quickly. So I've been talking with someone about partnering on a flip. He suggested I could possibly make $20K but when I told him I might use it to pay off my debt he said I wasn't thinking like an investor, that I should reinvest it.

But from my perspective, if I paid off my car loan, I would eliminate a payment of $379/month, which is likely more than I would get in cash flow from a rental property I put $20K down on.

 Thank you for the scoop, Skye. Helps us a lot!

I was where you are once. I didn't have a $24k car, but I wrote fat credit card checks as down payments on my seller-financed houses and apts. $87k worth.

I used my passive income to attack the 87k aggressively about 8 years in. Would have been sooner but the recession knocked me back about 3 years.  

So your flip friend is partially right. Use the assets to pay down the debt. You are also very right. You will not earn $367/mo hassle free, risk free and tax free with a $20k down payment.  There is a balance.

I'd sell the car and get investing in something that makes sense.  The car is crazy. I bought a 15 yr old minivan, clean and in great shape, loaded, with $105k miles for $1800 on CL a few weeks ago. If you're going to get serious about RE, you need a material hauler.   The young and broke have nice cars. The wealthy-minded don't give a rip what others think.  Now go get 'em!

@Skye Anderson I agree with @Steve Vaughan about the car.  If you really want to start investing, I would encourage you to have a cheaper car at the beginning. 

I would encourage you to look for deals now that you could put that $20,000 in and I would not encourage you to pay off any of the other debts that you have right now with their interest rates being so low. It is hard to find money at that low of an interest-rate. So if you have access to it, and you have the know-how to get a better return on your money, then I wouldn’t pay it off.

Right before your credit card interest rates gets out of the 0% introductory rate then I would encourage you to pay the whole card off And wait until you get the 0% credit card transfer checks and then use those to invest.

If you're going to get serious about RE making you wealthy, don't waste your time worrying about when your decades old car is going to break down and about hauling crap around. Buy something actually reliable to get you from Point A to Point B.

Originally posted by @Aaron Hunt :

If you're going to get serious about RE making you wealthy, don't waste your time worrying about when your decades old car is going to break down and about hauling crap around. Buy something actually reliable to get you from Point A to Point B.

 Says the vegabond from nowhere. Or is it everywhere?  Crummy advice, dude. Substantiate it with something or just save your breath. This is a new investor looking for help. Maybe you should stick with the big question of liquidating your wife's 401k or not before giving advice about being wealthy.

She doesn't have to buy a 'reliable' vehicle.  She already has that and the payment to go with it.  

Originally posted by @Steve Vaughan :
Originally posted by @Aaron Hunt:

If you're going to get serious about RE making you wealthy, don't waste your time worrying about when your decades old car is going to break down and about hauling crap around. Buy something actually reliable to get you from Point A to Point B.

 Says the vegabond from nowhere. Or is it everywhere?  Crummy advice, dude. Substantiate it with something or just save your breath. This is a new investor looking for help. Maybe you should stick with the big question of liquidating your wife's 401k or not before giving advice about being wealthy.

She doesn't have to buy a 'reliable' vehicle.  She already has that and the payment to go with it.  

Weak reply, with attempted personal insults. Checked my post history, and still couldn’t do better than that.

Now we know why your “wealthy-minded advice” to others is to live like crap. Would expect no less from a manual laborer!

Good luck to OP...and you while driving that pedo-van/Mystery Machine around town that you’re so proud of.

OP to better “substantiate” - what make and model is your vehicle is? 

The above individual is making assumptions that it is reliable just based on the age of the car and the car payment so now I’m curious...

No need for petty arguments folks!

My car is reliable (2014 Ford Edge with low miles) and not worth what I owe so it may or may not make sense to sell. For my current situation (single woman with a full-time job I commute to everyday and not mechanically inclined) I’m not sure I’ll be “hauling stuff” around anytime soon and would prefer not to spend my time, money and energy on vehicle maintenance, so you have a point @Aaron Hunt . Yet I do see your point @Steve Vaughan about the mindset of the young and broke versus wealthy minded individuals. For me it’s more about reliability than how I am perceived by others. 

Thanks for the suggestions on the cc debt @Steve Vaughan and @Shiloh Lundahl ! I have had some success already transferring balances to low or zero introductory rates. Not too long ago my balances were over $20k. So YaY me. 

@Skye Anderson i apologize for putting gravel in your thread.  I normally don't jump all over somebody for sharing their opinion, but knowing that same somebody needs or is at least contemplating liquidating their wife's 401k to expand yet is giving advice on being wealthy tells me they most likely are saddled with 5 figure car payments as well.   As you have found, the added benefit of nicer cars isn't just the payment, but loss in value.  'Nuff said.

i suggested a minivan and gave an example of an extra vehicle I just purchased because you referenced possibly going in on a flip.  It is a good use of new folks time to get material for the contractor/rehabber.  It's 1:1.  My contractor charges $65/hr.  I'll get the material or make a run when needed to keep him on the job.

Any common reliable car would suffice.  Minivans are plentiful and people don't get attached to them.  Same with Camrys and such.  The other end is the higher end, where people (college kids mostly) need money for school or whatever.  Picked up a nice sportscar with cash on the cheap from a motivated 24 year old this year.  I don't live like 'crap' as our friend above suggests. I have been asked to be on 3 podcasts and to share my story in more than 1 publication.  My 1st blog post will probably be "How i turned $40 into $10,000 in 2 hours" which i did last Thur.  If that makes me a 'manual laborer', so be it.

Anyway, glad to see you have been making progress on your cc debt.  Congrats!  The first step is to get uncomfortable with where you are and ID the problem or the thing holding you back.  Then dream and set goals like you have done.   Looking forward to good things for you!

Originally posted by @Aaron Hunt :
Originally posted by @Steve Vaughan:
Originally posted by @Aaron Hunt:

If you're going to get serious about RE making you wealthy, don't waste your time worrying about when your decades old car is going to break down and about hauling crap around. Buy something actually reliable to get you from Point A to Point B.

 Says the vegabond from nowhere. Or is it everywhere?  Crummy advice, dude. Substantiate it with something or just save your breath. This is a new investor looking for help. Maybe you should stick with the big question of liquidating your wife's 401k or not before giving advice about being wealthy.

She doesn't have to buy a 'reliable' vehicle.  She already has that and the payment to go with it.  

Weak reply, with attempted personal insults. Checked my post history, and still couldn’t do better than that.

Now we know why your “wealthy-minded advice” to others is to live like crap. Would expect no less from a manual laborer!

Good luck to OP...and you while driving that pedo-van/Mystery Machine around town that you’re so proud of.

OP to better “substantiate” - what make and model is your vehicle is? 

The above individual is making assumptions that it is reliable just based on the age of the car and the car payment so now I’m curious...

I think the advice Steve is offering is to live within your means. Most the people driving around in fancy cars have negative net worth. As the saying goes, "all hat no cattle". Just because someone calls themselves an investor has no correlation to wealth or success. There are lots of broke "investors" babbling nonsense on this website. I would rather take advice from someone like Steve who is very successful and humble enough not to brag about it. 

Used cars can be very reliable. I have driven several vehicles over ten years. I had a Pontiac Grand Prix that I drove ten years, then sold it to a friend for their kid who drove it ten more years. He had no major problems. He literally drove it until the wheels fell off. I am serious, the front wheel fell off. After years of tightening the lug nuts, they were unable to stay tight and his front wheel fell off. Apparently that happens on really old cars. But it was 20 years old with over 250K miles and original engine and transmission. The point is you can pick up a ten year old car very inexpensive and drive it reliably for years. On the flip side, new doesn't always mean reliable. I had a one year old vehicle that needed to have the transmission replaced. 

Managing money is the same if its a rehab budget, personal or business. I would prefer to see you improve your personal finances before taking on more problems (businesses) . Yes a flip will give your more immediate cash (in theory) then a buy and hold. However you can lose money just as easily especially being new or experienced . As you gain experience at managing budgets I would predict your ability to succeed to be a higher probability. Have you done networth worksheets? Do you know what debt to asset ratio is. IRR, or ROI. I would focus on educating yourself, improving your financials. Once your budget is solid, you have a plan for getting out of debt. Understanding money,interest rates, business principles have a greater value then money. Once a greater understanding of finances is achieved your networth will grow. You need to take a few steps back imo, and focus on educating yourself. Books, youtube, blogs etc. To answer your question. I agree with the others focus on paying off your higher interest rate debt first. Not trying to beat you up, but just by you asking this question tells me your not nearly educated enough in finances to be thinking about taking on large budget projects. The game is real, and losses happen every day. Real estate sales is a great low cost way to get your foot in the door. Flipping stuff off of craiglists, yardsales, or fb can be just as fun,profitable and educational.

@Skye Anderson

I would buy another deal and use the cashflow to pay down the debt. You would benefit from the tax savings, pay down your debts, building equity in the process. 

You cant go wrong with this.

Alright didn’t read most of this.

In my opinion if you want to be a real estate investor you carry one type of debt long term: mortgage debt. That’s it.

Car payment? Nope. Student loans? Nope.

Credit card? Hell no. You get the idea.

Now you can use private/hard money occasionally but don’t hold that long term.

It’s not a popular opinion but it’ll help with DTI issues and it’ll keep your risk down.

Originally posted by @Skye Anderson :

No need for petty arguments folks!

My car is reliable (2014 Ford Edge with low miles) and not worth what I owe so it may or may not make sense to sell. For my current situation (single woman with a full-time job I commute to everyday and not mechanically inclined) I’m not sure I’ll be “hauling stuff” around anytime soon and would prefer not to spend my time, money and energy on vehicle maintenance, so you have a point @Aaron Hunt. Yet I do see your point @Steve Vaughan about the mindset of the young and broke versus wealthy minded individuals. For me it’s more about reliability than how I am perceived by others. 

Thanks for the suggestions on the cc debt @Steve Vaughan and @Shiloh Lundahl ! I have had some success already transferring balances to low or zero introductory rates. Not too long ago my balances were over $20k. So YaY me. 

Got it. Thanks for clarifying. Most American-made SUVs (and disclosure: I have owned two myself) are not what I would personally refer to as reliable. 

There are various ratings sources and a vast amount of evidence out there to support that. (I noticed there were two recalls on that model already...it happens.) 

Unfortunately, most of the time we end up under-water for years on these until it’s paid off and then the inevitable repairs kick-in to set us back even further. It’s a crappy cycle.

The hater in this thread (self-proclaimed expert of sorts - yeah, not impressed) has a weird tendency to anchor and fixate (only he can be right!) so I would take such antiquated advice cautiously.

Examples: Notice how he is only looking at the monthly cost of the car, and immediately assuming it is reliable since it is relatively newer. We both agree that the car payments are an issue, but where we disagree is buying a reliable car. The vast majority of 10-20 yr old cars require work to maintain and run, so unless they’re just trying to brag with anecdotal evidence, it doesn’t fly for the vast majority of cars out there. The headache of repairs is time lost.

Now continues to “throw gravel” attempting to belittle my opinion by commenting (twice now) on a single post regarding my wife’s old 401k (irrelevant to your discussion here), without having any further knowledge about how much is actually in there, or regarding our financial status. (The average age of cars in our home is 11 yrs old...surprise!)

Suspect at best...

Love your insight @Gareth Fisher ! I definitely have a lot to learn. I have been tracking my net worth for the past 2 1/2 years and managed to bring from a -$65K to a small yet positive number during that time. So I'm not financially illiterate. That said, I for sure have a lot to learn and I love your suggestion about getting some experience with small, less risky stuff to master the principles. Thank you! :-)

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