Pay down debt or reinvest?

[Skye Anderson]

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?

[Steve Vaughan]

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!