Pay down debt or reinvest?
Austin, TX · Member since 2017 · 64 posts · 34 votes
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?
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!
Good points, @Joe Splitrock! That's funny about the wheel falling off. Assuming no one got hurt that is! Thank you for your insight!
That's fantastic, @Caleb Heimsoth! Best of everything to you on your journey!
Thank you @Heidi Kenefick! Great point about investing versus paying off debt.
Yes great advice @Steve Vaughan! Get uncomfortable! You'll definitely see good things from me. Thank you for the encouragement and the recommendations. And congrats on turning $40 into $10K. That's awesome!
You're going to find that in real estate, unless you're in the selling side of the industry and need to impress people, it's practically a merit badge in this business to drive an older, high-mileage car. Nine times out of ten, that car is a Toyota or a Honda, the last time it's a large American minivan.
It will happen to you again and again in this business that you will meet people who loudly claim they would LOVE to get into real estate, IF THEY ONLY HAD THE MONEY, and then get into a late-model, low-mileage car while you get into your 10-year-old Toyota or Honda beater.
When it happens to you, you will be startled at how on point my description is. I promise you, it will be eerie.
After you get to even a quarter of a million in investments minus debt outside your home, the opinions of the broke on what to drive, what to buy, how to look stop mattering to you. They just stop mattering AT ALL. You won't be able to look at a flash car on the street without laughing. This is a great gift.
It is incredibly helpful to look poor at all times in the self-managed landlording business. You never, ever dress to impress your tenants. You never want your tenants to think you are doing well and wouldn't mind too much of they paid the rent on the 15th or so this month. If you ever plan to be a landlord, you should start practicing now.
If you get rid of your car now and replace it with something like a 6-year-old Toyota that you have a mechanic check out thoroughly, I believe you will spend the rest of your life patting yourself on the back for doing it. There is no car worth $24,000 at 4.24% interest unless you have a solid plan to make more than that off that car.
@Joe Villeneuve has laid out what financial author Dave Ramsey calls "The Debt Snowball." Neither Joe nor Dave are anyone's fools. The Snowball works. Don't focus on the interest rates of the debts. Focus on the debt amounts. Joe's laid out the reasons.
60% of Americans will admit to carry credit card debt from month to month. My belief is that unless that debt is 0% interest debt and you have at lease three more months to go on that introductory rate, credit card debt is vampire debt. Make it a priority of your Snowball to get rid of it, but don't change the order of debts. Celebrate when you knock out the credit card debts. Celebrate with the people you care about as if you have passed a milestone in an addiction recovery program.
So I would sell the car and pay down debt with the money. I have made many, many mistakes in my life, especially with money. I'm not better than anyone else. But I've learned some solid principles that have worked in my life. I am also married to a money management wizard. When she saw what my finances looked like before she married me, she insisted that I hand over my paycheck ever month and shut up about how the money got spent. In a rare moment of brilliance, I did as I was told. It worked. None of the ideas I've laid out here were espoused by the utter monetary failure I was before I met my wife. So my last piece of advice is that if you can't manage your money according to straightforward, wise principles, find someone to be with who will teach you. At the very least, be with someone who is willing to learn along with you.
Debt, in the real world, the world that those who have never know deprivation or poverty do not live in and treat as an academic puzzle to be solved, not a trial to be lived through, is bad news. You should cut away the leech before you get going on investing in real estate. Establish a budget to promote artificial scarcity. Establish record-keeping systems to track expenditures. My parents never taught me how to do this -- they had no clue and lived and died on the bleeding edge of broke. My wife had to to show me. It worked.
This website and the people in the forums can help you get ready for your real estate investing career. Keep reading and pay attention to people who are speaking from experience. Patterns will emerge. Another Dave Ramsey principle: try to read a book about personal money management at least once a year. It helps.
Good luck to you, Skye!
1. If you put the money into the car loan, can you pay off the car before the credit card debt kicks into high gear? Also remember that if you pay off the car loan, you could get rid of your collision and comprehensive insurance, which is usually expensive, and protects the lender more than it does you. Consider the risk and decide, but treat the cost of collision and comprehensive insurance as if it were interest on your car loan -- it's a cost of borrowing money.
2. If you can't pay off the car loan before the credit card teaser rates expire, pay off the credit cards and put the additional $7k towards your car loan. Then take the credit card payments and apply those to the car payment as well.
3. Keep your credit good. If a deal comes along, you can arrange financing then.
Based on your situation, if you can make a better return on your seed money vs.the highest rate you currently have of 5.5% (which I believe you can) then invest it in another property. Time Value of Money combined with compound interest is a extremely powerful and beautiful thing.
"If you dont owe anybody money you cant go broke"..... Pay debt off then save for investments with money that would have otherwise been used for debt payments.
Wow! Thank you so so much for investing your time in helping me grow. Your reply is full of so much wisdom! I keep reading it over and over (along with replies from several other awesome and kind people on here, @Steve Vaughan) and my mind is spinning.
Complete transparency... I was initially dismissing the conversation about getting an older car, telling myself, "they've all gone off on a tangent and whether or not to sell my car is not what I was asking." But I've learned to pay more attention to the things I find myself strongly objecting to. Seems as though they often contain the nuggets most crucial to my growth. ;-)
I'm going to get personal for a bit here and it's probably more detail than any of you care to read about. Yet it feels important for me to write the words, even if no one reads them except me.
I'm 45, the mother of 5 children, and grandmother to some pretty cute little humans. I grew up conditioned to believe that my role in life was to be a wife and a mother and that's pretty much it. I played the part for quite some time yet it was never really all that satisfying to me. I love my children and enjoyed being a mom, but it wasn't enough. I always wanted more.
Thirteen years ago I chose to get divorced, go back to school, and leave the religion I had grown up in. Over the ensuing years I evolved into a completely different person - one I like much better! My journey has been full of learning about myself and lots of mini triumphs of self-empowerment. I feel truly blessed.
The one part of my journey that is still in the earlier stages of evolution is financial independence. I've been taking care of myself financially since shortly after my divorce. That's not what I'm referring to here. Rather it's my internal journey that I've struggled with.
You see I spent a good portion of my life believing, even after I got divorced, that any true financial wealth, and the ensuing freedom that would bring, was only going to come as a result of being in a relationship/marriage. I bought into this idea that this fictional man who is to be my future husband is going to have the capacity to generate wealth yet I do not have that same capacity on my own. It sounds silly as I write the words, yet that is a belief I have carried around with me.
I've made a tremendous amount of progress financially over the past thirteen years. I went from living (surviving) on a part-time $8/hr job, food stamps and student loans to graduating with a master's degree and landing a job with a current salary I would have never imagined was possible for me thirteen years ago. So I am really proud of myself.
Yet I realized today that, although I haven't been competing with the Joneses, I do view my ability to purchase certain things (my car for instance) as some sort of proof that I am not that housewife and mother who can't take care of herself financially. So when I started to really consider the idea of selling my car, it made me feel sick inside. Like somehow not having that car would be evidence to everyone that I am not an independent and capable woman.
And then I realized how utterly ridiculous that notion was!!!
Having the courage and the discipline to do what it takes to create financial freedom for myself is a heck of a lot better indicator of my independence and capability than anything I could buy with money.
This is a HUGE AHA for me!!! So thank you to all of you!!!
I'm so so grateful to each one of you who took the time to share your thoughts with me and coach me along my journey. I have work to do... and I'm so excited about it! <3
Great point @Chris Armstrong!
Yes I believe you're right about the return being greater than my highest interest rate.
Thank you @Frankie Woods!
I like your thinking. I'll have to run the numbers and see what makes the most sense. Good point about comprehensive insurance!
Wow! Thank you so so much for investing your time in helping me grow. Your reply is full of so much wisdom! I keep reading it over and over (along with replies from several other awesome and kind people on here, @Steve Vaughan) and my mind is spinning.
Complete transparency... I was initially dismissing the conversation about getting an older car, telling myself, "they've all gone off on a tangent and whether or not to sell my car is not what I was asking." But I've learned to pay more attention to the things I find myself strongly objecting to. Seems as though they often contain the nuggets most crucial to my growth. ;-)
I'm going to get personal for a bit here and it's probably more detail than any of you care to read about. Yet it feels important for me to write the words, even if no one reads them except me.
I'm 45, the mother of 5 children, and grandmother to some pretty cute little humans. I grew up conditioned to believe that my role in life was to be a wife and a mother and that's pretty much it. I played the part for quite some time yet it was never really all that satisfying to me. I love my children and enjoyed being a mom, but it wasn't enough. I always wanted more.
Thirteen years ago I chose to get divorced, go back to school, and leave the religion I had grown up in. Over the ensuing years I evolved into a completely different person - one I like much better! My journey has been full of learning about myself and lots of mini triumphs of self-empowerment. I feel truly blessed.
The one part of my journey that is still in the earlier stages of evolution is financial independence. I've been taking care of myself financially since shortly after my divorce. That's not what I'm referring to here. Rather it's my internal journey that I've struggled with.
You see I spent a good portion of my life believing, even after I got divorced, that any true financial wealth, and the ensuing freedom that would bring, was only going to come as a result of being in a relationship/marriage. I bought into this idea that this fictional man who is to be my future husband is going to have the capacity to generate wealth yet I do not have that same capacity on my own. It sounds silly as I write the words, yet that is a belief I have carried around with me.
I've made a tremendous amount of progress financially over the past thirteen years. I went from living (surviving) on a part-time $8/hr job, food stamps and student loans to graduating with a master's degree and landing a job with a current salary I would have never imagined was possible for me thirteen years ago. So I am really proud of myself.
Yet I realized today that, although I haven't been competing with the Joneses, I do view my ability to purchase certain things (my car for instance) as some sort of proof that I am not that housewife and mother who can't take care of herself financially. So when I started to really consider the idea of selling my car, it made me feel sick inside. Like somehow not having that car would be evidence to everyone that I am not an independent and capable woman.
And then I realized how utterly ridiculous that notion was!!!
Having the courage and the discipline to do what it takes to create financial freedom for myself is a heck of a lot better indicator of my independence and capability than anything I could buy with money.
This is a HUGE AHA for me!!! So thank you to all of you!!!
I'm so so grateful to each one of you who took the time to share your thoughts with me and coach me along my journey. I have work to do... and I'm so excited about it! <3
Thank you for sharing your story, Skye. You should be proud of how far you have come and I'm glad you are excited about where you are headed. We are excited for you, too!
I see better how a car can mean something more than someone like Jim or I see it. I think (and hope) you will see that it had nothing to do with all you've accomplished so far. It has an identity of sorts for you, the new chapter of the Skye that made it. Now, if you decide to sell it, your new to you car can also represent a new chapter. It can be your get out of debt, financial freedom car! It's up to you.
I won't think any less of you if you decide to play the car through, buckle down and pay it off. It will just take less time to be able to begin investing without it.
The more important issue is that you're excited to change and have a plan. We here at BP will be here if you have questions, need encouragement or just want to vent. Stay strong!
Nothing that you have said sounds silly, naive, or ridiculous. I read what you wrote. Your words were important to me. They spoke of a hard-won, honest self-awareness few adults have, one clawed back from the forgotten point where we all seem to lose it in childhood. I'll repeat what @Steve Vaughan said about being here if you need help or encouragement as you get into this.
@Skye Anderson Given your got your budgets in order and can manage one. I think your on the right track. Look for a partner/mentor to do a flip with. You put in the time, he takes on the debt/risk. That way you increase your income /experience. w/o taking on more debt. Once your high interest rate debt is cleared, and a nest egg is established. You will be able to start borrowing your own money, and by that time you should have enough experience to take on your own projects.
If your were a smart investor you would pay off all bad debt before you ever consider investing. If you are not financially disciplined enough to realise that then you are not ready yet to invest your surplus savings. In fact you have no surplus savings if you are carrying bad debt.
Real estate investing is high risk. The last thing you want going in is carrying bad debt that will further increase your risks when your investing hits the inevitable bumps in the road. Personal debt will only hamper your chances of success.
Investing should not be approach as a method to get out of debt. It should be viewed as a path for those with surplus savings to invest.
If you can find a good rental with the $20k that you can buy, renovate and refinance, then I would do that as many times as possible to create cash flow to pay the bills. The power in doing this, is that the rentals continue to cash flow after the bills are paid.
I would check and see if you can qualify for a few loans with all your debt. If you cannot, then paying off the debt is the most important thing.
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. :)
Paying off debt using your (seed) money is wrong.
Paying off debt with someone else's money (profits) is right...as long as you maintain your seed money never spent...just used to make your profits, over and over.
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.
Payoff debts with profits, keep you seed money moving forward. I wouldn't recommend chasing shiny objects (that great deal that comes along) unless that great deal was part of your plan. It that great deal takes you off of your plan, then will find your self with a trophy, and at a dead end. Now what do you do?
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?
I haven't read the whole thread ... Being something of a contrarian, I'd say continue using your cash flow for your unsecured debt payments and reinvest the profit. That can bring you more cash flow and improve your overall position.
Car loans tend to to have the interest "front loaded" since they're amortized. So, paying that off really just improves your cash flow to the tune of your car payment. Not much other value there. Paying it down has little or no value with respect to your credit profile.
That said, remember: we don't have your full financial picture. So, these opinions are of limited value.
@Joe Villeneuve
I don’t disagree with you. I think its about risk tolerance. For myself, I would pay off debt and invest from a position of financial strength rather than financial weakness. Having debt means having risk, and certainly you will not make as much money as quickly, but you also won’t lose it if the market turns.
@Joe Villeneuve
I don’t disagree with you. I think its about risk tolerance. For myself, I would pay off debt and invest from a position of financial strength rather than financial weakness. Having debt means having risk, and certainly you will not make as much money as quickly, but you also won’t lose it if the market turns.
The more debt you have, the less you have at risk...just ask any lender. Less debt isn't financial strength. The less debt you have means the more something cost You. When you have positive cashflow, your cost is what comes out of your pocket...which is the down payment...and, like any7 business, you must recover all of your cost before you start making any profit.
So, let's say you have two options to buy a $100k property: 1) 100% down and no debt, or 2) 20% down and 80% debt. Assuming you will buy all of your properties using the same option, here is a summary of what you have financially:
1) Cost to you = $100k; number of properties bought = 1; total asset value = $100k; CF with no debt = $10k/year; time it takes to recover your cost = 10 years; number of years to 2nd property = 10
2) Cost to you = $20k per property: number of properties bought = 5; total asset value = $500k; CF with debt = $5k/year/property ==> $25k/year total; time to recover your cost = 4 years; number of years to 2nd property = 1
Total REI over 10 year period, assuming only a 5% appreciation/year, and reinvesting all the cash flow:
1) Cost to you = $100k (the second property); number of properties = 2; Total asset value = $265k; CF with NO debt = $20k/year.
2) Cost to you = $0; number of properties = 43; total asset value =~ $5M; CF w/ debt = $215k/year.
@Joe Villeneuve
If that’s how you like to invest go for it! I just think it’s flawed thinking and more risky... I used to think the same way but have changed my mind.
Debt is risk, because you don’t own the property, the lender does. If they call the note due, or your tenant stops paying and you default, the bank forecloses and you lose your equity and the house.
Now, yes it’s slower but your argument of building a larger portfolio quicker is also flawed. You can use 100k to buy one house or buy 5 with 100k down and 400k in loans. The paid for house will let’s say cash flow 1000 a month and the leveraged houses let’s say 200/month. You get the same 1000, but no risk of foreclosure and your net worth is higher in the first scenario. So while you might build a 500 million dollar portfolio with debt, you will owe 480 million to the bank, and your net worth will be negative. If you own the properties outright, you keep all the cash flow, have zero risk, still make about 10-12% on your money. You don’t lose money by buying the house, it’s just not liquid. Plus, you aren’t paying interest. Some argue the tenets are paying the interest, but nonetheless, the mortgage cuts into your cash flow.
I realize my idea is very contrary to what a lot of people preach and do. I just think there is more than one way, and it’s a good idea to understand multiple methodologies.
@Joe Villeneuve
If that’s how you like to invest go for it! I just think it’s flawed thinking and more risky... I used to think the same way but have changed my mind.
Debt is risk, because you don’t own the property, the lender does. If they call the note due, or your tenant stops paying and you default, the bank forecloses and you lose your equity and the house.
Now, yes it’s slower but your argument of building a larger portfolio quicker is also flawed. You can use 100k to buy one house or buy 5 with 100k down and 400k in loans. The paid for house will let’s say cash flow 1000 a month and the leveraged houses let’s say 200/month. You get the same 1000, but no risk of foreclosure and your net worth is higher in the first scenario. So while you might build a 500 million dollar portfolio with debt, you will owe 480 million to the bank, and your net worth will be negative. If you own the properties outright, you keep all the cash flow, have zero risk, still make about 10-12% on your money. You don’t lose money by buying the house, it’s just not liquid. Plus, you aren’t paying interest. Some argue the tenets are paying the interest, but nonetheless, the mortgage cuts into your cash flow.
I realize my idea is very contrary to what a lot of people preach and do. I just think there is more than one way, and it’s a good idea to understand multiple methodologies.
At closing, the lender doesn't own the property...you do. The lender owns the mortgage, and the lien rights that go with it.
Debt isn't risk. Lending money is, because the money is what is at risk.
Math is math. 1 + 1 will always = 2. 2^30 will always = 1,073,741,824
...and you're missing the point. The total dollar amount achieved through the extrapolation of the compounding gained by using leverage wasn't the point. What is important is the impact it has, based on the power of leverage...starting at the same place, with the same amount of money.
The point was three things:
1 - The speed at which leveraged money moves.
2 - The speed at which profit can be achieved by the recovery of the money spent. Profits happen only when all costs are recovered.
3 - The lack of cost to the investor when you leverage money.
@Joe Villeneuve
All very valid and true points.
Guess it just depends on your comfort level. :)