Pay Debt First or Start Real Estate Investing

69 Replies

Hi all, I’m interested in purchasing my first property by way of house hacking a multifamily property. I’m pre-qualified for a mortgage. My question is should I pay down debt (student loan, car) before investing or just jump right in?

Jump in as long as the numbers make sense.  The income from the property will remove your debt.  

@Brieer Doggett No numbers yet. I wanted general advice on if this was a smart move or not.
@Craig Dell I’m completely new and I don’t even know how to run the numbers for profitability

If your investment return will be greater than the debt interest rate, invest.  

@Eddie Werner where can I learn how to run the numbers for that information if I plan to stay in the property

Easiest way would be to use one of the BiggerPockets calculators, you punch in the numbers and it tell's you ROI.

Sound like you think the only way to invest is to go to a lender for money ----- you might want to use some creative financing methods to CONTROL real estate before you have to go beg a lender for money, before you pay retail for a property ----

Some ideas:

  • Consider the Control and Roll method of investing - find a property (using guerrilla method of marketing), use a "skinny contract - one page - control the property, offer it at public auction. You keep the overage at settlement. You never have to own the property while walking away with cash. Do this a few times a month and you'll have enough money to pay cash for your next property. Make full disclosures.
  • Try a "Front Porch Clause", tell the seller XY and Z needs to be repaired before you buy, estimate it at$15,000, tell seller to write you a check for $15,000 for the repairs, you endorse the check and give it back to him as your down payment. 
  • Offer to buy the property with a 45 day study period - with right of possession - flip your contract by private treaty or public auction, assign your contract for cash.
  • Ask the seller to refinance - he gets the cash, you take the property subject to his new mortgage.
  • Ask the seller to take back a mortgage for 100% of the purchase price - you help him find a note buyer, sell the discounted mortgage ---- nothing down.
  • Make an offer with a delayed settlement - like 6 months with the right of possession - you fix and flip during your possession.
  • Have a partner with real estate (maybe some junk properties), offer those properties as a down payment..... your partner friend get an interest. Make it subject to the sale of his property.
  • Create a note on something you own, offer it for a down payment on the house you want.

Hope some of these ideas will help and get you thinking that you can do deals without banks.

Originally posted by @Brieer Doggett :
@Craig Dell I’m completely new and I don’t even know how to run the numbers for profitability

 Please get together with a good lender before you do anything else.

Stephanie

What's the benefit of paying down your debt? If your answer isn't valuable to you then no, if it is, then yes.

@Brieer Doggett

It's going to depend entirely on the goal or goals you have in mind.  People usually have other goals besides paying off debt so my general advice is to do both.  When you do both then you are working both sides of the accounting equation to increase your net worth, but also when you are building assets that puts you in a position to be able to take advantage of opportunities that might come along in the future.

Example: Say you calculate you can live like a Spartan using all your spare cash to pay your debts off within 8 years. Then in year 3, after 2, 3, 4 years of reading personal finance books and consuming everything biggerpockets... you find an opportunity to invest in something that could make enough to pay your debts off in just two more years, but you don't have the cash to invest.

You also have the option later of taking savings/investments and using that to pay off your debts.

If you're not already you should start monitoring your net worth monthly.  Do whatever you can to increase assets and lower liabilities.  See if you can grow your net worth by 1% per month, do that and you'll be quite wealthy in a hurry.

@Brieer Doggett Pay off all other debt besides a primary mortgage. Worse types of debt in order: student loans, car debt, credit card debt. Your car is a depreciating asset. Pay that off. Student loans are with you forever. Can’t get rid of them, typically. Pay that off. Then go invest. Don’t get more debt when you’re already in debt. One bad tenant and you could lose it all. Only debt I have is mortgage debt. In 10 years I’ll have no debt besides maybe a primary house.
@Brieer Doggett Find a local mentor with more than 5 doors and 3+ years of experience. The more people you talk to face to face the easier your decision will be.
@Brieer Doggett , I was in the exact same situation, from my perspective, it takes time, due diligence and monies to fix credit. It depends on how you want your loan numbers to look like, if credit is good, lower interest, meaning lower payments leaves a bit more cash flow monthly but all depends how you want to start. I decided to fix credit first and has worked not only for mortgage fico score Increase(better loan rate) but has lead to other “saving money” scenarios like lowering my car insurance premiums. Good luck

if you're just starting out, then you have a long lead time of education ahead.

my opinion, stack capital for investments in the mean time and pay down any low balance debt you may have to help DTI.

you don't need an all-in either/or strategy, do both

@Brieer Doggett It all depends on your confidence in the proposed investment and your tolerance level with risk. The zero risk would obviously be to pay down your debt first.

My two cents.

  • I disagree for the most part with Dave Ramsey on debt. It is a tool like a chainsaw. Use it wrong and you'll hurt yourself. Use it wisely and it will magnify your productivity. 
  • If you indicated what your debt balances are, I missed it. Are your student loans $7k or $70k? Is your car loan $4k or $40k? If it was me, those absolute values would be a big consideration here.
  • The difference in comparing the profitability of house hacking vs paying off the debt is that the house hacking is a projection and the debt service cost is a known value. So there is risk in the house hacking projection that it ultimately is less than estimated, maybe far less depending on your diligence with the analysis and quantification.
  • Just because a lender will loan you money, doesn't mean it is in your best interest either. They are in to make money, period.

Agree with @Caleb Heimsoth that, based on the info you have provided here, you should focus on eliminating your student loan and consumer debts before buying property. Concurrently, get your graduate degree in Real Estate investment by harnessing the power of Bigger Pockets. 

Best of luck to you.

Dave

@Brieer Doggett 1. Provided if the gross cash flow can cover gross rental expenses, the net cash flow will help you make that decision. 12-15 percent yIeld proves A good margin! 2. Learning to prioritize like an investor, Knowledge and asset (sustainment, protection, and leverage) must come first. 3. Consider/ DETERMINE what needs to cut back on gross monthly expenses.
Thanks everyone. Your answers were informative. I have more I need to analyze this more to come to a final conclusion.
@Dave G. The student loan debt is $32,300 @ 6.55% interest; the car is $11,500 which is a lease I want to sale back to the dealership

I myself and still in process of buying my mult-unit. My suggestion from where I stand is to learn as much as possible! If you have audible bigger pockets has a few good books on it. Also as far as debt goes If you can afford the payments now, you should be able to afford it with a positive cashflowing property. personally I try to minimize all personal bad debt. I own all my vehicles, no credit debt and minimize bills by paying in advance etc. But if your investing in something that'll make you money every month go for it! Sometimes you need to spend money to make it other times you can spend someone elses to make it. Find a excellent loan guy. Mine taught me so much about different kinds of loans you can use on property. 

@Brieer Doggett well those numbers aren't too bad. Maybe a purchase still makes sense with good cash-flow and solid analysis and risk assessment. Even still, I would try hard to accelerate debt paydown of non-investment, non-primary residence debt. 

I recommend house hacking as soon as you can run the numbers to determine if a property will cash flow.  Especially if you’re currently renting and can get multi-family property for close to the same amount per month.  You have to live somewhere and having tenants paying you is an added bonus.

@George W. I won’t make money but will be paying much less than my current rent

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