Dryden, MI · Member since 2019 · 22 posts · 10 votes
Hey everyone,
I am wondering if it makes more sense to pay off existing debt first such as student loans credit card and car debt, or to save up instead to put a down payment on a rental property to bring in passive income.
If I was to go to pay off the debt first it would probably take around a year and a half to two years to do so.
I didn’t know if anyone has had experience already with going about either one of these routes that could give some insight into what is better.
Investor/Agent · Kansas City, MO · Member since 2017 · 291 posts · 308 votes
7y
@Philip Abbey I would strongly suggest you pay off any debt you have before investing...particularly if you have credit card debt or more than one kind of debt like CC, student loan and car. You need to get yourself in better shape with your personal finances before you jump into something else. People can talk about returns and highest and best use of money, etc, but rarely are your paper returns the same as your actual returns at the end of the year....especially if this would be your first deal. Nobody I've ever talked to has regretted paying off or getting out of debt. Use the time it takes you to pay everything off as your education and learning the market period. That way when you are debt free and ready to jump in you will know what a good deal looks like. Best of luck.
There are many things to consider and it also depends a lot on what kind of personality you have (Risk taker, self motivated etc) so there is no one answer fits it all.
Of course if your interest is over 8 percent on those loans i would strongly recommend you to pay them off first / consolidate the loans into one loan with lower interest rate and invest.
For me personally i know that i can make more than a single digit return on my money + tax benefits so if my loans are less than that i wouldn't try to pay them off faster.
I don't know any investors personally that have bad debt. I know some that tried to invest with bad debt but lost it all when they hit a rough financial patch in their investments. Their bad debt took them down.
Dryden, MI · Member since 2019 · 22 posts · 10 votes
7y
@Joe Villeneuve
If I understand your question correctly. I am referring to the extra funds that I have left over. Instead of paying extra off each month on the debt it is simply saved for an investment.
Investor/Agent · Kansas City, MO · Member since 2017 · 291 posts · 308 votes
7y
@Philip Abbey I would strongly suggest you pay off any debt you have before investing...particularly if you have credit card debt or more than one kind of debt like CC, student loan and car. You need to get yourself in better shape with your personal finances before you jump into something else. People can talk about returns and highest and best use of money, etc, but rarely are your paper returns the same as your actual returns at the end of the year....especially if this would be your first deal. Nobody I've ever talked to has regretted paying off or getting out of debt. Use the time it takes you to pay everything off as your education and learning the market period. That way when you are debt free and ready to jump in you will know what a good deal looks like. Best of luck.
Dryden, MI · Member since 2019 · 22 posts · 10 votes
7y
@Bob Woelfel
Thanks a lot! I felt paying it off first was better but figured it didn’t hurt to get advice from experienced people just to be sure I wasn’t missing something.
Rental Property Investor · Chantilly, VA · Member since 2017 · 104 posts · 149 votes
7y
Hey @Philip Abbey I had this same question. For me it was simple. I asked myself the following question....
Can I generate a higher return on investment than the interest rate on my Student Loan?
If yes > Invest in Real Estate
If no > Pay off your Student Loan
This simple equation however does not account for the feeling that you might receive from being debt free. If it is hanging over your head, then maybe the incremental return is not worth it to you. If you are like me, and are okay with the debt, then put that money into an investment property, or a house hack, reduce your living expenses, and then evaluate whether you want to pay off that debt quickly or not.
Louisville, KY · Member since 2016 · 3 posts · 0 votes
7y
I am in the same boat, I am currently saving up for an investment. My debt is all <5% which I expect to get a better return investing, but I haven't spent the money yet so if I change my mind for some reason or another the cash is still available.
If I understand your question correctly. I am referring to the extra funds that I have left over. Instead of paying extra off each month on the debt it is simply saved for an investment.
Hope this answers what your asking
Not really. The answer to every problem is in the problem...hidden in plain sight.
If you pay off the debt, and it takes you 1.5 years, how long will it take you to accumulate those same funds you used to pay off the debt, and use them towards REI? ...and how much would that be?
If you used your current funds for REI instead of paying off the debt with it, that income from the REI could be used to pay off that same debt. The difference, is at the end of that 1.5 years. Where would you rather be.
A) With the debt paid off using your current cash, and be at square one...with no money to invest with.
...or...
B) With the debt paid off using the income from the REI, and having that same REI income still coming in.
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
7y
To me it's the type of debt more than which will maximize returns.
Even if the car loan and cc rates are less than what you could potentially earn on houses in MI, the mindset is the problem.
I would prove to myself and my spouse I am ready to think and invest long term in assets that appreciate in value for a change. I'd sell the car and pay off the cc s. I think that will serve you well. Good luck to you!
Real Estate Agent · San Antonio, TX · Member since 2017 · 814 posts · 466 votes
7y
@Philip Abbey
It all depends. Credit cards usually have very high interest rates. If you still come up with cash flow and pay for your credit cards within a year and half, and able to keep up with students loans... go for it.
Banks may see this differently, but nothing wrong to submit a mortgage pre-approval for what you can buy.
Rental Property Investor · Royersford, PA · Member since 2018 · 25 posts · 19 votes
7y
@Philip Abbey
There is no reason anyone should be paying interest on a CC. There are plenty of CCs that offer a 0% interest rate for 15 or 18 months and you can transfer your balance to the new card at 3% interest. There are a few cards that would allow you to transfer at 0% interest. Double digit interest rates are designed to keep you in debt.
Interest from school loans is tax deductible to a limit. Also if you were to file for bankruptcy, the CC and car debt would go away but the school loans likely can’t be wiped out. This is why I think student loans are dangerous.
If your car’s interest rate is low, I would make the minimum payment. For high interest, I would sell the car and buy something cheaper leaving you no car debt. Leasing might be a better option for you keeping the payments low.
Work with a mortgage broker to get a pre-approval. If you do not quality then focus on debt pay-down per the broker's advice. If you qualify, create REI goals based on what you can afford and learn how to analyze deals. If you can't find RE deals then find another investment or focus on paying off your debt. I try to chase the highest return on my investment without putting myself at high risk. Always look for multiple ways to buy a deal or exit a deal. Good luck.
All those wannabe investors out there need to keep in mind, when considering whether or not to clear bad debt first, that 95% of new real estate investors fail. Many never start others are not successful and do not survive. Like everything in life it is not for everyone.
Anyone wishing to succeed in starting a new business does so by first insuring their own personal house is in order. I have always believed that if you have bad debt then any savings you have is already spent.
All those wannabe investors out there need to keep in mind, when considering whether or not to clear bad debt first, that 95% of new real estate investors fail. Many never start others are not successful and do not survive. Like everything in life it is not for everyone.
Anyone wishing to succeed in starting a new business does so by first insuring their own personal house is in order. I have always believed that if you have bad debt then any savings you have is already spent.
Lewisville, TX · Member since 2015 · 341 posts · 264 votes
7y
I will break the mold on this post & answer to this question about investing with debt. 9 months ago I was single & debt free. Today I’ve been married 9 months & by getting married I picked up $100k in student loans & another $20k in car loans plus some credit card debt at 0% flipping a house over holidays that recently closed. I own a hard asset fund consisting of over $500k of syndications & partnerships with a partner. I’m in 9 deals total (7syndications & 2 partnership llc’s) & always evolving. I also picked up an income of $38k after tax. Investing with debt can be done but shouldn’t be entered into lightly. If I decided to stop trying to out-invest the debt with average rate of 5% I couldn’t because of illiquid deals I made with syndicates prior to marriage. I know to pay off 5% after tax it takes a 7% annual rate of return but I shoot for 15-19% typically! Only one deal is liquid & could be dissolved & that would only pay off the car loan. If you’re new to real estate investing in general or syndications I wouldn’t recommend my own strategy!
Raleigh, NC · Member since 2017 · 347 posts · 94 votes
7y
@Philip Abbey how does each one compare. Is your bad debt higher than the interest rate of your RE? If so then pay off that debt. Also varies by comfort level.
Rental Property Investor · Wilmington, DE · Member since 2018 · 36 posts · 23 votes
7y
Really depends on how long you would save for the investment property(s). Regardless the cashflow from investments helping pay down any debt is an amazing thing to have. I would likely lean towards getting an additional rental! Never hurts to pay down debt either! Best of luck!
Rental Property Investor · Dyersburg, TN · Member since 2019 · 45 posts · 31 votes
7y
@Philip Abbey Pay the piper. Get rid of the bad debt. Odds are regardless of interest rates etc on the existing debt vs return in a new investment, I bet if you compare your cash flow post payoff of bad debt it will be much more attractive than the new investment cash flow. Plus is you have all those debts cleaned up your much more bankable when your ready to dive in. @Thomas S. Is right in his comments. You need to have your house in order first.
Investor · Wichita, KS · Member since 2017 · 584 posts · 813 votes
7y
@Philip Abbey post a real estate deal you are looking at in the thread and I’m sure you’ll get in-depth responses on what you should do. If you show me you can buy a property all in for 40k and generate $900 a month in rent I’d say do real estate and stop getting into further consumer debt. But if you show me you are putting 20k down on a 100k house in a B+ area, you also want to be hands off and hire a property manager to rent the property for $1100 a month, I’d say pay off the debt. @Joe Villeneuve hit the nail on the head. Where are you going to be in 1.5 years by taking both avenues? Once you pay a debt the money is gone forever, I lean on the side of getting my tenants to pay for my bills, but I also know the difference between a good deal and a bad deal. Good luck sir.
Dryden, MI · Member since 2019 · 22 posts · 10 votes
7y
@Jonathan R.
Hey thanks for the advice, I think one big factor that I believe I have failed to mention on my part (my bad for not noticing) is that I do not have a deal in place, nor do I have the funds to do a deal. Up to currently all extra funds have been going to paying off consumer debt, (which we have also stopped accumulating and have been using Dave Ramsey’s method, and then got introduced to BP) this puts me to now where I don’t have extra funds and was putting out there if over the period of the 1.5 - 2 years if the extra money should stop going to the debt and be saved for an investment later on at the end of the 1.5-2 years where I’d have enough for a down payment on my first property later down the road.