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.
@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.
Check out the book "The Richest Man in Babylon." It talks about looking at your finances a different way. You have debt but you also have to invest in yourself.
Pay off your short term debt, save 6 months of emergency funds to cover all your monthly expenses, then save for REI. Having too much risk combined with debt is how you lose everything.
I didn’t read all the comments but I think the most important point has not been brought up. To me it is all about your debt ratios. If you are talking $20k in consumer debt the answer can be completely different depending on your income. If you are making $30-$40 k you better not take a risk in real estate until it is cleaned up. If you are making $200 k then who care about $20 k. You will take care of that naturally in a few years so why not save up for real estate investing.
I would not be opposed to buying the real estate first, if you get a great deal (10-15 CAP with minimal CAP X), but you better have a large reserve account that will cover unforseen expenses. Even if you don't have debt, make sure your reserve account is fully funded.
Be very cautious taking advice from successful investors on a forum. Most will be very pro active in advising new investors to jump in based on their own success. Regrettably you are not hearing from the majority of new inventors that failed miserably. They are not on here to provide their opinions/advice. You must understand that they far out number successful investors. Their failure was most likely due to insuficient knowledge/education, insuficient financial security and a poor business plan.
It's all sunshine and roses until it isn't. There are plenty of rainy days in this business.
Too big of a risk. Get your income up and get rid of the debt. Do not jumps into re with that much debt to your income. You are already over leveraged with out re debt. I would be asking for a raise today, ask what you need to do to get a promotion in the next few years, get a second job or side business, put all your tax returns and any money you can get and you will be ready in a few years. Sacrifice now for a better future.
Pay off bad debts first. You can always invest after paying off bed debts, as investment will be a long term goal and getting rich and staying rich is behavior and process.
Carrying too much debt and investing will be like running with heavy weights on you.
Thanks for the tip, I’ve been doing exactly that, it been a huge change in my finical life, having an actual budget and currently putting everything extra towards paying down the debt
Just saw that your household income is 50k. I would hands down say ‘take care of your debt’. You have a right coach with Dave Ramsey. I modified it to my situation. Pay off all debts except home. I have 15 yr loan. 7 more yrs to pay it off. I also carry credit card but pay the balance monthly. This gives me more room to invest aggressively as passive investor in cash flowing projects.
You will find much better opportunities to invest in next 2-3 yrs. prices are at all time high now. You will be in a deep trouble if you invest in real estate with leverage at expense of bad debt accumulated.
Wealth accumulation will commend lot of patience and you need to enjoy the journey there. Tackle your bad debt first for that. You have your head in right place for this journey. I encourage to do your study/research on real estate and mentor with someone in your area meanwhile. Google for local real estate investors groups.
You should 100% pay off student debt and credit card debt first. Those are both horrible kinds of debt to carry around. Paying them off will increase your cash flows for future investing AND remove risk. You're also likely to get far better rates on debt if you're existing debt burden is low/less.
Personally, I did not buy my first rental property until I had paid off all non-tax deductible debt. That seemed best to me.
Looking at your photo reminds me that my first rental was a duplex and when a tenant moved, my wife and I moved into one side. We brought our child home from the hospital to that duplex when she was born. Years passed. The tenants paid off that rental - and that's not the only one tenants paid off. That child has grown up and graduated college - with no debt. Two years to shop and learn and pay off debt will still leave time on your side to invest for your family too.
Playing it less risky and having no non-tax deductible debt before buying that first rental worked for us.
My personal opinion would be to pay off the debt first. If it only takes a max of two years, you could spend that time building valuable RE relationships, doing research etc. Also, paying off the debt improves your financial flexibility, debt-to-income ratios, etc. Best of luck!