What would you do in this situation?

Question

I am not into real estate yet. I am still doing research. I am also a beginner in investing. I have some small investment accounts.

I have 30k in student loan debts, a car loan and mortgage.

If you had 40k to either invest or pay off debt, what would you do? I am leaning towards investing so that I can pay back my debt faster than I would otherwise and be able to increase my income.

Though, with 40k I'm not sure what the best option for an investment (whether real estate or other types of investments). I just purchased a home so getting another loan is pretty much out of the picture right now.

What would you do in my circumstance?

Chad Gaddie · Answer

@Paul Farley Sell that car.

Marc Winter · Answer

Hang on.  This is kinda odd prioritizing, isn't it?

For those that don't know me, here is a disclaimer:  The following is a real question, not a passive-agressive semi- sarcastic one:  Why would you have taken a 6 year loan on a (probably) $40k+ car which is nothing more than depreciating hunk of metal aka 'asset'?  My rough calculations--a $40k loan with 6-year amortization schedule and 5.75% is about $658 /month???  Plus insurance.  When your real estate cash flow is sufficient, you'll be able to get whatever car you want.  Maybe a couple, 2, 3.  ;-)

Suggestion:  pay off the 6% student loan with some of your cash.  Figure out a game plan to get out from under that car/car loan.  Excercise restraint in your outflow of capital.  Save as much as you can, but don't skimp on your real estate education.

@Jason Hendrickson makes a good point.

Jason Hendrickson · Answer

I'm always the contrarian on this question. I'd pay off your debt. It's a guaranteed return (possibly even greater than what you'll get leveraging into an investment property), it's zero hassle, zero risk and it can never come back to bite you. Run the numbers. You won't "pay back your debt faster" by leveraging your small cash position into a property/properties with miniscule cash flows and that may actually *require* you to spend money.

James Wise · Answer

I would use the $40k to buy two $80,000 duplexes with traditional 30 year financing. Each duplex will need approx $20,000 to cover the down payment.

Jarred Lustgarten · Answer

@Paul Farley try and find a classic car if you can before you get rid of the expensive one. I have a 1986 El Camino. It is beautiful and comfortable and paid for and qualifies for classic car insurance because it is over 25 yrs old. Insurance is like 400 for the year.

Paul Farley · Answer

Thanks everyone. I will definitely pay off the higher interest rate student loan.

Selling the car is really tough to hear. I love the car. I have driven POS cars my entire life and this was the first nice car.

Any other suggestions?

Matt Kauffman · Answer

@Paul Farley I'm with the two above me here. Get rid of the car, go cheap used. I'm driving a 2010 subaru outback with 252K miles on it. Don't buy the reliable car crap that people use to justify an expensive depreciating asset (if you want to call it that).

@Marc Winter is dead on with his analysis.

Theresa Harris · Answer

Between the car loan and student debt, you have about $70K of debt that you have to service along with your mortgage.  You've been able to save $40K which is great.  Your debt load will factor in when you go to borrow money for a rental and may limit how much you can borrow.  If the $40K is sitting in a low interest account or earning less than 6%, use some of it to pay down some of the student loan (6%).

I'd suggest talking to a bank to see how much you can borrow and they will be able to run scenarios whereby you can see what happens when you pay down some of the higher interest debt.

Paul Farley · Answer

I have two student loans:

1 - 4.5%

2 - 6%

The car loan is 12 months into a 73 month loan. I owe $38,000 or so. Interest rate is at 5.75%.

Theresa Harris · Answer

What is the interest rate for the student loan and car loan?  Assuming those are lower interest rates, find out how much you can borrow.  I'm guessing your car loan is small, so if the interest rate on it is higher than what you're getting from the $40K savings, pay it off.

If you invest and get a place that cash flows, put that extra money towards paying off the rest of the debt if you don't like debt.

What would you do in this situation?

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