I sold a business. Do I invest or pay off debt?

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I sold a business. Do I invest or pay off debt?

Joey Allison
Rental Property Investor · AZ · Member since 2019 · 46 posts · 25 votes

Guys, I am 34 years old. I will be selling my ownership in one of my companies for $300k. With this sale, I’m losing $40k per year in salary. I’m trying to see how you would invest the $300k. Here’s my breakdown. I have 2 rental properties. I owe $64k and $86k respectively. I own a home and 2 vehicles. Those payoffs are $440k, $30k and $30k. No other notable debt exists. My question is, should I use the $300k to buy as many rental properties as I can to replace as much of the $40k as possible? Or, should I pay off as much debt as I can which will save money. Both options will increase my net worth, but both options have their pros and cons. Paying off the debt will save 6% interest while buying the condos will produce about a 10% return. Thanks everyone!

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Twana RasoulBusiness Member
Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
7y

@Joey Allison there’s no right or wrong answer really, it really depends on your lifestyle, goals and level of risk you are comfortable with. Decisions don’t always have to be based on maximizing returns. Maybe you can do both. Is it at all an option to sell one of the 30k vehicles and also pay off the other? After that maybe focusing on acquiring more cash flowing properties?

Best of luck!

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  • Twana RasoulBusiness Member
    Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
    7y

    @Joey Allison there’s no right or wrong answer really, it really depends on your lifestyle, goals and level of risk you are comfortable with. Decisions don’t always have to be based on maximizing returns. Maybe you can do both. Is it at all an option to sell one of the 30k vehicles and also pay off the other? After that maybe focusing on acquiring more cash flowing properties?

    Best of luck!

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  • Account Closed
    Rental Property Investor · Brooklyn NY · Member since 2018 · 263 posts · 469 votes
    7y

    @Joey Allison

    I wouldn't do anything.  See how your life plays out for the next 6-12 months.  You may or may not need money to make up for the loss of $40k annually.  You may want to start a new business.  You may decide to sell your existing rentals for bigger deals.  You may decide to get into private lending.

    There is a lot of power knowing you have $300k sitting in cash...

    4Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    7y

    From the wording, it sounds like you have multiple companies and are only selling one therefore I am assuming you still have other income aside from the rentals.  If this is the case and you aren't unemployed, I would not pay off the mortgages on the rentals, the tenants are already doing that and presumably the interest rates on those loans are good. 

    I doubt you can buy enough rental properties with $300K to make up for the $40K loss in salary, but you can probably offset it a bit. Have you looked at multifamily units such as a duplex rather than condos? The condo or HOA fees take a good amount out of your pocket every month, yes they are offset by some building maintenance.

    2Reply
  • Joey Allison
    OP
    Rental Property Investor · AZ · Member since 2019 · 46 posts · 25 votes
    7y

    @Nisa Matsuyama There is $210k equity in my home, and both condos add up to another $95k in equity. The vehicles are worth what I owe. My wife brings home a NET salsry of $43k and my other business NETS an an average of $100k per year. Those are all the details. 

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  • Frank Wong
    Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
    7y

    Hi Joey,

    If I was in your exact position this is what I would.

    1. I would NOT buy as many houses as possible with the money.

    2. I would take the $300k and buy 1 house cash and then scale and buy another house cash once I have a proof of concept.  Now I have guaranteed money coming in with very low risk. 

    3. Find a new job that pays me more money. 

    5Reply
  • Stephen Akindona
    Investor · Memphis, TN · Member since 2013 · 741 posts · 845 votes
    7y

    @Joey Allison I think you are in a vey enviable position. My opinion would be to scale my holdings as large as possible. I would keep the debt to about 75% and purchase as much cash flow as I can. You are also young and long term debt at the current interest rates can be a powerful tool to utilize as well! You have time on your side!

    I guess it also depends on your personality! I like to be aggressive. Not “caution to the wind” aggressive but aggressive using sound investing principles! I guess there is not right or wrong but I would buy right and scale!

    2Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    7y
    Originally posted by @Joey Allison:

    @Nisa Matsuyama There is $210k equity in my home, and both condos add up to another $95k in equity. The vehicles are worth what I owe. My wife brings home a NET salsry of $43k and my other business NETS an an average of $100k per year. Those are all the details. 

     You obviously have a nack for business investment, Joey.  Well done.  I'd invest in another business if I were you.

    You are in a different world than I, so my advice about your primary and cars won't apply, but I wouldn't have $60k in vehicles or a $650k ish primary at all.  That's $710k of assets,  60 of it debt and dropping in value fast.

    My breakdown example of $685k of relevant assets is $15k in 2 cars and a $325k primary that has a $1200/mo ADU. The balance was $345k into a now $750k townhome community down the street that grosses $6400/mo.

    But I am a Napper that values freedom and choices and hasn't had a job in 17 years. You are normal, I am weird, but wanted to give you a different perspective if you really wanted to shake it up.

    2Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    7y

    1. Get rid of the vehicles and buy something sensible. Auto loans are one of the greatest hindrances to building wealth. I would trade them in and get two reliable, fuel-efficient cars like a Honda Civic.

    2. Get a job. Don't transition to real estate until you've successfully generated the target income. You won't be able to spend $300,000 and generate an annual income of $300,000. To GROSS $50,000 annually, you need 21 homes cash-flowing $200 a month. Can you find 21 cash-flowing properties that can be bought with less than $14,000 down on each one? And this is just the gross, not net, and it's half what you net right now.

    3. Get a job. The ability to replace your income won't happen overnight, even if you are successful. It could take a year or two just to buy the investment property and build the experience. You may get into it and realize you suck as a Landlord or you just don't like dealing with Tenants. You need to know this is the right vehicle for you before you tie yourself to it.

    I would get a job, pay off debt, and use the money to slowly build an investment portfolio. Once it's stable, I would consider transitioning to real estate full time.

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  • Jonathan Gomez
    Member since 2017 · 27 posts · 11 votes
    7y

    @Joey Allison 

    What is the monthly income and the monthly profits for each property? I'm trying to figure out if the sum of the yearly income minus the yearly profits is near $40k because if it is and the objective is simply to replace the $40k, then you could easily pay them off, get the extra cashflow, and use the other $150k to invest in another deal. 

    0Reply
  • Josh Rogers
    Cheyenne, WY · Member since 2016 · 23 posts · 94 votes
    7y

    @Joey Allison Just curious, how did you come up with a value for your portion.  Was it determined by the company?  I have a small business online (no employees) that I've been considering selling, but I don't know how to value it?  Sorry this isn't related to your question, but I'm just asking for advice.  Thanks

    0Reply
  • Joey Allison
    OP
    Rental Property Investor · AZ · Member since 2019 · 46 posts · 25 votes
    7y

    @Jonathan Gomez The property with $65k balance NETS $243 per month. The property with $86k balance NETS $275 per month. If I pay both properties off, I only increase my monthly cash flow by an additional $1,000 per month. There is no way in either scenario I can replace the $40k salary without taking another job, which I will NOT be doing. I plan to transition into more of an investor type role. I guess what I am trying to find out is this: Is adding debt for more income better than reducing debt for income. I can pay debt and save $$, or I can add debt and earn more $$. If I add debt, lets say $1 million in real estate and use the $300k as a down payment, I can reap the benefits of a monthly cash flow plus, if that $1 million in real estate appreciates even 2%, I generate $20k on paper. I would never have that if I simply pay off debt.

    1Reply
  • Joey Allison
    OP
    Rental Property Investor · AZ · Member since 2019 · 46 posts · 25 votes
    7y

    @Josh Rogers It was semi-complicated but in the end, we had assets to help value the business worth. I am selling 60% of the company (my ownership) to my brother-in-law. I have heard the quickest way to value your business is by taking 5X your profit. Thats a general rule-of-thumb.

    0Reply
  • Jonathan Gomez
    Member since 2017 · 27 posts · 11 votes
    7y

    @Joey Allison Your question seems to be mostly related to personal preference or risk tolerance based on your response. Everybody will have a different answer for you. If you're focused solely on what generates the greatest return, then you are correct, you will likely make more reinvesting the money into something (REI, business, stocks, etc.) assuming you don't invest poorly, which leads into your risk tolerance and knowledge. There are a lot of variables and options that would be hard for anybody to consider unless we were in your shoes and saw the whole picture.

    If you're looking for ideas, one potential option to consider is whether or not you can significantly change the cashflow by investing a bit in the properties you already own. That might also increase the value of the homes, allowing you to have significant realized and unrealized earnings when considering the amount invested. You would still have to figure out what to do with majority of the money though. Only thing I wouldn't do is leave it in the bank earning nothing or some insignificant amount of interest. 

    2Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    7y

    Congrats on the sale.

    • Option 1 - pay off 6% debt
    • Option 2 - invest in condos with a 10% return

    Many investors would select Option 1...the 4% incremental return is not worth the work and added risk involved in sourcing and managing an active real estate portfolio.

    Most investors would select...

    • Option 3 - invest in other real estate with a 15+% return
    1Reply
  • Joey Allison
    OP
    Rental Property Investor · AZ · Member since 2019 · 46 posts · 25 votes
    7y

    @Jonathan Gomez I was definitely looking for opinions on what you guys would do in my situation. Different points of views and opinions are always great to know. Thanks for your input!

    0Reply
  • Jonathan Gomez
    Member since 2017 · 27 posts · 11 votes
    7y

    @Joey Allison it's my pleasure. You probably already know this as a businessman and investor, but if I were in your shoes and I wanted to replace the $40k ASAP, then I would invest in things that maximize the profit from cashflow per dollar invested. Whether that's reinvesting in your properties, buying new ones, or some other investment, it would all be focused on cash flow. I believe, that will stretch the 300k the furthest. 

    Just in case I didn't make my ideas clear with all my responses. 

    0Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    @Joey Allison

    Just in case nobody mentioned it, is that $300k really $300k? You seem pretty successful so can we assume you’ve thought of the tax consequences of the sale?

    I’m more conservative. I would sell that main residence and both cars. At those prices they’re probably too big and fancy for the prices.

    Then I would take half the money and invest in Vanguard VTSAX, and invest the other half in 75% loan to value cash flow multi family properties.

    So, your lower your bills by getting rid of large home and cars, and you’d diversify investments.

    2Reply
  • James Murphey
    Waipahu, HI · Member since 2018 · 121 posts · 81 votes
    7y

    I agree with @Twana Rasoul I think it depends on your lifestyle, and goals and level of risk you are comfortable with. In Mark Manson's Book The Subtle Art of Not Giving a F**K, Mark describes only giving a F about things you know you are willing to suffer for, and knowing the level of suffering you are willing to endure. You should consider the investments, and the work that comes with them, and how it will enrich or constrain your life. It sounds like you are very entrepreneurial. I would consider the ROI, the work, and the impact it will have on your life good or bad. Hope this helps. Let us know how it goes.

    0Reply
  • Elizabeth Miller
    Flipper/Rehabber · Cambridge, MA · Member since 2019 · 65 posts · 8 votes
    7y

    @Joey Allison look into opportunity zones and opportunity zone funds for capital gains deferment. https://eig.org/opportunityzones/about

    0Reply
  • Nate Bell
    Member since 2018 · 151 posts · 140 votes
    7y

    @Joey Allison

    Pay off or sell the cars. Then, wait for the economy to dip a little more, and then go find a partner(s) to invest your cash in a large multi family deal.

    1Reply
  • Account Closed
    Member since 2019 · 52 posts · 123 votes
    7y

    @Joey Allison Buy as many units that you can for cash. The complex or units should be able to cover your $40k income and payoff your debt at the same time. You kill two birds with one stone. You may have to buy units in another city but you can get bigger bang for your buck 

    1Reply
  • Bill Goodland
    Rental Property Investor · Allentown PA, United States · Member since 2016 · 567 posts · 442 votes
    7y

    @Joey Allison I'm young and naive to risk, so I say buy as much cash flowing real estate you can with safe leverage, value add opportunities in stable markets that are unlikely to be hit hard by a recession (diverse labor market, NOT a coast). That, or use the cash to be your own bank and BRRRR one place at a time

    1Reply
  • Joey Allison
    OP
    Rental Property Investor · AZ · Member since 2019 · 46 posts · 25 votes
    7y

    @Bill Goodland I like it! I think I’m with you on that plan brother.

    1Reply
  • Andrew Flora
    Rental Property Investor · North Vernon, IN · Member since 2018 · 136 posts · 192 votes
    7y

    @Joey Allison

    Sell both of those cars. Those things are dragging you down. Get rid of that debt and pay cash for a cheaper vehicle you dont need a 30k car. I would consider downsizing your house as well. In this market I would pay off the rentals. Get 100% debt free. Then pay cash for additional rental properties. If the market goes back down then buy a lot more properties for 50 cents on the dollar. If you are out of debt you literally have zero risk and will be set for life. Get a job for a few more years to fund more real estate. Then retire at 40.

    0Reply
  • Bill Goodland
    Rental Property Investor · Allentown PA, United States · Member since 2016 · 567 posts · 442 votes
    7y
    Originally posted by @Joey Allison:

    @Bill Goodland I like it! I think I’m with you on that plan brother.

     Glad my suggestion may be a winner haha. Keep us updated on how it goes. I'm curious, do you mind sharing a little bit about the current business you are selling?

    0Reply
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