Columbus, OH · Member since 2020 · 8 posts · 34 votes
My wife and I are split 50/50 on wether or not to pay off all our existing debt such as student loans and auto payments before we take on more debt to invest into real estate, or we begin saving to buy our first rental property. My personal opinion is that debt in real estate isn’t true debt, but I am just curious as to what others have done and how others feel about this topic?
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
6y
...or, you can invest and let the returns from the investments (cash flow/profit) pay off the debts...and then, you still have the investment income to do whatever you want with it. If you use your cash to pay off debt first, you have to generate those funds again to invest. If you invest first, you can let the investment returns fund the payoffs, and still have those returns coming after the debt is gone.
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
6y
...or, you can invest and let the returns from the investments (cash flow/profit) pay off the debts...and then, you still have the investment income to do whatever you want with it. If you use your cash to pay off debt first, you have to generate those funds again to invest. If you invest first, you can let the investment returns fund the payoffs, and still have those returns coming after the debt is gone.
Erie, PA · Member since 2018 · 413 posts · 348 votes
6y
Opinions vary but my opinion...get your own personal finances in place before investing. Plus you create cash flow by getting rid of those liabilities.
Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes
6y
I'm a huge fan of minimal debt, and while I kind of look at real estate debt the way you do @Zachary Giles, I would want to relieve myself of other consumer debt before jumping into real estate.
COVID-19 has reinforced this belief of mine - those who were already stretched due to other debt REALLY felt the pinch when tenants stopped paying, or were simply unable to pay due to lack of employment. Those without the debt were/are able to weather the storm a bit better.
My wife and I are split 50/50 on wether or not to pay off all our existing debt such as student loans and auto payments
I'd get rid of the cars. No place for expensive things that drop in value 'like a rock' if you guys are serious about investing.
Student loans? Depends on type and how much. Private, expensive loans I'd be more aggressive towards than federal. @Craig Curelop house-hacked while having student debt. It can be done. Here's his BP Money episode https://www.biggerpockets.com/...
But cars and credit cards are a mindset issue. A normal problem, but we're not here to be normal. Normal is broke and looking good. Let your assets pay for your nice stuff later👍
My wife and I are split 50/50 on wether or not to pay off all our existing debt such as student loans and auto payments before we take on more debt to invest into real estate, or we begin saving to buy our first rental property. My personal opinion is that debt in real estate isn’t true debt, but I am just curious as to what others have done and how others feel about this topic?
You said car loan and student loans. Now unless you bought too much car for your salary I’d say invest in real estate.
You have what i would consider “normal” debt. Unless your student loans are so monumental that one broken furnace in a rental will make you pick between paying your bills or fixing the unit.
If I had waited until I was debt free before buying my first rental I wouldn’t be here today. Debt happens just be responsible about it. Keep your credit cards paid off monthly and don’t over extend yourself for a vehicle.
Just like someone else said. Make your real estate investments pay off your debt as you move along. I’ve looked at rentals as oh look these 10 rentals will pay for my car payment, insurance, and gas monthly for the rest of my life. Do that until you don’t have to pay for bills with your paycheck and wham your financially free.
Rental Property Investor · Canton, OH · Member since 2017 · 1k+ posts · 1k+ votes
6y
@Zachary Giles
You'll get different responses on here, but the fact is we don't know enough about your situation. How much debt are you talking? Are you barely able to pay your bills right now? Also depending on how much debt you have, could really impact your ability to use leverage from a bank.
Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
6y
@Zachary Giles I agree with @CJ M. we need more information. We're talking about the intersection of several things - your peace of mind, whether you have high interest debt that is sucking up your cash, whether carrying this debt will keep your DTI too high to borrow, etc. These are all factors.
I'll mention something no one else has mentioned - your statement that real estate isn't "true debt." I'm not sure what this means - real estate debt is debt. It might have a lower interest rate than a car or a credit card, it might be being paid down by your tenants, but it's absolutely debt. =) It's on your credit report, it can prevent you from borrowing more if you max out your DTI, etc.
Investor · Philadelphia, PA · Member since 2016 · 73 posts · 43 votes
6y
If you take personal risk preference off the table, I would say go with the highest return. I.e. if debt rate is 5% and you can make 15% investing then go with investing. But there are so many other factors that come to play that would impact your risk tolerance. Go with what would give you the most "zen". Investing for the sake of investing is not worth it if you or your wife are going to be on pins and needles knowing you've accumulated debt.
Rental Property Investor · Allentown PA, United States · Member since 2016 · 567 posts · 442 votes
6y
@Zachary Giles the way I look at it is that real estate debt is the cost of doing business and it's actually paid by your tenants. What should really concern you is your rate of return, or COC compared to the rate you're currently paying on your debt. Pay off or refinance your high interest debt over 10%. Anything 7 or below I would start investing as your rate of return should be significantly higher. Obviously buy good deals, have cash reserves and understand paying off debt is risk free whereas REI is not
Columbus, OH · Member since 2020 · 8 posts · 34 votes
6y
@CJ M.
Right now my wife and I are not struggling to pay the bills. Our debts are about 20k on a car and 60k on student loans that we are federally held student loans, which we are aggressively attacking during this 0% interest window we have. We both have solid jobs and are able to save about 2 thousand a month, sometimes more if our expenses come in under budget. Big question is do I put 1000 towards savings and the other towards debt or just put it all towards our first investment. Our current plan is to save for 2ish years to put a down payment on our first rental property, and then continue working our jobs and saving to buy 1 rental property every 2 years until the cash flow will ultimately allow us to buy properties and expand based off of the CF our other properties bring in. The ultimate goal is to have a portfolio allowing me to retire by the time our newborn is 10 with the only debt being our properties mortgages.
Rental Property Investor · Canton, OH · Member since 2017 · 1k+ posts · 1k+ votes
6y
@Zachary Giles
I can only tell you what I would do based off of that information. Since you're not planning on buying a rental for 2 years, I would keep stocking money away until then (perhaps a Roth IRA for some of the savings). Then, in the future, if you saved more than you thought you would, or had a change of heart, you could always just pay off your student loan and/or car then. Also in 2 years, I would think you would have a sizable amount of your car paid off anyways.
Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes
6y
@Zachary Giles
That’s not a lot of fluff. 2K a month can get ate up quick if HVAC, roof, plumbing, etc. If you save up for 2 years for a down payment and leave zero for when you buy it that’s trouble. Could you save up for 2.5-3 years to build a cushion instead of 2?
Investor · New York City, NY · Member since 2016 · 155 posts · 105 votes
6y
Not all debt is the same. I know some successful RE investors who got started by using credit cards. It really comes down to interest rates and the cost of money. For instance, if you do a balance transfer for 3% with "zero interest payments for 18 months" the cost of the capital is 3%. And if you can use that money to flip a house and earn 200% of your investment, you just made a very good decision. Many people prefer to be "debt-free" but that's not always in their best interest.
Another example is if you buy a property with all cash. If the property value increases by 20%, you just made a 20% return. But if you buy the property with debt and only put 20% down, you made a 100% return. The reason why so much wealth is created with real estate is because of leverage (i.e. debt).
Columbus, OH · Member since 2020 · 8 posts · 34 votes
6y
@Caleb Brown my plan was to have about 50k saved for investing, and to put roughly 25-30 of that down on the first property depending on how good of a deal I am able to make. Having roughly 20-25k of “cushion” while still adding 2k a month in savings. I am all for having this plan picked apart, I like the advice and appreciate everyone’s input! Thank you!
Columbus, OH · Member since 2020 · 8 posts · 34 votes
6y
@Caleb Heimsoth agreed, I feel very stupid for taking that car loan, something about new degree new job and new car all sounded good, fell for the idea I have been told since birth “debt is adulthood”.
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
6y
@Zachary Giles it goes both ways. My buddy bought a used truck for around 4K when he graduated (paid cash for it). He had a job, lives frugally and paid off ~ 37k in student debt in a year.
Over the next couple of years that truck had all sorts of issues. He spend a couple grand on fixing it (stuff continued to break) and he turned it in. Now keep in mind he also drove a ton, so could be some of both.
His next car he bought a new Honda Civic and got a loan in it. He can do that since 1) he knows it’ll last him forever, and 2) he had no other debt.
He also makes more money that 95 percent of all people his age.
If you buy a new American car, that’s a double whammy because 1) it still depreciates a ton and 2) it won’t last as long as Asian made cars.
The new American fully loaded truck is probably about as bad as you can go in that regard since they’re stupid expensive. At least they last longer on average
Columbus, OH · Member since 2020 · 8 posts · 34 votes
6y
@Caleb Heimsoth we got a 2019 Toyota Corolla, my dad has had a corolla for near 20 years and has had 0 issues with it and puts a TON of miles on it, that was why I figured I’d get the corolla.
@Caleb Heimsoth we got a 2019 Toyota Corolla, my dad has had a corolla for near 20 years and has had 0 issues with it and puts a TON of miles on it, that was why I figured I’d get the corolla.
Then don’t beat yourself up to much about it. Toyota makes fantastic cars.
I’d still pay off that debt before you invest in real estate. But keep the car!
Rental Property Investor · Dayton, OH · Member since 2017 · 48 posts · 68 votes
6y
Lots of people will tell you to invest and use income/gains from those investments to pay off debt. That can work in theory. It will also screw you over if you come across unexpected expenses. Maxing leverage will increase rate of return, but you're left with no equity and a lot of risk if something goes bad.
@Caleb Heimsoth agreed, I feel very stupid for taking that car loan, something about new degree new job and new car all sounded good, fell for the idea I have been told since birth “debt is adulthood”.
Personally - right now I'd look at the stability of your work. We don't know how many sectors are going to be hit hard (hospitals are laying healthcare workers off) and if you are relying on another job's income to cover your issues (like when the place doesn't have a tenant, when you underestimate costs, when someone trashes your place, you have a large dollar repair that is needed, you have to hire an attorney for an eviction or a lawsuit) instead of a healthy amount of cash or liquid assets; that could really rock your finances when a lay-off happens at the same time an expected one-time hit comes (those things above happen - and never at a good time).
I wouldn't take on debt for additional real estate investment unless you had at least 6 months of your monthly expenses (all those debt payments) in the bank and don't touch it. If you have that and a good down payment (investment is ~30-35% to get a good rate on a traditional mortgage) and have your debt to income ratio low enough that you can get approved for the additional debt - I would say go for it.
With that said - I either put a 35% down payment or buy cash if the property won't finance (major repairs needed). I use cash for renovations. I spend probably 30% of my income in monthly expenses from my "job"and invest/save the rest. This has been good for me as we just had 40% pay-cuts announced at work. I have enough cash to finish my investment property and if were laid off today - could also support myself for 8-10 months. That is definitely a better position than most.
I also have very low monthly expenses - no car loans, no credit card balances, no student loans, and a mortgage that I could pay by mowing lawns if I had to...
Rental Property Investor · Denver, CO · Member since 2018 · 46 posts · 48 votes
6y
Go read “The Richest Man in Babylon”.
It covers this scenario in detail and a lot of other great personal finance insight as well.
Bottom line, you should pay yourself first by investing a certain percentage of your income toward your future. As you pay off debts, increase the amount you set aside. Don’t let “lifestyle creep” get in the way.