Pay Off 3.5% Car Loan vs Save Up For REI

2 Replies

Hey, y'all. Long time lurker here. I'm currently in a pickle and need some advice on how to approach my goal of getting into real estate investing. I would love additional perspectives to make sure I'm thinking of all possible scenarios.

Personal Financial Situation

Income: $140,000/yr

Emergency Fund Status: Six Months of Expenses at $20,000

Car Loan Balance: $25,000

Monthly Cash Flow: ~$4500

Now that I've reached my first financial benchmark of saving up for an emergency fund of 6 months, I'm at a crossroads. I can spend the next 5-6 months aggressively paying off the car loan and be completely debt-free or I can jump right into saving for my first REI property.

From my perspective, paying off the car loan would put me in a great personal financial position. Positive net worth, free up the car payment which would push my cash flow to ~$5,000 a month, and be a great burden off my financial shoulders. Who doesn't want a completely paid off nice car? The only negative I see with this approach is that it'd delay my entrance into the real estate investing game.

On the other hand, because the interest rate on the car loan is only 3.5% and my cash flow is already at a decent amount, I'd only have to find a property whose returns could beat that percentage, right? It would probably take me close to two years from today to reach the amount necessary to buy a distressed property in cash and begin the BRRRR process. Otherwise, it'd take me an extra year or so (because you know, I'm sure life will do its thing and throw a wrench into my plans).

I'm currently leaning towards paying off my car because of the psychological benefits of being completely consumer debt free and increasing my cash flow by nearly $500.

What are your thoughts? What moves would you take if you were in my financial position?

If you payoff the car, can you use that money to make you more money?  The key thing here is opportunity cost & the future value of your money.  

If you take $20,000 and payoff the car, that is the end - car is paid off & it will depreciate, without making you any money.

Our average return on investment is 87%, that means that if we put $20k in, we get the $20k plus an average of another $17,400 back...

Your decision hinges on opportunity cost & future value of your money.

Originally posted by @Moises R Cosme :

If you payoff the car, can you use that money to make you more money?  The key thing here is opportunity cost & the future value of your money.  

If you take $20,000 and payoff the car, that is the end - car is paid off & it will depreciate, without making you any money.

Our average return on investment is 87%, that means that if we put $20k in, we get the $20k plus an average of another $17,400 back...  

Your decision hinges on opportunity cost & future value of your money.

 Sheesh, if I know my investment would return me that much, I'd definitely wait to pay off the car loan, but as a newbie investor, I'm not sure yet. Hopefully, I can educate myself by then to be able to run the numbers with enough confidence to make such a decision. At the moment, I feel like paying off the loan is like a guaranteed 3.5% return.

I'll definitely run numbers as I come across deals at the moment to get more comfortable with analyzing properties! Man, if I could get 80% ROI...ha. I'd quit my job in a heartbeat to focus solely on this lol