I have a personal finance scenario where I'd like to know what other people would do if they were in my shoes. In January 2021, I'll be about 18 months away from being completely debt-free (I'm currently renting for $1825/mo in Los Angeles) and I'm wondering if I should start investing at that point or if I should wait. Once January hits, I'll have two loans left:$45,000 on a car loan @ 6%$24,000 personal loan @ 15% Minimum payments being $1125 and $437 respectively. After all of my monthly expenses I'll have about $2500 per month to either throw towards debt or I can start saving for everything I need to buy a duplex or triplex that I'll househack in. From what I've gathered, I'll need to build an emergency fund that's at least 3 months of the mortgage and I'll have to save up the closing cost. I'll be using the VA Loan so I shouldn't have to worry about a downpayment. I'm estimating the monthly mortgage to be around $4000 per month so I'll be able to cover the full mortgage without a tenant if I combine my current rent payment plus the $2500. It'll leave me tight but once I have a tenant I'll be fine. My question is Should I finish out the 20 months and be debt-free, going in with ~$4000 of discretionary income; pay off the 15% loan in 8 months (from January so Aug 2021), going in with ~$3000 of discretionary income, or is it wise to start now with ~$2500 of discretionary income. TLDR Should I start investing now with $2500 per month, pay off a 15% APR loan in 8 months and invest with $3000 per month, or pay off a 15% and a 6% loan in 18 months and invest with $4000.

Should I pay off two loans before saving to invest?

Investor · St Petersburg, FL · Member since 2014 · 231 posts · 221 votes

6y

I'd pay it all off, even though I didn't do it that way. I bought my first house with a VA while I still had a car loan. That loan was at 2.2%, so it didn't make much sense to pay it off. Yours is a lot higher rate, so knock that personal loan out at least. The car loan is high, but not credit card high.

3 Reply

Theresa HarrisPro Member

Member since 2019 · 15k+ posts · 11k+ votes

6y

$45K car loan-ouch. Some will suggest selling the car and getting a less expensive one. Don't do the minimum payments on the 15% loan-do the math and figure out how much that is really costing you. Pay that down quickly.

As Colin said, your rates are higher so I'd pay them off and then save for a down payment. If you pay them off faster, once they are paid off pretend you still owe the money and put that into a separate account for your down payment.

The $1600 you are paying for the loans will make a huge difference in terms of what you can afford to borrow.

1 Reply

Dennis Cosgrave

Rental Property Investor · Member since 2019 · 304 posts · 462 votes

6y

I agree with the above. What in hell are you doing with a $45k car loan? Read the discussion on what kind of cars investors on here drive. That should tell you more than enough. Sell that car, get something cheaper. Either pay cash or pay it off as quickly as possible. That will certainly help your credit score as well as reduce your DTI ratio which will translate into better financing terms when you make your first investment.

3 Reply

Lee RipmaPro Member

Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes

6y

@Johnathan Walton

I would certainly pay of 15% very fast. I agree with others about trading out your car for a something cheaper with a better interest rate or just buy it with cash. I got my used car with 4% interest. Any interest that is sub 5% I don’t pay down because I can get much higher returns in RE.

Podcast Guest on Show #373

3 Reply

Johnathan Walton

OP

Real Estate Agent · Los Angeles · Member since 2020 · 14 posts · 10 votes

6y

My credit score is around 785 right now. I took the loans out when it was much lower. According to a calculator I found online, my front end DTI is 13% and back end is 33%.

I did some math and selling the car to buy a $7,000 car would save me 6 or 7 months so I'll just pay them both off before investing.

Thanks for the advice, everyone!

0 Reply

David Pere

Rental Property Investor · Springfield, MO · Member since 2016 · 1k+ posts · 890 votes

6y

@Johnathan Walton I would ABSOLUTELY pay off the 15% loan immediately. The 6% isn't as bad, because you can earn more money investing than that...but 15% is a really high interest rate. Definitely pay that off!

3 Reply

Jon Schwartz

Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes

6y

Originally posted by @Johnathan Walton:

My credit score is around 785 right now. I took the loans out when it was much lower. According to a calculator I found online, my front end DTI is 13% and back end is 33%.

I did some math and selling the car to buy a $7,000 car would save me 6 or 7 months so I'll just pay them both off before investing.

Thanks for the advice, everyone!

Dude, you got this sh*t figured out. You didn't need the forums!

My analysis would look at the opportunity cost of waiting to buy that duplex or triplex. For example, if you can get into a duplex in January 2021 that reduces your living expenses by $1000/month, then your opportunity cost of *not* buying it is the $8000 or what-have-you until you pay of your debt. Does that compute with you? Have you looked at the situation in this light?

Best,

Jon

1 Reply

Alyssa Dyer

Rental Property Investor · Oklahoma City, OK · Member since 2017 · 1k+ posts · 694 votes

6y

Congrats!

I persoanlly paid off all debt before investing, but in hind sight I wish I would have started a little sooner. I just had car debt at a low interest rate. I could have been making money to pay off the car.

I'd likely save up, then house hack, then get rid of that 15% loan ASAP, then focus on buying. If the $45k car either is needed for a sales job (lame that it matters, but sometimes it does) hold onto it, otherwise I'd ditch it for something practical.

Good luck!

1 Reply

Darnell KuykendallPro Member

Member since 2018 · 10 posts · 5 votes

6y

@Johnathan Walton

Hey john,

Great question and some great answers on here. I myself am having the same somewhat issue where I did pay off the car (25k) at the beginning of the year. however school loans are there at 45k with 4.5% interest. Which I said I want to have these paid down and start saving for a mult family unit in mass. John if you didn’t want to get rid of the car, ( which I think you should) have you tried refinancing at a lower rate at least? Just another option. But getting rid of that high debt would ease your mind.

Darnell

0 Reply

Johnathan Walton

OP

Real Estate Agent · Los Angeles · Member since 2020 · 14 posts · 10 votes

6y

Originally posted by @Jon Schwartz:

Originally posted by @Johnathan Walton:

My credit score is around 785 right now. I took the loans out when it was much lower. According to a calculator I found online, my front end DTI is 13% and back end is 33%.

I did some math and selling the car to buy a $7,000 car would save me 6 or 7 months so I'll just pay them both off before investing.

Thanks for the advice, everyone!

Dude, you got this sh*t figured out. You didn't need the forums!

My analysis would look at the opportunity cost of waiting to buy that duplex or triplex. For example, if you can get into a duplex in January 2021 that reduces your living expenses by $1000/month, then your opportunity cost of *not* buying it is the $8000 or what-have-you until you pay of your debt. Does that compute with you? Have you looked at the situation in this light?

Best,

Jon

Jon,

That makes sense. The rough numbers I came up with just now seem to fall towards paying off the 15% loan and then refinancing the car loan. I just don't have the cash right now to buy in January so I'd have to save up for about 6 months which would put me in June when I'd be ready to actually buy.

0 Reply

Johnathan Walton

OP

Real Estate Agent · Los Angeles · Member since 2020 · 14 posts · 10 votes

6y

Originally posted by @Alyssa Dyer:

Congrats!

I persoanlly paid off all debt before investing, but in hind sight I wish I would have started a little sooner. I just had car debt at a low interest rate. I could have been making money to pay off the car.

I'd likely save up, then house hack, then get rid of that 15% loan ASAP, then focus on buying. If the $45k car either is needed for a sales job (lame that it matters, but sometimes it does) hold onto it, otherwise I'd ditch it for something practical.

Good luck!

That's originally what I was thinking of doing but I wasn't sure if it made sense. I'll keep running the numbers since I have till January to decide for sure.

1 Reply

Johnathan Walton

OP

Real Estate Agent · Los Angeles · Member since 2020 · 14 posts · 10 votes

6y

Originally posted by @Darnell Kuykendall:

@Johnathan Walton

Hey john,

Great question and some great answers on here. I myself am having the same somewhat issue where I did pay off the car (25k) at the beginning of the year. however school loans are there at 45k with 4.5% interest. Which I said I want to have these paid down and start saving for a mult family unit in mass. John if you didn’t want to get rid of the car, ( which I think you should) have you tried refinancing at a lower rate at least? Just another option. But getting rid of that high debt would ease your mind.

Darnell

I haven't tried to refinance anything as of yet. Originally I figured by the time I got to the debt I'd pay it off faster than it would make sense to refinance so I never really bothered but if I ended up holding on to the debt for an extra year so I could start investing now then I think it would be a great idea to look into refinancing.

1 Reply

Renee Moomey

Real Estate Agent · Bennett, IA · Member since 2018 · 62 posts · 40 votes

6y

@Johnathan Walton I can see this working either way, without the big car loan. I'm curious what those payments are and how changing that factor could change your timeline.

0 Reply

Johnathan Walton

OP

Real Estate Agent · Los Angeles · Member since 2020 · 14 posts · 10 votes

6y

Originally posted by @Renee Moomey:

@Johnathan Walton I can see this working either way, without the big car loan. I'm curious what those payments are and how changing that factor could change your timeline.

It's $1125/mo. Selling it and buying a $7000 car would make me debt-free 6 months faster and I'm estimating the monthly payment would go to around $200 per month if I financed the new one for 36 months.

So I'd go from 18 months of debt to 12 months of debt. I really like the way it drives and I planned on keeping it until the wheels fall off so I'm thinking I'll suffer through the extra 6 months. Or even refinancing it, based on the advice I've received here, and paying it off after I'm living in the duplex/triplex.

3 Reply

Jonathan G.

Investor · Marietta, GA · Member since 2015 · 382 posts · 258 votes

6y

@Johnathan Walton

Jonathan, why are you messing with such high interest loans with that nice credit score?. You already know all the answers but what you need is a plan with a time line. You need to refinance that personal loan ASAP to something lower. Check with your bank and if your not already a member of a credit union, check out that too.

Next, sell that car and get something cheaper (but not “cheap”) like a reliable Honda, Toyota, or older Lexus.

Have a goal to have all of this done in the next two months. Then you’re going to go into 2021 with that same amount of income and you’re going to be killing it with moving closer to your goal to buy property.

0 Reply

Johnathan Walton

OP

Real Estate Agent · Los Angeles · Member since 2020 · 14 posts · 10 votes

6y

Originally posted by @Jonathan G.:

@Johnathan Walton

Jonathan, why are you messing with such high interest loans with that nice credit score?. You already know all the answers but what you need is a plan with a time line. You need to refinance that personal loan ASAP to something lower. Check with your bank and if your not already a member of a credit union, check out that too.

Next, sell that car and get something cheaper (but not “cheap”) like a reliable Honda, Toyota, or older Lexus.

Have a goal to have all of this done in the next two months. Then you’re going to go into 2021 with that same amount of income and you’re going to be killing it with moving closer to your goal to buy property.

I guess since I'm down to two loans left I'm just getting antsy. But I'll contact a few banks to see if they can move me into a lower APR loan.

Thanks for the reply!

0 Reply

Mike Hourihan

Investor · Montgomery Village, MD · Member since 2017 · 31 posts · 9 votes

6y

@Johnathan Walton what kind of car?

0 Reply

Johnathan Walton

OP

Real Estate Agent · Los Angeles · Member since 2020 · 14 posts · 10 votes

6y

Originally posted by @Mike Hourihan:

@Johnathan Walton what kind of car?

Tesla Model 3

1 Reply

Colin Reid

Investor · St Petersburg, FL · Member since 2014 · 231 posts · 221 votes

6y

@Johnathan Walton, I'm being completely serious when I say I like your plan. A 6 month difference isn't that big, so I wouldn't sell the car, either.

2 Reply

Marian Smith

Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes

6y

@Johnathan Walton You may want to reflect on worse case scenarios. And reserves. Think of yourself as an insurance guy estimating the likelihood of a fire or earthquake and how much "premium" is needed to cover the disaster. In your case it is job loss, yours or tenants, unethical tenant during moratorium, in California pretty much any unethical tenant, and then the usual. Last downturn there was a Cali investor profiled in the paper here in Texas who had a washer hose burst and flood the interior of a pretty new rental sfh. While Investor waited on insurance the tenant moved out (said place was uninhabitable due to water but probably also found somewhere cheaper) so now she had deductible and mortgage and pm fees to manage rehab. Paper said she didn't have the money to move forward (or chose not to move forward more likely) and the bank ended up foreclosing. You need to pay down debt so you can build reserves. Being very thorough in vetting your tenants can greatly reduce risk, but vacancy creates urgency without reserves. You really need reserves...or a line of credit (credit card) starting out but not sure if you can charge mortgage. reserves allow you to sleep well.

1 Reply

Steve Cook

Member since 2020 · 10 posts · 6 votes

6y

@Johnathan Walton. First Congratulations on almost being debt free. That is great. The good news is that you have a plan and you have a choice. Sometimes people are trying to choose between two bad paths, you happen to be in a good spot.

I'm with the others about the car. You could eliminate that debt tomorrow by choosing a different vehicle. A good used pick up truck would serve you well and allow you to focus on paying down the personal loan more quickly.

But your question was what to do first. I'd look for a deal now. If the right one comes along, move on it. If not, keep paying the debt in the mean time. If it takes 8-12 months to come across the right deal, by that time your debt will be paid and your knowledge of the market will be greater.

Let us know what you decide.

But

1 Reply

Anthony Wick

Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes

6y

@Johnathan Walton I would stop spending any money that I possibly could, sell that car and buy something much much cheaper, move so I could have less rent (roommates?), and pay off that personal loan asap. That $69k is what I would call bad debt. Terrible debt. Unburden yourself of those as quickly as humanly possible. It will take sacrifice. No dinners out. No lunches out. No drinks with friends. Nothing extra or online purchases because you "deserve it". Good luck.

2 Reply

Alyssa Dyer

Rental Property Investor · Oklahoma City, OK · Member since 2017 · 1k+ posts · 694 votes

6y

@Johnathan Walton keep us posted on how it turns out!

1 Reply

Johnathan Walton

OP

Real Estate Agent · Los Angeles · Member since 2020 · 14 posts · 10 votes

6y

Originally posted by @Alyssa Dyer:

@Johnathan Walton keep us posted on how it turns out!

Will do! Because of the feedback I've received, I'm leaning towards sticking with my original plan of paying everything off as fast as I can before investing. I didn't want to sell the car because I actually don't mind driving now (I generally hate driving in Los Angeles traffic) but after the feedback, I'm going to crunch the numbers to see if I can gain more than 6 months from selling the car. I personally don't think 6 months is terribly long to wait so I can drive a car I enjoy. I'll also compare selling it to refinancing it.

1 Reply

Alyssa Dyer

Rental Property Investor · Oklahoma City, OK · Member since 2017 · 1k+ posts · 694 votes

6y

Originally posted by @Johnathan Walton:

Originally posted by @Alyssa Dyer:

@Johnathan Walton keep us posted on how it turns out!

Will do! Because of the feedback I've received, I'm leaning towards sticking with my original plan of paying everything off as fast as I can before investing. I didn't want to sell the car because I actually don't mind driving now (I generally hate driving in Los Angeles traffic) but after the feedback, I'm going to crunch the numbers to see if I can gain more than 6 months from selling the car. I personally don't think 6 months is terribly long to wait so I can drive a car I enjoy. I'll also compare selling it to refinancing it.

I totally get that! I am right in the middle of selling my car. I used to be in it all the time but with how much I am traveling it's just not worth it. In that same vein, we are selling our primary residence so we can house hack for a while as well. Nothing is permanent, lol. Always time to adjust and make changes later on.

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Should I pay off two loans before saving to invest?

Should I pay off two loans before saving to invest?

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