Pay of debt or Buy a Cash Flow Property? Question of the Week.

[Dennis Maynard]

Hey Everybody,

Many people face this challenge.  Should you pay off debt such as a car, credit card, or student loans first?  Or should you take the same money and buy a cash flow income property?  

What would you do and why?

Having fun with this.

Dennis

[James Hamling]

@Dennis Maynard I can not say this enough and it's scary how little it is spoken of; Risk, risk, risk RISK RISK ANALYSIS!

Everything, every deal, every number MUST start with Risk Analysis. And I near to never hear it spoken of in open public forums like this yet, inside the world of Institutional/Professional REI it is the single most centric item we discuss, analyze, assess, quantify, weigh and measure.

Let's say your considering an est. 15% ROI property, IS that going to ACTUALLY turn into a 15% ROI in reality? Projections are NOT realized returns, meaning just because something "penciled-out" to make that does not mean it actually will. What is the Risk Analysis? Is it at high or low risk?

A person can easily see something that looks great on paper yet, it's based on fairy-tale best case scenarios and once they get in there is issues with tenant reliably paying rents, or tenant does damage to property, or PM issues, or property tax's go up 20%, or or or or. 

There is a reason that A-class properties have a small COC rate, because they give SECURITY, reliability, performance, and equitable gains. AND conversely there is a reason D-class properties have BIG COC numbers, because risk is through the roof, and the slightest deficiency in operations will all but certainly net BIG losses, and or reinvestment requirements.

So if your going by blind tunnel vision of just COC %, I would pay debt because that 10+cap is almost a certainty for net loss for anyone but a pro at that property class and if your a pro, you wouldn't have tunnel-vision on in the first place.

I know the general populous wants to hear that all you gotta do is say "yeah, I wanna be rich" and it's as easy as just buying a property, tenants bow down and worship the LL for the opportunity to enrich them, governance awards them medals of service for providing housing, money flows like honey and all is well..... Yeah, not so much in reality, in reality the life of REI is basically everyone and everything is out to eat your lunch, and you gotta be smart, fast, strong-like-bull and tip-toe through the mine-field.