Hi everyone! I'm new to the forums and to REI. I haven't done my first deal yet. Actually, my husband and I nearly bought a place earlier this year. That place fell through at the last minute, but although I was hugely disappointed at the time, in hindsight, it wasn't a great deal for us, I learned a lot and the whole experience got me inspired to start looking into real estate investing. My husband and I have a small amount of savings - around $25k, which is enough to buy a rental property - but we also have credit card debt of about $19k. That sucks and I'm not proud of it - but I'm so proud of how far we've come. Two years ago we were drowning in over $40k of CC debt, I was just coming out of being laid off, and I was regularly worried sick about what we were going to do to survice. So I feel really proud of our efforts to pay it down. We have worked hard and hustled, and now finally we moving into positive net worth territory even with the credit card debt after years of having a negative net worth. Anyway, one of the reasons our potential house deal fell through earlier this year was because of the credit card debt. I'm now in a position where I could pay it all off in one fell swoop - but it would wipe out most of our savings and we'd have to start rebuilding them before we would again be in a position to invest in a rental property. I have a few options. I could pay off some of the debt and hang on to more of our cash reserves, which I could use to start investing. I could keep paying a large amount each month to the card companies (I have payment deals with them so interest is low). I could take some money out of my 401k and lend it to myself to put towards the debt. OR I could pay it all off in one fell swoop, start rebuilding my reserves firstly by paying myself what I was paying the credit card companies. What would you do if you were me? All advice welcome!

Account Closed Your arguments are not valid. You are using the exceptional situation to justify a general rule. Yes your illegal employee may have made 236% return but how did he get a loan with no fico score. Not everyone can do that. Also he made money in an extreme appreciating market. That is not the norm. Most of your arguments are assuming significant appreciation. However we know that real estate does not always appreciate. Your suggestion that smart investor should only buy properties that will double their capital in a couple of years is absolutely ridiculous. You have ignored transaction costs, for one thing. You are also giving advice to a brand new investor. New investors and not likely to have the success you with 50 years experience have had. You have given some very good advice. But you have also give some very bad advice that could have new investors make poor decisions. You have totally ignored RISK and give advice based on only rosy assumptions.

Pay off all Credit Card Debt Before First REI Deal?

Jon K.

Rental Property Investor · Perry Hall, MD · Member since 2016 · 587 posts · 598 votes

5y

Welcome to the forums. My two cents: Pay off your CC debt. Don't invest large sums of money in ANYTHING until your personal finances are solid.

16 Reply

Theresa HarrisPro Member

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

5y

Other than mortgages, I don't like debt, but that's me. I would pay it down and then invest. The debt will limit how much you can borrow. Plus do the math at how much interest you are paying on that debt (ie the real cost of the $19K CC debt) at the current rate you are paying it down. Use that as motivation to pay off the debt and then start saving for your first property.

6 Reply

Ned CareyPro Member

Moderator

Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes

5y

@Melanie Johnson what is the interest rate on the credit card debt? My guess is it is 18% or higher. Paying off CC dept has the same affect on your net worth as investing money at the same rate.

Lets say you credit card charges 18% interest. Paying it down is like investing your money at an 18% rate. Where else are you going to get that kind of return? Most importantly you are earning that rate with NO RISK. Actually you are reducing your financial risk by reducing your dept. If you take the same money and invest it in something else you will always have some risk.

I might not pay it all off and have zero reserves but I would certainly accelerate the pay down of debt.

13 Reply

Brendon K.

Real Estate Agent · Los Angeles · Member since 2017 · 107 posts · 33 votes

5y

Credit cards modify your debt to income ratio. If you go past 40 percent you will significantly limit your financing options. Pay those things off.

5 Reply

Eric Sipe

Rental Property Investor · Dunedin, FL · Member since 2019 · 55 posts · 26 votes

5y

Melanie Johnson

Welcome to the BP Forums! If I were in your shoes, I'd lean towards aggressively paying off the credit card debt and THEN saving for the real estate investment.

I personally saved enough to cover half of a years worth of personal expenses and enough for a property (a downpayment, expected repairs, and closing costs) before purchasing my first investment property. Each situation is different, but CC debt gives me chills and there are so many upsides to paying down that kind of debt.

Either way, best of luck in your financial journey!

Best wishes,

Eric Sipe

4 Reply

Alecia LovelessPro Member

Member since 2019 · 3k+ posts · 2k+ votes

5y

@Melanie Johnson I paid off $18,000 of CC debt before I began investing. It was my second go round, this time I learned my lesson. Previously I had paid off $40,000 in CC debt. Granted I’d always had the money to pay the CC off with but then would have had no reserves.

Now I pay my debt each month and use my CC for certain things and cash for others.

I'd recommend paying off the CC debt and then rebuilding the cash for the down payment. You can always find a partner, get an FHA loan and house hack, depending on where you're located buy a duplex that's not too expensive and the 25% down on an investment property isn't that great, etc.

Best of Luck!

4 Reply

Brandon Myking

Member since 2021 · 9 posts · 18 votes

5y

Investing in real estate is an amazing way to build lasting wealth and you obviously have been working hard to pay that debt off. First of all, way to go! With that said, the less reserves you have the riskier real estate becomes. When analyzing deals, setting aside a certain percentage for expenses, CapEx and vacancy will set you up to build an appropriate level of reserves. However, this will take time to build and just because we budget monthly doesn't mean that's how the expenses come. What if you incur a large expense soon after acquiring the property? What if a tenant leaves and it sits empty for several months? Reserves and cash flow keep us in the game with an investment property. Credit card debt could potentially inhibit your ability to remain in the rental game. Investing from a place of strength is what you should aim for.

From your numbers it looks like in the last two years you have paid off $21k of debt and have saved $25k totaling $46k in two years. I would pay that debt off and save like you have been (or more now that your not making the CC payment) and you’d have $29k to invest in a year ($6k remaining savings, plus $23k this next year)! Then you can feel good about investing from a place of safety and strength. Good luck!

8 Reply

Sarah BlessePro Member

Property Manager · Fresno, CA · Member since 2017 · 35 posts · 23 votes

5y

@Melanie Johnson congrats on coming so far!! How do you feel about the way you manage tour personal finances? If you have disciplined habits and are committed to not going into consumer debt, I’d recommend buying a cash flowing asset that pays for your liabilities. So buy a rental where the cash flow pays your CC payment every month. Once the debt is paid down, the asset will continue to pay you throughout your life. In the meantime the tenant is paying down the loan, building you equity and you get the depreciation tax benefit. Good luck!

5 Reply

Melanie Johnson

OP

Member since 2021 · 5 posts · 7 votes

5y

Thanks everyone for all of your thoughts. You've given me a lot to think about, and a lot of motivation too. Thank you! I appreciate it!

2 Reply

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

5y

I agree with the pay-down-the-debt strategy.....however, just to play Devil's Advocate for a second.....if you could get into a property that had great cash flow, you could pay down that debt even faster....

2 Reply

Tim Stuart

Real Estate Agent · Member since 2019 · 60 posts · 37 votes

5y

Melanie,

Congrats on making massive progress toward financial freedom. Blast that debt ASAP! You will sleep so well that first night. Just remember the difference between good debt (assets) and bad debt (consumer debit often used for instant gratification). Dave Ramsey has some great books regarding living debt free and budgeting. Also, if you haven't already, read Rich Dad, Poor Dad and tune into his podcast. Good stuff here, I'm excited for you and your husbands investing future!

Hope this helps,

Tim

3 Reply

Robert Beardsley

Member since 2020 · 117 posts · 84 votes

5y

normally i lean towards investing but credit cards have very high interest. always look at it in terms of what makes you more money. paying off the credit card debt is atleast 17% if not into the 30% interest. that means to break even you need to make atleast what you credit card debt interest is. that will be hard. pay off the debt use the money to save up faster and buy once you save back up. i would say the one way i would invest if you are going to house hack then you can probably justify it by saying you no longer have to pay rent or mortgage.

2 Reply

Charles DuFour

Investor · Stonington, CT · Member since 2021 · 20 posts · 10 votes

5y

Agree with all about paying the CC debt first. Just want to add another benefit of that route that has been eluded to, but not said outright. CASH FLOW. That's King to any of this and yours will be increased greatly once the CC isn't taking it from you.

2 Reply

Brendan Miller

Rental Property Investor · Gilbert, AZ · Member since 2020 · 210 posts · 163 votes

5y

@Melanie Johnson I would pay off your CC debt before you start investing. I’d have to imagine it’s a high interest rate ~15-20%, so for investing to make sense you’d have to find a deal that is outperforming that. Not having CC debt will make financing easier also

2 Reply

Gary L Wallman

Rental Property Investor · Beavercreek OH · Member since 2018 · 422 posts · 970 votes

5y

Since you pay your credit card interest with after tax dollars, paying them off should give you the benefit of an approximate 23% tax free yield equivalent that is 100% safe. I know of no other such investment. Why undertake a real estate deal that requires your participation for a yield that, if you are super fortunate and diligent, would likely return half of that yield? With risk, I might add. Both market value and tenant risk and even possible Covid collection issues should moratoriums on eviction continue or reoccur.

A complete no brainer. Debt first, investments second.

Respectfully,

Gary

3 Reply

Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

5y

You don't meet a lot of self-made high-net-worth individuals in the $1-5 M range who made their money while carrying significant credit card debt. You just don't. You meet people who did it while carrying a lot of business debt, sure. But not personal debt, and especially not credit card debt.

9 Reply

Michael D Valadez

Member since 2021 · 11 posts · 6 votes

5y

Im house hacking with an FHA loan. 2-flat building, making it a legal 3 flat in the near future.

I had ~$13,000 in a auto loan and my mortgage lender had me pay that off and that went toward my closing cost. I had gotten like $10,000 in credits and my closing cost was like $7,000. Lender wouldn't let have the house unless i paid the car off. i gave the title company a check made out to Ford for $13,000 and that 13k shows up as closing cost on the paper work.

I'm just saying maybe you don't have to pay it off. I would talk to a bunch of lenders and maybe you can try to replicate what happened in my situation.

2 Reply

Account Closed

Member since 2020 · 983 posts · 1k+ votes

5y

Don't pay the credit card debt because with a half-smart investment your profits will exceed your credit card interest many many times.

Example. I wrote this story about 9 months ago and I just wrote it again last night, or was that at 3 am this morning.

Almost exactly 5 years ago, one of my employees (no greed card and no social security number). Did you just turn green with anger? Oooops! Well...he has a valid TIN number and he has been paying an immigration attorney for several years. If you want to speak with him he has absolutely no accent and you would never guess he is Hispanic by talking to him. Regardless,

So much for that! I give this guy a lot of credit. Five years ago, he put $20,000 on a $108,000 house in Apple Valley California. His cashflow is $500 per month after all expenses. Today, the house is worth $300,000. So, how much did he make?

He earned $40,000 per year from appreciation plus 5 x $6000 per year for cashflow = $$46,000 per year for 5 years, or a total of $236,000.

That comes out to 236% PER YEAR on his money. Your credit card is not costing you 236% per year.

So...yesterday, my half-legal almost legal employee asked my to wire $50,000 to his old stomping grounds in El Salvador, the Murder Capital of the World. About 30 days ago, he put a $50,000 house in escrow and he wired the money to El Salvador, yesterday. As in the old days in California, his house appreciated in value in one month to $85,000 and his broker in El Salvador is actually trying to get him to sell the house.

So...here is a guy who makes very little money (about $2300 per week) and he made $265,000 in 5 years.

Now... (I love my 3 dots). It is my doctor-prescribed narcotics affecting me. I never thought I would turn into a drug addict at the age of 71.

My construction company does some seriously expensive jobs for cities, the Los Angeles airport and hotels and I have some employees who earn $4,000 to $5,000 every week. How much real estate do they own. Zip! Zero! Nothing, but the dumps they live in.

Every single day of the week, I say I would love to be a fly on the wall in some of my employee's homes. I seriously don't understand how a man (all my employees are men except my part-time secretary who spend 99%of her work day talking to her mother and 13-year old child on the phone) can spend an average take-home pay of $2800 and not have own one nice thing.

Still, the very best place to invest is in California and there are areas like Victorville and Apple Valley where prices are equal to or less than many other states. The most important thing for earning money in real estate is APPRECIATION and NOT RENTAL INCOME as shown in the example above.

The next most critical thing is SMART INVESTORS (not so many who get this) need to purchase properties where they can DOUBLE their investment capital every 1 to 2 years. That means you keep your money in your smoking-hot little pocket until you find a property where you can earn 50% to 100% on your investment capital (money) every 1 to 2 years.

Sure!!! This may sound difficult, but it is actually very simple. First, you cannot do this and will not do this if you do not make this your business model.

THE BIG HOW!!! You look and hundred of properties. You look for properties that are undervalued, properties you can fix up and increase the value and you do the math 10,000 time over and over and over and over and eventually you will be so smart rather than asking questions you will be a real estate guru charging for your services. You will be telling brokers to take their advice and shove it and to go fry ice.

So...if you have $20,000 to invest and you purchase a property worth $120,000 for $100,000, then you earn 100% on your money (the simple math) the day you close escrow. You did not even have to wait 1 year to earn 100%.

If you purchase the a $100k property worth $100k and it increases in value to $120k in 1 year you earned 100% on your money in 1 year. If it takes 2 years to increase to $120k you earned 50% on your money every year.

SIMPLE!

The hard part! Never listen to a broker's advice. They will tell you that every house they have for sale is great for you. Never listen to any person's advice. If you need to ask for advice keep your money in your hot little pocket.

CALIFORNIA! This is the best place in the world to invest. People get filthy rich, accidentally, and that cannot happen in most parts of the country.

2 Reply

Account Closed

Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes

5y

You dont have 25K savings. You have 6K savings. Pay off the CC today. And never run a balance on them again. Without financial discipline your investing will never be successful anyway.

7 Reply

Gary L Wallman

Rental Property Investor · Beavercreek OH · Member since 2018 · 422 posts · 970 votes

5y

Originally posted by @Account Closed: