Help Real situation!

25 Replies

Help, I'm going to give as many details as possible because I'm just getting started and could use some good advice. I currently own 5 properties including my primary. 2 of them I just purchased as bad shape rehabs that I wanted to fix and rent out, using the BRRR strategy. I had no cash so I put all of the repairs and purchases on a 50k loan at 25% and 50k credit cards at 25%. So now I am 100,000 dollars in debt. The properties appraise for 75k and 100k, for a total of 175,000, and my bank just gave me a check for 50k to refi the first property. What do I do now? Do I pay off the high-interest loan, then take the other refi and pay off the credit cards? Do I split up the money in some way, keep the high-interest loans and acquire more properties? I can't help but feel like having the high-interest debt is really risky. I need ideas and feedback. The collective rents from the two properties will be $1600/month.

So the question is: Do you pay off the debts at 25% interest or use the money for more investing?

Easy answer - what return on your cash will you get by using the money to invest?

Say you will get a 15% return - then pay off the debt as your money is costing you 25% and you are getting a 15% return on it.

Say you will get a return of 40% - then invest it as your money is costing you 25% and you are getting a 40% return on it

@Johnoson Crutchfield

Brie, the thought is that I could continue to build equity through the debt. Not sure I understand if your answer is to invest or pay off the debt. My next deal would be... by for 20k, invest 20k, appraise for 70k. BRRR and have another cash flowing property. By the way.... if I pay of the debt I don't have any money to keep securing properties.

@Johnoson Crutchfield  I would be concerned about the interest rates and also how the credit cards affect your ability to obtain additional mortgages.

@Johnoson Crutchfield Unload the high interest rate card(s)/loans.  25% is ALOT of interest.  It was a risk to do it in the first place.  It paid off as you were able to acquire these 2 great properties, and have the opportunity to refinance both of them.  TAKE IT.  You never know when the tides will turn, so take this gift now.

Down the road when you are ready to make another purchase, put the high interest loan or credit card loan back on the table as an option to consider with other options.  It's not like you can't use it again, however, why would you pay all that high interest while you are figuring it out? 

Also, as another option for next time, consider a hard money lender in your area.  Hard money lenders charge higher interest, but it is usually anywhere from 9-13%, so it would STILL be lower than the option you chose this time.  Hard money lenders usually evaluate the deal, not you, so credit and income don't really play in that scenario.  Additionally, they will usually let you finance the rehab.  So, your cash out of pocket is minimized.

Best of luck to you!

You Pay Off The Two 25% loans.  You Get The 2 Homes Rented.

Now You Have income coming in &  You Still Have Access To The High interest $50k credit card to do it again if you have to use it. 

This is exactly what I'm thinking.  I guess part of me is just ready to do the next deal.

I'm a huge fan of debt, properly used. 25% isn't sustainable. You HAVE to get those paid off. There is no margin for error at that rate. I have lines of credit between 4.15% and 10.5%. And the 10.5% one is a last resort. Now putting 4% debt on properties, as much as I can, all day long.

Pay off the loans and tell the part of you that wants to do the next deal that when you hit the inevitable bump in the road, that all investors hit, you will not only lose your properties you will also lose your personal home as well and end up declaring bankruptcy.

You need to get control of the crazy voices in your head.

You’re paying 25% on $100k of debt, for income of $19,000 annually?

Is my math wrong?

I second what @Blair Poelman says. You mentioned you want to “continue to build equity through the debt”.  Your collective rent (top line revenue) is 19,200, assuming no vacancies. Factor in other expenses (repairs, taxes, insurances. The interest alone on $100k is $25k (with no principal pay down).  At that rate, you have  money pit, not an equity builder. 

Ok, so cash out refi the two I've completed, pay off the debts.  How do I get capital to do deals from there?  Do I use the credit cards as downpayments?  How do I show my bank I have downpayment money if the loans are paid off?

and another thing mentors are telling me.  2% a month is all you're paying to if I pay them off in 6 months I've only paid 12% interest and secured all the equity I could in that time frame.  Is that true?

Pay off that 25% debt as quick as possible.  Worse case you could spend it again but I would not recommend it.  25% is high, many people are happy with a cash on cash return less than that.

And I thought my first house purchase back in 1981 was a high rate  it was 12 % .

Pay of off ASAP because the interest rate is terrible. Then save money for the next deal from your rental income and whatever your work is outside of it. Perhaps you can work overtime or pick up a second job to save money faster.

@Johnoson Crutchfield pay off the high interest debt, then learn about the finances of investing, then start looking for another deal. Learn about secured and unsecured lines of credit, hard money - real hard money, not that usurious BS that your "mentors" are charging - conventional loans, and commercial loans. The bank that is giving you the refinances on those homes may be willing to work with you for a line of credit since they have seen you succeed with these 2.

Pay off the loans and use hard money on the next deal.  Two points plus 1% per month is a way better deal than 2% per month.

Just curious, how have these maxed out credit cards affected your FICO? Paying off the debt might improve your score for the next one.

The reason I did the high percentage debt is that hard money folks seem slow and getting cash off the credit card was such a quicker process. When I see the deal I want to grab it. I also don't have to deal with construction crew estimates and ARV appraisal fees when I go through a credit card instead of a hard money lender.

Originally posted by @Johnoson Crutchfield :

and another thing mentors are telling me.  2% a month is all you're paying to if I pay them off in 6 months I've only paid 12% interest and secured all the equity I could in that time frame.  Is that true?

 no, you paid 12.5% interest in 6 months, which is STILL 25% annually

IMO you need new mentors if they told you that it was OK to take out 25% interest debt when there are hard money lenders that will loan you money for less...

Originally posted by @Bryan O. :

@Johnoson Crutchfield pay off the high interest debt, then learn about the finances of investing, then start looking for another deal. Learn about secured and unsecured lines of credit, hard money - real hard money, not that usurious BS that your "mentors" are charging - conventional loans, and commercial loans. The bank that is giving you the refinances on those homes may be willing to work with you for a line of credit since they have seen you succeed with these 2.

 GREAT advice...

Originally posted by @Johnoson Crutchfield :

The reason I did the high percentage debt is that hard money folks seem slow and getting cash off the credit card was such a quicker process. When I see the deal I want to grab it. I also don't have to deal with construction crew estimates and ARV appraisal fees when I go through a credit card instead of a hard money lender.

then you could use the HML to pay off the high interest rate loan and credit card, no?

@Johnoson Crutchfield

You mentioned hard money was slow.  They can usually close within 2 weeks.  If you're buying much quicker than that, I fear you might not have had enough time to do enough due diligence.

The problem with your current method is that it leaves no room for error and is dependent on everything going right.  I always get 1-yr hard money loans these days, even for a 2-week flip, because I've seen and experienced enough things going wrong, things out of your control.

The nice thing about hard money, especially for newer investors, is that they will double-check your deal for you. I think of my lender like a partner. They'll confirm the ARV and current values (you want that BPO/appraisal), make sure you have the right insurance in place, ensure title is clean, etc. And when you have rehab going on, they'll send inspectors out to make sure your contractor's actually doing work and not BSing you.

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