Paying off Debt first or start real-estate investing?

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

9y

Congrats on paying down $40k these last couple years @Carlo Rodriguez!

Momentum with the debt snowball is huge. One advantage to continuing on your path of debt-freedom is this awesome momentum. You stopped investing in your 401k and are hungry to finish this so you can begin real estate investing. A home equity loan now will stop the momentum and quench the hunger. The $40k could linger on for years and years.

What is the rate and term and type of the remaining $40k? Is it on cars you could sell and buy functional beaters for a while? That would be the first thing I did.

If you are plugging away and an absolutely awesome deal drops in your lap, scoop it up. Otherwise I would remain on my debt-free path. Something changes inside you when you are free. I paid off $87k of consumer debt so I have been there. Most of mine were credit card checks I wrote for down payments on my seller-financed plexes. I've been consumer debt-free for a couple years now and I highly recommend it!

OP

Seattle, WA · Member since 2017 · 12 posts · 3 votes

9y

Wow thank @Nicholas Covington

Both of your points are solid.

One reason why I want to start now is because I always think opportunities will pass me by. I dont want to "miss out". But I know that is not true- its just the feeling i get. I definitely make good income and can afford grinding down this debt for another 12 month. And you are right, I will position myself way better if my DTI was lower.

I'm terrible at searching forums but I will look in to the "REI while in debt" types of post.

I should take advantage of the next year and learn as much as i can before i dive in. Right now I'm reading the ABCs of Investing. Trying to figure out what i want to read next.

Thanks man!

Carlo

OP

Seattle, WA · Member since 2017 · 12 posts · 3 votes

9y

@Steve Vaughan

Wow so you definitely know how i feel! thanks for the advice.

to answer your question

20K is from a Car

10K is from Taxes (my wife's business)

The rest is student loans credit cards at HIGH interest.

So like i said, all the minimums add up to 1400 per month. We are throwing about 2700 to 3K a month at this.

My thoughts are, "wow, when I'm out of debt, i can save for a down payment on a home real fast instead of taking equity from my home"

I love your advice. thanks

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

9y

Originally posted by @Carlo Rodriguez:

@Steve Vaughan

Wow so you definitely know how i feel! thanks for the advice.

to answer your question

20K is from a Car

10K is from Taxes (my wife's business)

The rest is student loans credit cards at HIGH interest.

So like i said, all the minimums add up to 1400 per month. We are throwing about 2700 to 3K a month at this.

My thoughts are, "wow, when I'm out of debt, i can save for a down payment on a home real fast instead of taking equity from my home"

I love your advice. thanks

I would do taxes first (they have incredible power to cause pain in your life). Any chance you're not upside down on the car? Sell the car to help pay the taxes, Get a beater, then bang out the high interest credit cards.

You will not get better cash-flow in RE than this. Risk-free, tax-free and without 'effort', getting out of debt for you is most likely the best bang for your buck! Go get 'em, Carlo!

David Dachtera

Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes

9y

@Carlo Rodriguez,

I'm the "voice of dissent" here.

I promote the idea that one should invest for income to pay off the debts. The idea being that once the debts are gone the income will remain.

"When the debts are gone ..." becomes an excuse to procrastinate. Then, your investing just never happens because "life happens". Invest to get more income and apply THAT to the debts.

4 Reply

OP

Seattle, WA · Member since 2017 · 12 posts · 3 votes

9y

I hear you man. thanks.

Now the challenge is to talk my wife into selling her car lol

my car is paid off in a few months.

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

9y

Originally posted by @Carlo Rodriguez:

I hear you man. thanks.

Now the challenge is to talk my wife into selling her car lol

my car is paid off in a few months.

Your wife needs a why. Most guys explain WHAT we need to do to get to x. Ask her where she wants to be in 10 years? Still working? Maybe travelling? Giving? Get her excited about the future and make selling the car her idea!

BTW - some of us offer opinions that are just theories. In theory...blah blah blah. Since I paid off my debts a couple years ago, my biggest question is should I pay off this house in a lump sum, or keep my acquisition acct over-funded in case an opportunity arises? I just paid off a commercial loan on a 7-unit, should I just pay off the one house at 8%, or do that one AND another I have at 6.5%. That's the reality of what being consumer debt-free can be. Pay the debt off!

2 Reply

Michael Lucero

Rental Property Investor · Pasadena, CA · Member since 2016 · 164 posts · 149 votes

9y

When you invest the decision is almost always dependent on the % return on your money. So you just have to look at the rate on your loans, rate you think you could earn investing, and the numbers sort of make the decision for you. This is hard to answer without you stating the interest rates on your loans. If its 1% dont pay it off fast. If its 10%+ pay it off fast. Depending on the interest rate, what you should at least look into a HELOC with all that equity to pay down the loans, if the HELOC rate is lower than the rate on the loans.

Or to answer yes to your question, yes you could take the equity out for a down payment either via a cash out refinance or HELOC.

The answer is is undoubtedly yes that some people started investing in real estate while in debt, it just depends on the situation and the wants and desires of the person.

3 Reply

Marcus Johnson

Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes

9y

To be truthful you don't want revolving debt when investing in real estate. In fact you also need a cushion of money for inseeable expenses. For example a sump pump breaks down and now you've flooded the basement 5k later and there goes you profits for the year. The city appraises your duplex and the market value goes from 160k to 230k, your taxes suddenly raise $1400 a year.

Jana CainPro Member

Enrolled Agent · Richmond, CA · Member since 2016 · 225 posts · 148 votes

9y

@Carlo Rodriguez Comfort level (with debt and risk) also play a huge role. I have a giant pile of debt (mainly student loans, but also an assortment of the other "normal" debt), and as a Dave Ramsey fan, had planned to not purchase any real estate until I was debt free. Late last summer I learned that I would likely have the opportunity to buy the condo I was renting in about 6 months. Discounted price, amazing terms. So I looked at my finances and decided I would do anything possible to make that happen, even pulling from my retirement if necessary. Over the 6 month will-they-or-won't-they-sell period of waiting, I was blessed with some unique work opportunities. By the time the sales announcement was made, I had stockpiled enough cash to buy my condo (so thankfully, no retirement withdrawals). At closing last week, I had $35k in instant equity, thanks to the discounted price. Dave Ramsey absolutely would not have approved of this purchase, but opportunity cost meant something to me. My giant pile of debt has now grown thanks to the mortgage, but I still have a goal of doing another deal of some sort in 2018. Said deal will take into account my debt comfort level, willingness (or not) to partner, and what the consequences of failure will look like (lol).

My mentor, a CPA, once told me (when I was fretting about trying to get into the market back in '05/'06) "there will always be a deal on a property". Real estate FOMO is very real and I get that, but browsing this forum shows that there are deals to be had all.the.time. in all markets, and all market cycles.

So if you're comfortable with the risk that comes with having the debt, I say go for it. In my ideal world I'd have zero debt (I fundamentally don't like the risk, but much like everyone else, "I can, therefore I do"), so I can certainly advocate for waiting. I can tell you that if someone handed me a lump sum of cash that would wipe out all of my debt, I would wipe out all of my debt rather than use it to invest.

Steve K.

Denver, CO · Member since 2017 · 265 posts · 234 votes

9y

@Carlo Rodriguez , a couple of your statements struck me as paradoxical.

(Not to pry, but to help; I used to teach get out of debt seminars for helping in my community a decade ago).

On the one hand, you seem to feel "wealthy"; you have a ton of equity in your house, (that's off limits?)
You appear to be spending beyond your means, to the tune of $80k over a few years. Two cars financed (1 remaining auto loan), some medical bills....student loans, and poor tax planning(?) on the family business that led to $10k tax bill owed with penalties and interest to the IRS?
You've stopped saving into your 401k. (did you give up employer matching funds? if your employer matched 100% of what you deposit, didn't you just forgo 108% return (i.e. mutual funds to make 8% and doubling your deposits with match?)

Congrats on the discipline to pay down $40k in a few months; very commendable.

If you're that disciplined, why not take the HELOC loan, and pay off the $40k.....then make the $3k per month payments to yourself (paying down the HELOC balance). Won't you be paying 4.5% on the HELOC, and saving 18% interest on credit cards, and something like 11% interest to the IRS? If your student loans are 5%-ish, I wouldn't pay them off, just keep making the minimum payments. (however, if they are higher than the HELOC, perhaps "refi" them in the HELOC.

I'd rethink your 2 autos. If the 2 car payments cause you to bust your budget and outspend your income, cause you to use 18% credit card debt, then, effectively, you're incremental purchase of the auto is costing you 18% interest. Consider cars that fit in the budget.

Now, go about building your wealth (home equity included) and stop paying high interest to loans. Hope that helps.

3 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

9y

Don't, I repeat DON'T spend your money on your debt. Use your money to invest. Use the recurring income from the investments to systematically pay off one debt after another. When the debts are paid off, that income keeps coming. This means you use your money once, but get multiple returns.

If you Spend your money on one bill, you have to generate more funds to spend on the next bill...and so on. In other words, you only get one use out of your money when you spend it.

Notice the differences of where I use the words "use" and "spend". Huge, huge difference.

2 Reply

Harjeet BhattiPro Member

Lender · Glenview IL- CDLP NMLS#230554 · Member since 2015 · 2k+ posts · 747 votes

9y

Its all about calculations in investment. If take out equity will keep your DTI under guidelines than go that route. Do your calculations with your LO and see where you save money in new purchase finance or take out equity from current home.

Peter Hollyfield

Bellevue, WA · Member since 2017 · 9 posts · 8 votes

9y

Personally, I think that you should pay off your debt as soon as possible to avoid paying all the interests. The faster you pay off the debt, the less you have to pay in total at the end. Also, you might feel a lot better as you won't be thinking about or worrying about the debt every night when you sleep. Take this advice from a guy who has been through the same situation.

FYI: There are usually 2 kinds of investment. 1. Short term: this is risky and you might need to think about the consequences of losing all of your money being invested in. 2. Long term: this is generally a bit better as you can hold on to your investment for very long. However, both of them require a stable income. I would recommand you to put the amount of money you consider extra to invest. (But obviously you need all the money for debts.)

Account Closed

Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes

9y

Originally posted by @Carlo Rodriguez:

...So I'm on the fence on this one. I'm leaning more towards paying my debt off first to....As a hopeful investor in real estate, I keep saying " I plan to buy my first rental next year when I'm out of debt". My question is why should I wait?....

On an average deal, using median housing price in the US for instance (and depending on where you are investing), net of $28,000-$30,000K is feasible per flip deal. If you did two flips about $56,000 per year, $84,000 for three etc. What is your opportunity cost? Waiting isn't without it's risk. There are always unforeseen events that could create new liabilities, income variances or hit to your debt-to-income (DTI) ratio... depending on the strategy or capital structure, some might say DTI is irrelevant all together.

Brett Goldsmith

Investor · Los Angeles, CA · Member since 2012 · 1k+ posts · 500 votes

9y

I'd pay my taxes and any high interest debt off as soon as possible. Compound interest on debt is a wealth killer. I would focus on paying off my "bad" debt asap unless potentially if I came across a deal with large profit potential or a "can't miss it" opportunity to buy.

How much equity do you have in your home that would be reasonable to pull out?

I'd consider what sort of aggregated interest are you paying now on your other non mortgage debt vs a potential HELOC on your property. Then I'd run the numbers and consider using a heloc to pay off my other debt and then focus on paying my heloc back asap. I wonder if that would make financial sense?

Will Johnston

Investor · Washington, DC · Member since 2014 · 107 posts · 25 votes

9y

@Carlo Rodriguez, I second @Steve K.'s advice to use the HELOC to pay off the high-interest portion of the $40k.

And while without knowing the market your looking to buy in or the specifics of your debt I can't be sure, on the surface it seems almost irresponsible to do anything else. It's doubtful you're going to get a 15-20% return (or at least cash-on-cash return) on an investment property, which is what you would need to do to justify buying the property before paying off the credit cards.

If you're averaging 15% on the cc, student loan, and tax debts, then you're looking at spending $3k/year in interest just on those. With a HELOC at 5%, you're down to $1k/year. Get your HELOC, pay those off, and you just made $2k with almost no work.

Not sure what rate you're paying on your car loan, but if it's low, I wouldn't pay it off. (Selling and buying a beater is a priorities choice. Up to you.)

I've got a car loan at 2% from my credit union. I can get a way better than 2% return from investing my money, so why would I pay that off? Shoot, I can get better than 2% in a long term CD. If you don't have a good interest rate on your car loan you might be able to refinance into a better rate if you have good credit.

Once you have the HELOC and have paid off the high-interest debt, you can start paying down the HELOC, but you can also start looking for an investment property (assuming you have enough left over on the HELOC for the down payment). You have the flexibility to continue paying down your debt but still do a good deal if you find one.

For what it's worth, I'm actually in a similar position now. I have a $12k-ish car loan and a $56k balance on my HELOC (although mine was from a house purchase, not consumer debt). That HELOC balance had been around 100k, but I kept paying it down while searching for a deal to do. I found one, so I've paused on paying down the HELOC. I'm pursuing the deal and will take a sizable draw against my HELOC for the down payment on the new place. Once I'm up and cash flowing, I'll use the additional income to start paying the HELOC down again until I find my next deal.

2 Reply

Josue Vargas

Real Estate Agent · San Antonio, TX · Member since 2017 · 814 posts · 466 votes

9y

All depends.

I'll not take away 401k anything than your company is currently matching... its free money! Its a benefit from your employer (if your employer matches you something)

I'll wait, get my finances in a good standing, learn as much as you can, then go to several banks or lenders with capital to invest... we all likely have debts, its just a matter of investing debts--equity or bad business debts, like credit cards, cars, or something that do not likely appreciate with time.

I would not recommend getting an equity loan on your personal house, if you have 40K in personal debt. Get rid of that 40K debt, then leverage on your equity... Looks like you will be in a good shape within a very short time. Why risk it that way?

Will Johnston

Investor · Washington, DC · Member since 2014 · 107 posts · 25 votes

9y

Originally posted by @Josue Vargas:

I would not recommend getting an equity loan on your personal house, if you have 40K in personal debt. Get rid of that 40K debt, then leverage on your equity...

Why not leverage the equity to reduce interest on current debts and thus be able to pay them down faster/pay less money overall?

Nichole Stohler

Rental Property Investor · Scottsdale, AZ · Member since 2017 · 115 posts · 136 votes

9y

@Carlo Rodriguez, totally get where you are coming from! When my husband and I started out, we were in some debt but with very little income and then went into more debt to buy real estate. More details in the BP forum post here http://bit.ly/2s0SQil. For us, everything came down to the right opportunity/deal and weighing the numbers against your current situation. Can I ask, what type of deals are you seeing/looking at?

Al Mcbee

Investor · Council Grove, KS · Member since 2014 · 94 posts · 31 votes

9y

Congrats on even realizing the debt issue. Some people go through life spending everything away blindly, then look for a bailout from others. It's great to hear your doing something about it and want to continue to improve financially. With that said, it comes down to discipline. Your making forward progress. REI is like kids, if you wait until your completely out debt, you'll be to old to enjoy them and watch them grow to their full potential. So... I say go for it now while your aware of your finances and stay discipline my friend. You'll be fine.

Mark N.

Investor · Fallbrook, CA · Member since 2017 · 10 posts · 2 votes

9y

Pay off the taxes and the credit cards first. Only then invest in real estate.

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

9y

Invest in RE first, then use the RE to payoff all of your debt systematically.

OP

Seattle, WA · Member since 2017 · 12 posts · 3 votes

9y

@Steve K. thank for you reply. great advice

to answer your questions:

On the one hand, you seem to feel "wealthy"; you have a ton of equity in your house, (that's off limits?) I dont know if i feel wealthy lol. maybe lucky that the house' value went up quite a bit. Its not offlimits. I'm just not sure if tapping in to it for investing purposes is a good idea
You appear to be spending beyond your means, to the tune of $80k over a few years. Two cars financed (1 remaining auto loan), some medical bills....student loans, and poor tax planning(?) on the family business that led to $10k tax bill owed with penalties and interest to the IRS? yes over the last 10 years we were pretty bad with the spending. we have it under control now. we are just paying it off at a faster rate.
You've stopped saving into your 401k. (did you give up employer matching funds? if your employer matched 100% of what you deposit, didn't you just forgo 108% return (i.e. mutual funds to make 8% and doubling your deposits with match?) My employer matches .25 up to 6%. i temporarily am only doing 2% into my 401K

I think we can get a HELOC but have to look at my credit. Theres been a few negative reports that bumped my score down. Either way, I will be paying this debt off within 12-15 month.