Hold more cash or pay down overhead?

Question

Let's say I was coming into a load of cash from my investments soon. I'm torn as to what to do with it. Should I reinvest it all along with what I started out with, or do I pay off some personal debts to reduce my overhead, so that life on irregular pay becomes more easily manageable (I would still have what I started out with to keep investing) ?

Matt H · Answer

Minna,

There's good debt and there's bad debt. You want to accumulate as much good debt as you possibly can. Good debt is any form of debt that you use to buy an asset that's appreciating in value. Like a house, or apartment building. That's why I preach buying multi million dollar apartment buildings with as little down as you can. Because buying one will make you rich. That good debt is making you rich as long as the interest rate is bank rate and the property is cash flowing. So that kinda debt you can have long term and it will only make you more wealthy, and not take money out of your pocket each month.

Then as for bad debt like student loans, car payments. The reason it's called bad debt is it's debt taken out on an asset that's depreciating in value. So the longer you have it the more you pay and the less you have in the end because after you've paid off all that debt you're asset isn't worth much anymore. A car is a perfect example of that.

In your situation if I were you I'd save all my money toward using it to aquire a rental property. Then with the liquid cash flow you have at the end of each month, use that to pay down your bad debt.

See, what principle you have you want to put it to work for you and keep it. You do not want to get rid of it, otherwise you might not have enough to buy a property. Buying a property will be pivotal to you getting out of debt in the long run.

Frank Adams · Answer

Well minna; I'm all about paying off the debts. In fact I think it's crazy to carry ANY DEBT, except (possibly) debt for acquiring property.

I haven't had any debt except for property for about 16 years and no property debt for about 12. In fact the last mortgage I took out I did a 95% loan due to our income/cash situation, paid PMI for TWO MONTHS, and then paid off the $120K total in 26 months.

Having no debt, and cash on hand gives you enormous freedom in doing deals.

all cash

Minna Reid · Answer

So no one is for paying off debt - we're talking car loan, personal loans, old school loans...etc? I'd only have my personal mortgage left, I'd still have a little bit of reserves (along with the 50k I started out with to invest), but I'd also keep another $800 in my pocket a month.
Debt makes me uncomfortable. 
I do want to buy more rentals, but I'd rather do a few more rehabs first to build more capital. Theres not buying much for cashflowing rentals in my area of CT with what I have to spend right now.

Michael Rossi · Answer

Minna,

Running a business is ALL about cash flow.  Without knowing specifics, I would probably hang onto your profits as a reserve and continue to invest with your initial money, or better yet try to do future deals without using YOUR money.

I do agree with r2d246 that rentals are the best way to generate income and build wealth over time, but I think starting with a large apartment complex is an invitation to disaster.

Mike

Matt H · Answer

Just for the record, learning to buy and operate an apartment is got to be as easy or easier than learning to drive a car. It's not hard. And once you learn how you can do it over and over again. Also to operate an apartment building can be summed up in one sentence. Get a good residential manager and you'll at most spend 5 minutes a month making 1 phone call to see how things are going with him, and another 5 minutes checking your bank statement.

Matt H · Answer

Invest it all into getting an apartment building. That will set you up for life. When you add cash flow, appreciation and mortgage paydown you're making a ton of cash every month. Way more than what you're probably paying in bad debt servicing for your loans. Then use the apartment cash flow to pay down your loans. Never ever ever ever use what principle you have to pay off bad debt when you can instead put that money to work for you in a rental property then you the liquid cash flow to pay down bad debt.