Debt Versus Investments

33 Replies

So I have a very complex personal finance situation, one that's perhaps causing me more constraints than I'm fully aware of because of it's complexity and obligations. I feel totally ok with sharing some ballpark numbers because it puts things in context.

1) Student Loans,
I have 46k at 4.75%, and 15k at 5.5%

2) Credit Cards,
$23k in debt. I have a variety of credit cards, all the significant balances are being carried at 0-3% because of prolific balance transfer offers. However it still adds up to a fair amount.

3) Real Estate
I own 1 house on my own (~$100k value), and 2 houses (~$50k each) in partnership with my father. These were all bought last year. All of these have conventional 75%LTV financing. I bought these from my trading portfolios and ROTH withdrawals.

4) Good job, work in Software in San Francisco, but that also means my living expenses are high, probably reducible somewhat.

5) A business that I own that throws off a little cash, but it's mostly a "professional hobby" type endeavor. I run social dance events in the city.

Ok, so here's where I get to the crux of why I'm posting. I'm trying to figure out where to put money next. I could:
A) Pay off CC debt
B) Pay of Student debt
C) Buy more houses (I could probably grab two more this year in the market I'm looking in, if I really stretch)

Some of the things I'm considering while debating this in my head.
- Real Estate is much more mentally stimulating than paying off debt, but that could be reframed if necessary
- I'm concerned that if I pay off my CC debt that old habits will put me right back into it
- I'm a Math guy, so it feels difficult to justify paying off a loan at 5% than investing money at 15-20%. It feels like taking on debt to increase passive income is a better way to go. Even though the CC could be considered "bad" debt, and the Student Loans "neutral" debt.

Thoughts? Considerations? Opinions?

Hi @Jameson Triplett

That's a tough situation. The math guy in me says buy the houses at 10%+ ROI and pay off CC and Student Loans as monthly payments. In order to do this, you will need discipline to be sure that you invest your savings and not spend them.

But at the same time it would be a huge mental relief to pay off the debt and start fresh without any monthly obligation to worry about. You can not put a price on peace of mind.

I have changed my investment strategy to where I am buying properties using cash only and not taking any more debt and it gives me a peace of mind which is very important to me.

It's a very tough call, but if I were in your situation, I would probably pay off the CC and student loans first and then move forward with RE investing debt-free.

Dave Ramsey will be so proud :)

@Sharad M. @Jason Hull was the one who got me thinking about this from his podcast about personal finance. I never really thought of the debt burdens as actual burdens, really just something to be calculated in an excel sheet with my monthly budgets. However when I started doing my financial freedom calculations (get out of the rat race, ala Rich Dad) I realized a big number of that included my student loan payments and other debt.

He answered quickly "pay off debt" before investing in the podcast, but then followed it up with a great answer on the podcast page.

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Hi Jameson. In your situation, if you can buy two more houses this year to generate revenue, then do that. Usually I'm a fan of getting rid of debt, but it sounds like you are not underwater in that respect.

My suggestion would be to take your profits from your real estate investments, including the next two purchases, and throw them at the highest interest student loan (in addition to the required payment you are making, presumably from your regular salary). You appear to be generating money for down payments already, so you won't miss that cash. I suspect that it is possible that you could get caught in a Debt-to-Income problem in the next house or two, so that's why paying down that debt will help you invest more long-term.

Plus, you can never get out from under the student loans - it's nearly impossible to discharge them in a bankruptcy. The credit cards, you can always keep moving that balance to low rate cards until you get in a position to get rid of them, and if disaster strikes, go bankrupt. Not so with a student loan.

I wouldn't consider Student Loans "neutral debt." Yes, you received value from your education in the form of a good job, but it's still debt, without a sellable asset behind it. Balance assertively paying those off while making good investments in your future. You seem to be in a position to be able to do both.

Good luck!

Being a somewhat "older" investor, I like your strategy. I am of the exact same mind set as you. You are securing 4-5% long term debt that is locked in which I think you (we) will all look back on in 20-30 years and say, wow remember when......

I also think that you should set a goal though to get all of your non-real estate ("bad debt" is about 80k) paid to 0. Say it's 5-10 years, or whatever, so that you can see it going down and eventually eliminated. And of course this assumes not incurring more! Then the next goal which is what I am grappling with is, do we then pay off the houses (w rates at around 5%), or buy more! :)

Anyway, just have a buffer in place with your real estate, which it sounds like you do, for those vacancies and repairs that will always be a phone call away. Keep up the good work, your on the right track!

the big question is the debt to income that Pam brought up. I would also ask approximately what you credit score is, I'm wondering if you will continue to get the 0% etc transfer offers. If those run out getting rid of your credit card debt could become more important, and when the interest rise, so do the payments, which would hurt you on DTI.

I am a big believer in leveraging, if I can put $15k cash into a house that will throw off $300-$400 a month, I don't mind borrowing that $15k if I can get a long term deal on the money (which i often have to do to keep reserves at the proper level),,,but I have an exit strategy, if everything ever starts to cause a problem I sell one rental and pay off all non-mortgage debt.

My credit score is actually quite good (~740 depending on who you ask), the sustained balance hurts me a little, but I've never missed a payment in 7 years on any of it so I have a good history.

And all of you are right the DTI is hurting getting loans. This is partly why I went in with my father on the last two houses, I was going to get just one, but the bank wouldn't loan based on my DTI so my father and I bought two instead and they like his DTI quite a bit. It probably wouldn't be an issue with small commercial loans though, so I guess I could always start looking at the small apartment building set.

23k is WAY too much CC debt for a successful young person to be carrying, IMO. Those low balances offers will go away- the trick is to have the debt paid by the time they do. If you count on being able to just transfer into another deal... well. That's exactly where the credit card companies want you to be.

Right now you're getting by on your father's "lendability". If you want to strike out on your own as an investor you need to get your own balance sheet in the kind of shape a lender wants to see.

For me, the CC debt looks like a ticking bomb. Playing games and transferring to another card is not good a financial practice. The student loans are OK as they are low interest without the 'deadline' factor. I'd look at when the 0% rates expire and set up automatic payments to have them paid off a month before they are due to go up. Then, I would save the remainder to put towards additional investment properties.

@James G. I admire that you even brought this up here. Many are probably in similar situations that this could help them too. Also, it shows that you are wanting something to change...or you would not be asking what to do. haha.

In seeing your note about reducing expenses some. I would first say take a look at that. If you have not set up a monthly budget for personal things like bills, clothing, food, gas, play money to use on dining out and movies etc. (maybe new dancing shoes =). That would be my suggested starting point. If you are spending $300/month on random dining and entertainment, see where you can scale that back a little bit. (I am just throwing out numbers not knowing your actual income etc.) Also, you said you are afraid of old habits putting money back on your paid off credit cards. I agree with @Jean Bolger $23k shows more than just a few emergency situations. I personally take advantage of no interest, but as @Bryan H. said, those are a financial disaster waiting to happen. What I do, is put the cards in a drawer or desk or hidden on a shelf or where ever. Anywhere that is not your wallet or pocket! That way you are forced to actually GET the card in order to put more money on it and it causes you to think before spending.

For what to pay and when. There is a method called snowballing. You can either aim for lowest balance, or highest interest rate. Whatever is more achievable for you. Say you pay $200/month on one credit card, pay as much as you can on that card and pay it off as fast as possible. THEN, when that card is paid off, take that $200 and pay it into another card, for example another $200 card you would now pay $400 until it is gone. THEN you have $400 to put toward something else! And so on... Get the ball rolling and keep it rolling into the next account until things are paid off. (Obviously you can adjust this however it fits into your finances)

As you are doing all of this. Like you said you always saw debt as just a line on a spreadsheet of sorts. Look at those payments now as what you COULD be paying towards another debt..AND all of those payments as what you COULD be adding back into REI or personal budget, etc.

@Ratho R.

Thank you for replying. Yes the $23k is definitely more than just a few emergency expenses, it's years of buying just a hair more than I can afford. Of not really thinking too hard about the $40-$50 purchases I make for little things off of Amazon.com. Or taking a trip that costs a several hundred without really saving for it first. It's really surprising how quickly that number can add up.

One way I used to use to justify carrying a balance was that I had liquid assets to cover it well in excess of my debts. Since I bought real estate those liquid assets have been sunk into illiquid RE, and now I don't have the cash that I could just buy off the credit cards in a day or two. So all of a sudden its feeling a lot more restrictive.

I'm definitely onboard with paying back the Credit Cards. It just feels like it's going to take so long to do it.

Well it is definitely a process. Basically you get out the same way you got in. Little bits at a time. =) I would say go for the lowest balance you have right now. That should be easier to pay off. Then you will get that feeling of having something paid off and that should give you some incentive to go after the next balance. I hear ya on those amazon purchases. Bill me Later on Paypal has been my issue. Similar thing is "No interest when paid off in 6 months." Well you loose track very quickly when you are getting little things here and there. Right now they hit me with almost $20 just in interest each month! So I am speaking from experience. The wife came with a small balance credit card when we got married and a few things I already had. So like I said, we have a small stack of cards I keep stashed away so we don't put anything on there anymore. I like the saying "If you can't afford it, you don't need it" Obviously there are some people that can't afford food and those situations are something else. But keep in mind, saving up to pay off a vacation or trip or outfit, etc will feel SO much better when you are not trying to pay it off later and fighting interest on it. How relaxing is a $1000 vacation if you are paying some 5% interest on it every month after that!?

I would say in summary, scale back where you can. Make some small sacrifices to kill your credit card debt and you will be so happy you did after you are cutting up cards and living without all this debt lingering over head. A little pain now for a long term of freedom to get RE loans and investing purposes. I am all for home loans and OPM when it comes to investing. I am totally against credit cards for random things and paying extra money on money you don't have.

I hope this is helpful and comes across correctly. I am in no way trying to scold you or come down on your situation! haha. There are TONS of people out there with very similar situations. I help people invest for Tax free retirement, but I have a passion for finances and getting people out of the grip of high interest fees. All that does is set you up to take two steps back every time you get one step forward..

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I'm down to 19k now in CC debt!

I've definitely decided to whack down the CC debt and am putting a lot of money into doing so. It feel like it's slowly lifting some weight off my shoulders when I do, so I think psychologically its the much better way to go even if the math returns aren't optimized. Also I know my loan officers for the SFHs I'm considering are happier without the CC debt on the books and it makes my credit rating stronger.

Also the extra $1k per month that I'm spending on CC repayments will make a big difference when it becomes saving/spending money!

As you are realizing it is a psychological benefit more than a financial benefit; although it is that too.

I bet you could squeeze some more out of your budget and/or increase your income enough to get rid of the CC debt this year!

Wow that is awesome progress! Cal's right, you'll have it gone in no time. When I was in debt I tried making it into a game- how fast can I pay it off? It really helped me turn it around psychologically. I felt like I was controlling the situation rather than being controlled by it.

Hey, Jameson - sorry to be so late to the game here! Congratulations on your progress! See if you can either a) get a little higher bump in the next raise, or b) squeeze that side hustle a little bit more to generate more income.

In most situations, I think of real estate as an investment category, just like stocks or bonds. You'd not quit your job to become a full-time stock trader. The same should go for real estate deals. Use the time that you have between now and being debt free to practice and get smart. Identify some properties that you'd be interested in and set a price that you'd pay. Then see what the properties actually sold for. If you're not handy, go to Home Depot or Lowe's and attend the classes so you can get smart on basic home maintenance.

Or, better yet, get enough income going from your job and your side gig so that it's worth your time to contract out all of that work. Remember, there's an opportunity cost to doing the repair and renovation work yourself; your goal is to make your time so valuable and profitable that it's the correct decision to buy the time.

Great work on knocking out that debt! Just imagine how it will feel when you're done. Don't forget to set up some meaningful reward at the end for accomplishing that goal!

Originally posted by @Jean Bolger :
23k is WAY too much CC debt for a successful young person to be carrying, IMO. Those low balances offers will go away- the trick is to have the debt paid by the time they do. If you count on being able to just transfer into another deal... well. That's exactly where the credit card companies want you to be.

Right now you're getting by on your father's "lendability". If you want to strike out on your own as an investor you need to get your own balance sheet in the kind of shape a lender wants to see.

Jean, this is absolutely true! I am in the same boat financially because of different "life" matters. I'm glad I read this post because it puts into words my thoughts exactly. About 3 months ago I read rich dad poor dad and really got interested in real estate, and at first thought instead of paying down debt as fast as possible to instead save for a down payment and cushion for my first real estate purchase. Instead though, I realized that I could instead invest in my real estate knowledge with the time it will take to pay my debt off, and look much better to lenders because of it.

Interest rates are extremely low right now so if you can be disciplined buy 1 more house and use the money to pay off the debts in order of interest rates from high to low.

But if you know yourself and cannot be disciplined then just pay off the debt.

when your looking at your cc debt, look at the relationship between balance and payment, they won't all be the same.

If you have a card that has a higher monthly 'minimum' per $1k, than the others, that should be the first one to work on to get your DTI down.

It's great that your working on getting your balances down, not just try to make sure to work on them in the most efficient manner.

Why not do both???

Start focusing on creative no-money/low-money down payment buy and hold techniques vs conventional financing and use your cash to kill the personal debt.

From a financial planning point of view the opportunity cost of the CC debt could be as high as 12-20% interest and from an APR perspective it can be even higher as the rate you're actually paying on them is being reflected on the average daily balance each month which ebbs and flows. Depending on what your cards will end up charging you it may be best to start amortizing these cards so you can reduce your future risk of being subjected to high rates and or find new cards to payoff your currently cards.

I think each person will find their fine balance of risk tolerance, equity/capital growth, and cash flow management.

At the end of the day leverage is great if you know what you're doing but as long as you manage your cash flow efficiently with respect to your financial plan you'll be fine.