pay off debt? get into more debt?

Question

just starting off my real estate investing journey.  I currently only have 2 properties in my portfolio, still looking to grow but with the ultimate goal of being a small and mighty investor.  About paying off debt: would you recommend paying off a heloc or an investment rental property that is cashflowing first?

John Clark · Answer

1. How secure is your tenant base? Section 8 is secure. Staff at the local art gallery, no. Vacancy is a killer, as is deadbeat tenants.

2. How is your emotional attitude towards debt? Some people can tolerate heavy debt loads and still enjoy life. Others aren’t happy until they have a can of gold coins buried in the yard, a million in the bank, and no liabilities on their balance sheets.

3. Is your property really cash flowing? You need hefty reserves for capital expenditures, vacancy set-asides, etc. Until/unless those reserves are fully funded, you need to be able to handle those extra charges.

4. What are your investment opportunities? Don’t do a deal simply to grow. Only cancers do that. If good investment opportunities aren’t available, put the money into your dry powder fund and wait.

5. What is your assessment of the local economy’s prospects where your investments are? Ties in with tenant stability and ability to liquidate assets.

6. What are your prospects for life events like marrying, moving, death, divorce, etc, and how will they affect your ability to buy or manage your properties?

7. Never take advice from people who get paid on commission.

Stacy Raskin · Answer

Some factors to consider: What are your rates on the HELOC versus the investment property rental? I would factor that in as far as what to pay off first. Also, if you pay down the HELOC can you use it again / will it stay open?

Most investors find mortgages helpful to scale. There are DSCR mortgages that don't use your personal income beyond the down payment and closing costs if for a purchase so that can be helpful potentially if looking to scale and will be able to cash flow. Debt can work depending on your goals and the interest you are paying versus your cash flow from the property.

Joel Miller · Answer

Theresa is right. There is good debt and bad debt. Good debt is the kind that leverages other people's money (OPM) to acquire things that produce more money for you than the cost of the debt. Real estate runs on OPM. You will not grow if you don't use it. And to put a twist about John's #7 point, don't take advice from anyone you wouldn't want to change places with.

Theresa Harris · Answer

It depends on the type of debt.  There is bad debt (credit cards) and 'good' debt (mortgages).  Always pay off bad debt as fast as you can.  For things like mortgages-can you use the money elsewhere (eg down payment for a rental) where it will give you a higher return?

As the other person said, it also depends on your attitude towards debt and your plans.  Some people pull out all of the equity in their rentals, others let the mortgage get paid down over time and keep the equity in the home.

pay off debt? get into more debt?

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