How to Eliminate Your Debt and Start Building Wealth in Two Simple Steps

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  • Jessamyn Smith
    Member since 2019 · 10 posts · 2 votes
    4y

    Thanks for your article. What do you mean by outsourcing your debt? You mean rent out the item on which you owe? For example, you couldn't do it with a student loan or a loan from your parents because there's no tangible item?

    Or do you mean, if you have the cash such that you could pay it off now, choose to delay paying it off for now?

    Also, in your CFI calculation, if the loan is real estate, what monthly payment would you use.. All the costs? Just PITI?

    Thanks!

    0Reply
    • Katie Rogers
      Santa Barbara, CA · Member since 2015 · 644 posts · 17 votes
      4y

      She means that the principal and interest on the mortgage or possibly on appliances, etc for a rental is bundled into the rent, so the tenant is effectively paying your debt, freeing up that debt you would have paid out of your own pocket to spend on other things. However, by the definition in the article, there really isn't such thing as "efficient" debt. According to the formula in the article, the average mortgage debt index is a whopping 250 (based on PI, not PITI. The TI part can never be paid off). The quicker you pay off your debt, the quicker you improve your own cash flow on the property.

      Some people say that instead of paying off low cost debt aggressively, you should carry the debt and use the money to buy stocks, citing the historical annual market return of 8-12% (depending on the differing parameters of each study). However, year after year studies have also found that regardless of the market return, the average individual investor return is about 2%. Most people get a better return by paying off debt.

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  • Curt Smith
    Rental Property Investor · Clarkston, GA · Member since 2012 · 2k+ posts · 1k+ votes
    4y

    You intentionally Paying off "good debt" debt someone else is paying off, the renter is a way to minimize wealth creation. Wealth is grown fastest by using max LTV on each rental water falling cash flow into the next the next the next door (as is net cash flow BTW). Appreciation grows wealth, and accumulates proportional to the number of doors which is made possible by maximizing debt, BUT safe debt is one at a decent DSCR (googleable) like 1.4 or better and at least $300/ mo cashflow $rent - $PITI. I went from wage slave to FI / quiting via this strategy. My wife came back from Gary Johnston's Financial Freedom class (recommended) and POOF; we jumped from Ramsey-esk to Good-Debt-esk and are happily traveling and being the Maytag Landlord. Ramsey is very (too) over rated. JMHO. You need to sleep at night. But we wanted FI worse which we did via maxing LTV which also maxes net cash flow and equity building. Minimizing debt maximizes cash flow per door but portfolio wise cash flow is minimized vs the high LTV route. :)

    BTW due to appreciation over last few years my buying LTV of 80% is now easily well under 50% plus my buying DSCR of 1.4 due to rent increases is well over 1.6 some above 2.0.

    Safety = reserves. We have a HUGE pile of cash, several years worth even if zero rent collected. This is excessive but we are poised to take advantage of the next wave of opportunities. FYI; you borrow (Cash out REFI) when you don't need it because when there's deals the banks won't lend. Borrow (cash out refi) now IMHO.

    Best to all.

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  • Andrew Peters
    New to Real Estate · Menlo Park, CA · Member since 2022 · 2 posts · 0 votes
    4y

    Great article, another tool to use going forward.

    0Reply
  • BiggerPockets TeamPro Member
    OP
    Member since 2026 · 14k+ posts · 4 votes
    3y

    Using CFI to prioritize debt paydowns may be useful for people who are over-burdened by debt obligations, but if not it doesn't make much sense.

    You mention CFI's under 50 as being destructive to your wealth, but in reality CFI has nothing to do with it since interest rates are not a factor. My 2.42% mortgage (which has less than 5 years to go) is close to 50 and will soon be under 50. How is it destructive to my wealth, and why would I want to pay it off?

    A better way to improve my wealth is prioritizing liquidation of my highest rate consumer debt irrespective of CFI.

    I also found it interesting that the author is uncredited/anonymous, but there are 2 recommendations for Chris Miles w/ links to his website selling stuff. Hmmm...

    Originally posted by Chris Soignier.

    BiggerPockets
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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    3y

    I saw the CFI be effective as I got close to end of mortgage terms a few times. Low balance, high relative pmt. But the same CFI will show a high CC balance as an efficient debt to maintain. Surely there's an exception to personal (high interest) revolving debt being called efficient.

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  • Michael P. Lindekugel
    Real Estate Agent · Seattle, WA · Member since 2017 · 224 posts · 55 votes
    2y

    there is emotional security in not have debt. on a home or a investment real estate it usually makes zero financial and economic sense not to have debt. interest only real estate loan are great for disciplined folks. gaining equity from paying down the mortgage earns nothing. in fact those dollars lose value at the rate of inflation. better to invest those dollars. it does make sense to pay down the mortgage when the after tax cost of borrowing exceeds the after tax interest earned on investments.

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