Hello I am a young entrepreneur. I do residential construction and I am currently living in a single family house that I am flipping. I plan to live here for 3-5 more years because I enjoy the house.
I have money (roughly 20k) that is burning a hole in my pocket. I want to fix up my house, but I also want to become wealthy. My 2 biggest debts are my college loans and my truck.
I am looking for advice on what to do with this money. I could either pay off some debt to lower my debt-income ratio and this will help me buy more houses, or I could use this money to continue fixing my home.
I am open minded to any suggestions and would greatly appreciate some advice from a veteran investor or financial professional.
@Michael Anthony , how much debt do you have? Would that $20k wipe out either the student loans or the truck payment? Any chance you could get rid of the truck and payment, then buy a less expensive truck with some of the cash?
What type of work is left on the house? If you are going to be there 3-5 years more, you can do small jobs around the house to fix it up while saving more money and paying down the debt.
I am a big fan of paying off the debt as soon as you can so it doesn't hang over your head. Start with whatever has the highest interest rate and pay that debt off, then the next highest, and so on and so on.
Home Depot and Lowe's both have store credit cards that offer no interest on purchases of ~$200 or more. If you make the minimum monthly payment on time every month, and pay the entire amount off before the end of the promotional period, you will pay zero interest - essentially a free loan. It can be a tricky thing, and if you leave even $1 on the bill after the promotional period ends, you will pay interest on the entire amount, so if you can't pay it off, don't use it.
Have you read about house-hacking yet? This is where you either rent a room in your current house to someone, or you purchase a small multi-family and live in one unit while renting out the other unit(s). Less than 4 total units and you can get an FHA loan which allows as little as 3.5% down.
Look into the BRRRR strategy of investing as well. Here is a great article about it. Basically, you buy a property that needs work, rehab, rent it out, refinance and pull out cash, repeat.
Saving $20k is SUCH AN ACCOMPLISHMENT. Good job! It's hard work to save up that kind of money. I would recommend accelerating your timeline on reselling your property. After 2 years most of the capital gain is tax free.
I also recommend doing the repairs on your house now. If you're going to do them anyway, you might as well do them now and enjoy them for longer.
If you're investing the $20k into a house that you know will give you a larger return in the near future, do that. If I can't convince you to do it faster (or if there is a reason not to and you're on a longer timeline) I would say pay off debt first. Get completely out of all student loans, car loans, credit cards, etc, etc.
Keep up the good work. Being an entrepreneur is like being a super hero! The less debt you have the less pressure :)
@Michael Anthony you didn't mention your family status, but if you are single, and don't have to consider school zones or what makes a significant other happy, you can do a live in flip every 2 years and take tax free profits up to 250k every time! I wouldn't wait 3-5 years when the rules are as they are today. If you build a huge amount of equity from your improvements and you really love the house, you could just stay there and get a LOC to be able to access the equity (~80%) for investing? (No tax advice, consult your tax advisor for what's best for you.)
As for the 20k, while the truck note and student loan are the kinds of debt you want to get rid of ASAP, you need liquidity (cash) to do things as an investor. If your truck and/or student loan were paid off and you find a great deal to invest in tomorrow, what will you have to contribute to the deal when an HML will fund the deal, but requires you to have $XXXX (or XX%) invested in the deal? Very few will fund 100% of purchase and rehab, no matter how good the deal. As a new investor, even fewer will consider funding 100% of your great deal.
Use paying off the debts as your investment motivation. Say something like, I will pay 50% of the profits from my first deal toward paying off the truck. Or whichever you want to pay off first.
There are a ton of possibilities.
Thank you very much for all of the responses!
I am a single man. My student loan debt is 17k and my truck note is for 30k. I think you all are correct and will put my money into my home rather than pay off debt. I could always use the flip money towards paying the debt off anyways.
@Robert Leonard how can I make the profits on my property tax free?
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