Fix your credit? Or, invest in your FIRST property?

Member since 2020 · 10 posts · 5 votes

You save enough money to start attacking small debts. You find a deal that requires a small amount down and is owner financed. You have enough to cover your down payment and begin fixing things here and there with expenses and vacancies accounted for. Do you focus on building your credit and paying off debts or invest your money first and start fixing your credit with cash flow?

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Dave SpoonerPro Member

Rental Property Investor · Cincinnati, OH · Member since 2020 · 869 posts · 823 votes

@Anthony Patton, to me, the biggest factor that I haven't heard mentioned is - what kind of interest rate are you paying on your debt?

I would pursue the highest ROI, and if there's a tie, I'd lean towards creating equity in a property and paying down your debt through cash flow (as long as you're confident it will cash flow and you're not just creating more debt). To figure this out, we'd need to know not just the interest rate on debt, but also the total debt owed and the expected cash flow on the property.

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Charles Carillo
Rental Property Investor · North Palm Beach, FL · Member since 2018 · 2k+ posts · 1k+ votes
6y
@Anthony Patton
I would focus on paying off your debt before you start investing.
1 Reply
Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
6y
Originally posted by @Anthony Patton:
You save enough money to start attacking small debts. You find a deal that requires a small amount down and is owner financed. You have enough to cover your down payment and begin fixing things here and there with expenses and vacancies accounted for. Do you focus on building your credit and paying off debts or invest your money first and start fixing your credit with cash flow?

Proper seller-financed deals that work and were your idea are hard to come by. I'd grab one while you can.
Shady Craigslist 'owner-finance' are a dime a dozen and should be avoided. Pay down your debt first.
Do you have an honest deal with a homeowner or a random crap deal found online?
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Account Closed
Realtor · Portland, OR · Member since 2020 · 87 posts · 43 votes
6y
@Anthony Patton
Try this: interview the “REAL” RE Guys in your area doing deals... see what each of them look for property wise. Pre-qualify them > meaning, make sure they actually have the money to close on a deal... find a deal that would suit their criteria, take an “option to purchase” out on the property. Sell that option to purchase to them. Get paid, even if they don’t close by selling them that option.
Dont waste your time building/fixing stuff/saving $.
Try this out. Then pull out $ for taxes lol and then pay off the debt. And repeat.
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Kenneth GarrettPro Member
Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
6y
@Anthony Patton
You are going to need your credit high enough to make your life easier and credit worthy. You can use creditnerds out of Arkansas. They work with a lot investors. Work on upgrading your credit.
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Anthony Patton
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Member since 2020 · 10 posts · 5 votes
6y
@Steve Vaughan it was just theoretical. However, I was thinking of striking up one of these deals on my while fixing my credit at the same time. I’m very eager and appreciative of your response. I am paying my debts now with a secured credit line. Hopefully that helps my situation a little quicker haha. Thanks again.
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Anthony Patton
OP
Member since 2020 · 10 posts · 5 votes
6y
@Benjamin Maciel this is interesting. Has this formula worked for you personally? Do you have monthly or yearly averages on deals closed? Just curious. Thanks!
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Account Closed
Realtor · Portland, OR · Member since 2020 · 87 posts · 43 votes
6y
Originally posted by @Anthony Patton:
@Benjamin Maciel this is interesting. Has this formula worked for you personally? Do you have monthly or yearly averages on deals closed? Just curious. Thanks!

Of course, this is how I got my first duplex. 3010 Countyline Rd Saint Joseph, MO ;) Shoot me a DM and I could clarify even more.... But---- it is only one way to make $

I would recomend getting an RE Liscense as well, and then your brokers so you can do yr own thing!
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Account Closed
San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
6y
I actually bought three different properties with bad credit and with owner financing. The first one was on the Canadian border in WA in a tiny town that was struggling and in the boonies, basically, and a 45 minute drive to my job in perfect weather in Bellingham, WA. Imagine that drive during the lovely ice and snow storms. Anyway, I bought it on an owner contract for $16,000 back in the early 1980s. But, basically, I was able to get it because the guy couldn't sell it to anyone else lol. Wish I'd kept it. Who knew the town would grow and it would be worth a bunch now. I tried renting it out when I moved away using a property manager, but that didn't work out for me being out of state, so I sold it.

Second one was a two-acre parcel I'd driven by for a couple of years with a for sale sign on it. Good location along the main two-lane highway in the mountains in WA but southern border this time. I asked around why nobody bought it, and was told that nobody could stand the seller. He was a real jerk. So, I thought about it every time I drove by it, and was saving up money. Finally, I made him an offer. Ironically, this property was also for sale for $16,000. I offered him his full asking price, $2,000 down and 10% interest, as I recall. This was early 1990s. He wanted $4,000 down and I finally agreed. I ended up developing it (put in gravel driveway, some fencing, electricity, septic, well) and lived on it in a trailer for several years while developing it. Sold it for $47,000, I think, profiting around $15K, as I recall and not counting living on it for free. Sold it after moving back to CA to the guy who put in the septic system, which I paid for with payments and bad credit. Did the same with the well-driller.

Third one was a condo I bought in CA during the 1990s crash with some of the money from the sale of the land in WA. It was about impossible to sell condos back then because you couldn't get bank financing for them anyway without a large down and interest rates were around 9%. I bought it for around $60K with bad credit, 10 year balloon payment, and around $3,000 down, and 10% interest as I recall. Sold it for a decent profit about 5 years later.

You just need to find a property that's hard to sell to anyone else for whatever reason and have some money to put down, even if it's not a lot, and a job history that's decent and/or a good reputation that can be checked out, at least with your landlords, etc.

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David BarnettPro Member
Rental Property Investor · Cambridge, MA · Member since 2016 · 634 posts · 415 votes
6y
I would pay off debt/improve the credit score first. Sure, one could buy a property with creative means (seller financing, etc.), however a good credit score/less debt will leave you with more options (conventional purchases). I view it as an investment to make future investments easier (more options).
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Aigo Pyles
Flipper/Rehabber · Memphis, TN · Member since 2020 · 758 posts · 285 votes
6y
@Anthony Patton
I think paying your debt is what you should do first instead of investing right away. Remember that debt is bad. This will also affect your chance of getting a loan for a property. You should pay your debt first and after that, you can start investing.
All the best!
Aigo, financial trader and turnkey provider in Memphis, TN
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Dave SpoonerPro Member
Rental Property Investor · Cincinnati, OH · Member since 2020 · 869 posts · 823 votes
6y
@Anthony Patton, to me, the biggest factor that I haven't heard mentioned is - what kind of interest rate are you paying on your debt?
I would pursue the highest ROI, and if there's a tie, I'd lean towards creating equity in a property and paying down your debt through cash flow (as long as you're confident it will cash flow and you're not just creating more debt). To figure this out, we'd need to know not just the interest rate on debt, but also the total debt owed and the expected cash flow on the property.
[email protected]
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Brian Ellis
Rental Property Investor · South shore, MA · Member since 2017 · 1k+ posts · 1k+ votes
6y
When I bought my first home (fixer upper), I quickly realized the only way I was going to be able to buy it was by fixing my credit. So I did both at the same time. I paid off my debts quickly by side hustling for extra cash. I downsized and sold a lot of stuff on ebay, I even went to yard sales and sold some of the stuff I was able to acquire cheap. I stopped eating out, I quit cigarettes, I educated myself, I cancelled memberships I wasn't using or could go without, I stopped buying clothes that would eventually end up in a donation bin, and I stopped sitting on the couch when I wasn't at my W2.

For me, the greatest motivator was being told by the bank I couldn't get a loan until I paid off most of my debt.
Assess your situation and act accordingly. I personally dont think its a terrible thing to invest with some debt, as long as you are financially responsible already.

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Anthony Patton
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Member since 2020 · 10 posts · 5 votes
6y
@Benjamin Maciel ok, sounds good. Thanks!
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Anthony Patton
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Member since 2020 · 10 posts · 5 votes
6y
@Sue K. This is similar to what my goals are to help kick start my financial goals. Very inspiring and validated some ideas of my own. Thank you for that l.
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Anthony Patton
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Member since 2020 · 10 posts · 5 votes
6y
@Dave Spooner makes sense. I don’t have a deal lined up yet, just debating theoretical circumstances. The scale has been tipped on paying debts off dramatically at this point though, haha.
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Anthony Patton
OP
Member since 2020 · 10 posts · 5 votes
6y
@Brian Ellis. That’s awesome I too have quit cigarettes and drinking not just for health but to pursue reí. I know I am in the same position as you were once in and hope to do both at the same time as well l. Thank you.
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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
6y
@Anthony Patton it really depends on what you mean by fixing credit. Paying down debt can be different than fixing credit. In fact, paying debt on time can actually improve your credit score. Do you know what is forcing your credit score down?
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Anthony Patton
OP
Member since 2020 · 10 posts · 5 votes
6y
@Joe Splitrock a combination of both unfortunately. I have school loans and other debts combined with a lack of credit history. I recently got a secured credit card and will use it to pay off debts and then make payments on the card (like a chain reaction) hopefully it works lol.
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Ken Taylor
Flipper/Rehabber · Detroit, MI · Member since 2019 · 15 posts · 4 votes
6y
@Anthony Patton if your not looking to make a major purchase in the next 4 months fix with cash flow if you are fix your credit . But remember the longer you don’t enter the real estate game the less likely you will
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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
6y
Originally posted by @Anthony Patton:
@Joe Splitrock a combination of both unfortunately. I have school loans and other debts combined with a lack of credit history. I recently got a secured credit card and will use it to pay off debts and then make payments on the card (like a chain reaction) hopefully it works lol.

If you buy a property with owner financing, it most likely doesn't build your credit, because they probably will not report to the credit agencies. The number one thing you need to do is make all your payments on time. I am not sure what the "other debts" are, but if you are not making the agreed upon payments on those debts, that is a big problem. If you have any judgement or unpaid debt not on a payment plan, you need to take care of that first.
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Brad Piper
Real Estate Agent · Dallas, Ft. Worth · Member since 2020 · 52 posts · 27 votes
6y
I would generally recommend getting your credit in order first. Having bad credit will be a roadblock in so many ways, both in your investing journey as well as your own life in other areas, get that credit in order and you'll have plenty of time to invest!
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James Williams
New to Real Estate · Charlotte, NC · Member since 2019 · 73 posts · 46 votes
6y
@Anthony Patton I say start investing. Paying off debt with investment returns is remarkably powerful.
1 Reply
Josue Vargas
Real Estate Agent · San Antonio, TX · Member since 2017 · 814 posts · 466 votes
6y
@Anthony Patton

What is your credit score? You didn't say, of course this is very personal but a range would help so we could better comment on your question.
I would start asking myself, what is going to take for my credit to go up and desirable for REI. There are a lot of reason for a person to have not so competitive credit score. Also, I think there will be more chances to fail and more time to recuperate if the money you put away for your first REI didn't come out as expected, specially with recurring debts, for a first investment. But no one knows better than you the situation. Hard to say or help with the provided info. Good luck.
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Joshua Howaniec
Contractor · Indianapolis, IN · Member since 2016 · 267 posts · 144 votes
6y
@Anthony Patton I have been wondering the same thing recently and while I was going to fix credit and pay debt first it occurred to me that if I can invest the money (small multi family) I can create an income stream allowing me to pay more debt faster.
Increasing income is a faster way to pay off debt, fix credit, and you are investing.
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Lindsay DavisBusiness Member
Real Estate Broker · Birmingham, AL · Member since 2019 · 326 posts · 203 votes
6y
Hi @Anthony Patton

This is a great question and the answer depends on a couple of different things.

First of all, what kind of debt do you have? Not all debt is created equal. If you have high interest debt, such as credit card debt, paying that off should be your priority. On the other hand, if your debt is lower interest debt, such as most student loans, there’s a better chance investing is the right option. Think about it this way, which provides more bang for your buck in the long-term - the money you’ll save in interest payments on your debt or the income from your investment?

The other thing to consider is if covering the down payment and beginning to rehab the place will wipe out all of your financial reserves. If that’s the case, it’s better to wait. Having an emergency fund is key for anyone, but especially for real estate investors.

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