Rental Property Investor · Elk Grove, CA (Elk Grove) · Member since 2019 · 30 posts · 3 votes
I have about 25k in cash available. I also have about 45k in non-real estate debt. Credit cards, car loan.
I really want to refinance my current residence to get it rented and look to buy a new home. Both the refinance and new loan get held up by my debt to income due to the bad debt.
The question is, should I dump all the cash into those debts, hold on to it, or look to invest it?
A little back ground.
I'm active duty Army, own two rentals and a primary residence. One rental is on a VA loan the other two mortgages are conventional. The hope is to refi the Va loan into a conventional so free up my entitlement. But I don't believe it would appraise with 20-25% equity. I appreciate any words of wisdom. Thank you in advance.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
6y
Pay off all three credit cards and stop using the credit cards to finance your life style. If you don't have cash to pay the credit card bill, don't buy it. Cut up the cards if you are unable to stop yourself from using them.
The car loan is fine. The short term and small loan amount means most all your payment is going to principal.
The good news is without these credit card payments, you will be able to save up cash for your next purchase.
What's the interest rates and balance like on the credit card debt? If the car loan is <4% I wouldn't recommend dumping cash in to pay it off unless you need to free up cash flow (e.g., >$500/m loan).
Rental Property Investor · Central Kentucky · Member since 2019 · 67 posts · 43 votes
6y
So I know the MO around here seems to be leverage, leverage, leverage, but when it comes to consumer debt I am hoping that isn't the case.
MY WAY, is to keep personal debt at $0 if at all possible. Meaning anything attributable to my personal life. My car, my house (not always easy for everyone), my cc's, student loans, etc.... Pay all of that off first before doing any investing. Regarding RE, in my head, regardless of the law, there are two of me. The family me and the LLC me. I want no debt on the family side, but will leverage a certain percentage for property on the LLC side because saving $_______k to pay cash for properties isn't always feasible.
Regardless, unload the debt first. You will be shocked how much simpler life becomes. And just for reference, my only debt is an investment I put on a cc a year ago...which in the grand scheme is tiny compared to cars, student loans, or a mortgage. Regardless, I need to follow my own advise and knock that out!!!
And I have to add, MY WAY proves its merit anytime s&*t hits the fan..... World falls apart? Markets collapse? Job loss? Probably gonna be ok....and thats worth a fortune.
If you had significant CC debt, consider applying for a CC with a balance transfer opportunity that contains minimal fees and delayed interest. From there you can pay off the balance over 12/15/18 months (whatever the promo is) and maintain cash on hand, rather than paying it full on day one.
The main idea was to pay off the 17% card then work on the car. Both together account for about 600 a month in cash flow.
I would see if you can refinance the car, then balance transfer and pay down the 15.7k CC. If you prefer the snowball method, I'd still refi the car with PenFed/USAA/NavyFed, then target the $3,200 -> $12,000 -> $15,700.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
6y
Pay off all three credit cards and stop using the credit cards to finance your life style. If you don't have cash to pay the credit card bill, don't buy it. Cut up the cards if you are unable to stop yourself from using them.
The car loan is fine. The short term and small loan amount means most all your payment is going to principal.
The good news is without these credit card payments, you will be able to save up cash for your next purchase.
Rental Property Investor · Newport Beach, CA · Member since 2017 · 218 posts · 138 votes
6y
@Jason Avila
Another option is to pay off the 17% credit card, and sell the car to pay off that loan. The interest cost of the car loan is low, but car payments are a large impact on a DTI, because of the short term amortization.
Buy something used with low mileage with cash. Then you might qualify for the refi.
Also, a tip: Your lender should be able to tell you if that will work before you make any moves.
Rental Property Investor · Elk Grove, CA (Elk Grove) · Member since 2019 · 30 posts · 3 votes
6y
@Joe Splitrock
I appreciate the feed back. The cards weren’t used to finance a life style they were actually used to make renovations on some of the properties. In prep for refinancing. But that was the idea of paying them off, to stack the cash that would normally go to the monthly payments.
Rental Property Investor · Elk Grove, CA (Elk Grove) · Member since 2019 · 30 posts · 3 votes
6y
@Sean McCluskey
Thank you for the suggestions. You're right with the car hitting the DTI hard. We do have a second vehicle that's paid off, so it wouldn't kill us to sell. Just not sure it's worth taking the loss. We rolled in a loss on a leased vehicle to this vehicle just to get out of it. Looking back, it would have been better just to pay that 5k loss when I turned the lease in. Lesson learned. Thank you again.
For sure, this is why I'd highlight again, talk to your lender and get them to run your DTI under that scenario before you go ahead and do it.
Selling the car and taking a short term loss now, in order to qualify for the refi and solve all of your debt problems at once, seems like it would be worth it! Selling the car, taking the loss mentally, and then still not qualifying, would not be fun.
Also, another option iIf your DTI is close w/o the 17% credit card: you might be able to just refinance the car with a partial paydown (say you pay $5k out of pocket and refi the rest?), into a 7 year car loan, and qualify.
As others have mentioned I’d get your debt down to zero before investing further. Pay off those credit cards and then I would sell the car if possible and buy a cheaper one with cash. I’m currently debt free besides the mortgage and it’s just a great feeling, your savings rate will increase exponentially and you’ll have that cash reserve again in no time.
Don't put all the money on your debt-you need an emergency fund. If you have a card with $15.7K balance and 17%-pay that off NOW. The interest rates on the others are low enough that I wouldn't worry, just pay them down normally. Do the math to see how much that $15.7K is really costing you and you will see why you should just pay it off.
The main idea was to pay off the 17% card then work on the car. Both together account for about 600 a month in cash flow.
If I were in your shoes this is what I'd do:
1. pay off the 17% credit card.
2. find an online high yield savings account to dump the remaining $9,300 into. That will only get you around $8/month since they are paying around 1% right now, but it beats earning nothing.
3. Wait 12 months; by then you'll have around $9,400 in the savings account and dump the balance of the savings account onto the 1.99% card right before the intro rate expires.
Sure, you'll have paid the interest on the car for 12 months, which is about $1000, but assuming that 1.99% intro rate goes up to 17% like your other card, it only takes around six months of paying the full rate on the $12k to more than erase any savings from paying off the car.
These are all rough numbers and we don't have enough info on specific payment amounts and savings rates to do a discounted cash flow model to arrive at a more precise answer, but I'm fairly confident the DCF will say a similar thing as the back of the envelope math.
4. In the intervening 12 months save as much as you can, but at least $6k, to pay down the two card with the intro rate. If you can save over $6k in 12 months to pay off the 1.99% intro rate card, then anything left over I would put toward the car.
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
6y
@Jason Avila Don't get down on yourself or feel like it's loosing or giving anything away by dumping cash into those high consumer debt's, it's just the "RINSE" phase your in which comes right before "REPEAT". Your in the game, have properties going, now eliminating some of the debt hurdles, it's a lot of steps forward and you deserve a big pat on the back.
Rental Property Investor · Elk Grove, CA (Elk Grove) · Member since 2019 · 30 posts · 3 votes
6y
@Bill F.
Thank you so much for the break down. The 17% will be paid. And I’ve already been able to throw 1k at the 12k card every month. That was a planned move. It was a balance transfer and consolidation to take advantage of the promo. I’m on track to have it paid by the end of the promo. I’m hoping to apply any spare cash to the car, including the monthly payment that was going to the 17%. Somewhat of a snowball strategy. I appreciate the help and confirmation that paying the debt was the logical step.