I found some similar posts, but I also had some specifics that I would like to try and get cleared up. I am new to investing, in the Denver market, and looking for the right time to buy. I believe that we are about to enter a recession, if we haven't already, but COVID and the possibility of a second shutdown throw in a lot of unknowns that may not play out like past recessions.

Catalyst: I expect a roughly 65K inheritance around mid-July.

Option 1:

Pay off high interest debt and increase monthly disposable income; Save for a property 12 - 18 months from now.

$33K consolidation loan @ 9.9% ($1365/mo)

$15K 401K loan (Currently on pause until December. $940/mo for 16 more months. Interest is paid to my 401K.)

This leaves my primary mortgage at 2.75 %, and a leased truck payment. (Up in October and refi for ~400/mo. or 24K buyout.)

This plan would leave me $2500-3000/per month to invest after bills. (Current plan $2K to savings and 500 to E*TRADE, until I get enough for a down payment.)

Note: I am already maxing out tax advantaged accounts. (401K and HSA; ~$2200K/mo)

Option 2:

Us the $65K to buy an investment property and continue to pay on the debt. This leaves me $500-1000 disposable income to save/invest.

In the Denver market I would probably need around $50K to get started, leaving a 15K savings buffer.

Conventional wisdom says that heading in to a recession you should pay down high interest debts and save. But recessions can cause property values to drop and might be an awesome time to invest. 

If the interest on my debt is 9.9%, there is a good chance I could do better than that in CoC ROI + appreciation with a self managed rental property under $300K.

Thoughts?

Are you looking for a rental or owner occ with house hack?

Are you saying you currently max out your 401k and hsa today, but have high interest debt?

Saying you need 50k to get started on an investment property. Are you also factoring in the closing costs, likely 6 months reserves, and likely 2 months reserves on your primary

@Matt M. a rental. Moving isn't an option right now. 

@Rocco Swinney no, right now I am using that money to pay the debt. Paying of the debt would allow me to max them out each month and still have the 2-3K disposable income. Before I took on this debt during my divorce I did max them out monthly and I want to get back there.

I have reserves on my primary. Putting 50K down would leave me 15 for reserves and closing. Plus the 1K of disposable income and would be saving and any cashflow.

Originally posted by @Jason M. :

@Matt M. a rental. Moving isn't an option right now. 

@Rocco Swinney no, right now I am using that money to pay the debt. Paying of the debt would allow me to max them out each month and still have the 2-3K disposable income. Before I took on this debt during my divorce I did max them out monthly and I want to get back there.

I have reserves on my primary. Putting 50K down would leave me 15 for reserves and closing. Plus the 1K of disposable income and would be saving and any cashflow.

You have do whats best for you. It seem things are high now and the last crash has almost been 12 years now.

I do have a place under contract though. Im not as concerned about the price of it (i think its a good deal for today) since i buy for long term buy/hold. Im concerned about the pandemic rules being put in, extended, etc. As currently you have few rights if the tenant stops paying during this time.

I also purchased a few places shortly after the crash up until now. So that helps me too, as if I buy one at the top... at least i have previous ones that werent and more towards the bottom to hopefully offset my thinking (right or wrong)

The first caveat, I would speak with a knowledge CFP who can help you determine the best course of action for your situation. They'll take into account your risk tolerance, goals, objectives, and values to determine how to best use that windfall.

Now, it also depends on how risk adverse you are. I'm a fairly risk adverse investor. And I hate having debt. So I would go with option 1. Pay off the debt, get the guaranteed return (certainly at 10%!). 

I would pay that 401k loan off because you're stealing from your retirement funds and having to pay yourself interest that doesn't match the stock market return. In addition, the 401k loan is risky because if you lose your job, that loan could become due immediately.

I would leave the mortgage because that's a great rate.

Paying down both these pieces of debt will certainly free up a lot of monthly cash flow, which you can then save for a down payment. It also delevers you, reducing your risk. 

@Jason M. I like paying down the debt.  Timing the market is difficult - I don't think it's clear at all what is going to happen to the real estate market as we head into fall and winter, so I wouldn't worry about "missing" an opportunity.  On the one hand, it seems like the recession would cause prices to go down, but on the other, supply in the places where people want to lives remains constrained.

@Jason M. Typically, I don't mind debt, especially at 5% or below, but 9.9% is nasty... Can you refinance it with SoFi or another institution and cut the interest in half and then do option 2? Otherwise, I would do option 1 because it's a guaranteed 9.9% risk free return. 

It's good to see you're thinking about it the right way. I've seen so many people take the $$$ and buy a new car and just add to their debt... Just know that you can't go wrong whichever option you choose 

Thank you for all of the quick responses, I appreciate the feedback. I figured that option one was the best option, but I needed to be sure that I wasn't making an obvious mistake.

@Jason M.

If it were me, I would make paying down that high interest debt the main priority. The guaranteed 10% return is tough to beat. Most importantly, its not uncommon for the first property to be a head ache, a dud, just break even, or even a complete train wreck. 

@Jason M. I'm having a similar debate and doing a similar analysis surrounding my wife's student loan debt. We had a pretty decent plan to pay it all off in the next 6 years, but I've been looking at accelerating that through some IRA money I have and can access under the CARES act. Similar debate in that is it better to pay off debt or invest and grow....for me I ran a couple scenarios and decided I'm going to pay off the debt. While in the short term it slightly diminishes my reserves and savings it also allows me to double my savings over the next two years after the student loans are gone. Some of those loans are similar to yours at 9%+.

I'd recommend the same thing to you especially going into an economy like we are.  I'd take smaller savings and reserves in return for no or very little debt.  That situation really gives you much more flexibility in tough times.   

I'd also encourage you to look at house hacking a duplex or other type of property if you have not already.  As an owner occupant getting into a house hack as your first income property is a huge plus!  and the options for financing are pretty endless.  We've been doing it the past two years and its been the best decision we ever made!

cheers!   

@Jason M. - If you are looking to house hack. Then I would recommend keeping money reserved for a down payment on the house hack. You won't get a better return doing anything else. 

If you are going for a traditional rental (25% down), your return is going to be much lower. If that is the case, I would pay down the high interest loans first. Especially if this is your first investment. You don't want to be over-leveraged. 

@Jon Kelly

How about 6.8% with the highest chance of 10 year forgiveness you can get? Had some private loans at 11% & did an 18 month 0% credit card. Ends in September, $18k sitting in worthy bonds earning 5%.

With my tax situation & high cost area I don’t want to earn over $60k unless it’s off passive syndications only or a moonshot with some businesses I started in Oklahoma or my crypto or silver portfolio. If that happened I would file taxes separately from my wife to protect taxes & loan forgiveness.