Payoff a Vehicle or buy another rental!?

Real Estate Agent · Houston, TX · Member since 2019 · 763 posts · 500 votes

About to close on a refi of our personal property. Saving $250/mo plus getting about $12k cash back in closing. Current vehicle payment is $398/mo with about 9000 left to pay (2.5% interest rate).

Initial thought is go use the cash to payoff the vehicle to increase our monthly cash coming in, and decrease our DTI (only debt besides the vehicle is our rental/pri res/boat) and use the next 6-9 months to see what happens with the election before picking up another door, however having the extra 12k on top of that 6-9 months is also a great boost for a down payment.

What are you doing in this scenario? Getting rid of debt, or keeping the payment because the interest rate is so low?

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Bill HamptonBusiness Member

Accredited Investment Fiduciary, AIF®, Financial Planner, Tax Strategist, Real Estate Investor · Atlanta, GA · Member since 2012 · 2k+ posts · 978 votes

Keep the payment and buy another rental.

Good luck.

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Tim H.
Real Estate Broker · Austin, TX · Member since 2019 · 32 posts · 18 votes
6y
Pay off the car. Debt has an emotional as well as an economic cost.
3 Reply
John Clark
Member since 2018 · 1k+ posts · 1k+ votes
6y
"(only debt besides the vehicle is our rental/pri res/boat) "
------------------------------------
Vehicle interest is 2.5 percent.
What is your interest rate on current rental's mortgage?
What is your interest rate on primary residence mortgage?
What is your interest rate on boat loan?
What is your view as to the next election and its potential effects on rental prices?
What is your view as to Covid 19 and its potential effect on rental prices?
What are the rates of return on alternative investments at the risk levels you find acceptable?
What is the rate of return on the potential rental units you would buy?
What amount of cash flow do you need for your monthly cushion of reserves, etc.?
Answer those questions and they will give you the answer you need.
0 Reply
Dan Torluemke
Rental Property Investor · Kansas City · Member since 2014 · 36 posts · 12 votes
6y
Buy a rental. Not sure what rate you are getting on your refi, but assuming 3.5% you will be paying about $7500 in interest over 30 years for that $12k you cashed out. Borrowing at 3.5% to pay off debt at 2.5% doesn't make much sense to me. Maybe throw in an extra $100-$150/month from your monthly W2 savings to pay the car off faster.
2 Reply
Stefan Folkert
British Virgin Islands · Member since 2020 · 31 posts · 13 votes
6y
I'd say pay off the car. That and the 250 you save on your mortgage is 650 a month.
The 400 car payment, with 12000 you'll struggle to find a property that cashflows 400.
1 Reply
Karl McGarvey
OP
Real Estate Agent · Houston, TX · Member since 2019 · 763 posts · 500 votes
6y
@Dan Torluemke 2.34% on the refi :)
0 Reply
David M Trapani
Rental Property Investor · Franklin, TN · Member since 2019 · 160 posts · 125 votes
6y
I agree with Paul and the others suggesting purchase of another rental. Drove BMW's for 15+ years. Held back REI significantly. About 2 years ago lost paid-off Jeep to not-at-fault MVA. It was paid for cash. Living in a small downtown area, work from home, walk or bike most places, opted not to get another vehicle. Used insurance proceeds to acquire an STR. It makes about $5000+ month and just keeps on giving. Appreciation going well. Plus, it's a great place to visit. Get a cheap reliable car & plow funds into well located REI. Be sure to keep adequate reserves. Best wishes!
2 Reply
Dan Torluemke
Rental Property Investor · Kansas City · Member since 2014 · 36 posts · 12 votes
6y
Originally posted by @Karl McGarvey:
@Dan Torluemke 2.34% on the refi :)

Wow! Nice job.

1 Reply
Klint Ruud
Investor · Nashville, TN · Member since 2019 · 92 posts · 96 votes
6y
Hold it for now... just incase fit hits the shan! But I would intend to pay off the truck in 6-9 months. If things are looking optimistic after the election... buy a rental instead!
0 Reply
Alfonso Inclan
Specialist · Chandler, AZ · Member since 2011 · 4 posts · 7 votes
6y
This is a great question, and the answer will depend in the financial experience and abilities of the borrower.

I asked a similar question to my mentor in 2005.

"I have this cash right now. Can I buy a car in cash or invest in real estate?"

He told me: "finance the car and buy real estate".

Back in those days, I didn't have enough experience in Real Estate, so, I lost all my rentals in the crash of 2008... and lost my car as well.

Robert Kiyosaki would say the same: "buy real estate".

Dave Ramsey would say "don't carry a loan in your car".

In my experience, the right answer for your question is: "DEPENDS".

*If you have experience in Real Estate (you know what you are doing), solid income for the last 3 years and great reserves, then you can buy another property.

*If you are new in the game, your income has been unstable in the last 2 years and don't have good reserves, payoff the car.

=>AN ADDITIONAL STRATEGY is about THE CREDIT:

Having an installment loan in your credit (besides of your mortgage) benefits your FICO score.

If you payoff your car loan your FICO score may drop by 60 to 100 points!

But paying off MOST of the debt and continuing with a little balance for the rest of the life of the loan (like paying only $20 dollars a month), will not affect your DTI and will benefit your FICO score a lot.

De nada. :)
2 Reply
Michael Heisterkamp
Member since 2020 · 122 posts · 62 votes
6y
This comes down to a simple question. Can you make more than 2.5% on another rental? If so, buy another rental.
1 Reply
David Ade
Member since 2019 · 13 posts · 4 votes
6y
@Karl McGarvey Rentals put money in your pocket while car takes money out of you pocket. I’ll rather invest in wealth instrument ( Asset) that generates cash flow than invest in liability that takes money of my pocket
0 Reply
Gary L Wallman
Rental Property Investor · Beavercreek OH · Member since 2018 · 422 posts · 970 votes
6y
I bought a shiny new Corvette Stingray in 2014. The vehicle was over 80k. Rather than pay cash for the car, I bought a rental with that money instead and financed the car at 2.09% interest. Used rent from the newly acquired rental property to pay off car in 2 and 1/2 years.
Now I have a paid for toy and a rental asset that is now worth 125k. Win win.
3 Reply
Peter Welch
Realtor/Investor · Yakima, WA · Member since 2015 · 23 posts · 9 votes
6y
I would say pay off the debt. Consumer debt can be very taxing on your mental health. I believe it will free you up in more ways than one. Finding money for another deal is much easier than paying off personal consumer debt.
0 Reply
Chad G.
Real Estate Agent · Bradenton, FL · Member since 2015 · 71 posts · 15 votes
6y
Most of the responses telling you to go one way or the other are purely gut or emotional in nature. If you want to make this a legitimate financial/logical decision, you have to take the returns you expect from a potential rental and compare it to the car, which requires you to factor depreciation and the loan rate. You could use returns on a previous/current rental(s) as a general gauge, just remember there is no guarantee a future investment will provide the same so allow for a margin of error. That said, if you estimate an actual deal it will still only be a projection that you can only verify after it becomes seasoned
So for instance, if the car with depreciation costs you 10% annually, but you get an estimated 15% CoC return on your rental (I would avoid including appreciation on the property since that is speculative, whereas depreciation on the car is guaranteed)... then the rental would be better. On the other hand, if the car costs you 10% annually and you are only getting 7% on your rental it would make more sense to pay off the car.
1 Reply
Account Closed
Lender · Milpitas, CA · Member since 2016 · 376 posts · 248 votes
6y
@Karl McGarvey it depends if your DTI can support another rental property. IMO, the market is going to go down a bit in the coming months. A lot of the stimulus programs will expire soon and we will start to see the true economic ramifications due to the COVID-19 pandemic. This means that they'll be more opportunities for deals in the near future.
Paying off a car payment is a direct saving and helps with your DTI ratio, while buying a rental may cause you more cashflow problems if you have trouble filling in the unit or have problem tenants.
0 Reply
Tony Kim
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
6y
Originally posted by @Chad G.:
So for instance, if the car with depreciation costs you 10% annually, but you get an estimated 15% CoC return on your rental (I would avoid including appreciation on the property since that is speculative, whereas depreciation on the car is guaranteed)... then the rental would be better. On the other hand, if the car costs you 10% annually and you are only getting 7% on your rental it would make more sense to pay off the car.

If buying a rental would provide you with 7% CoC, how would paying off the car which would lead to a 0% return make more sense? I'm not necessarily saying that buying a rental is better. I'm just trying to better understand your analysis.

As alluded to by previous posters, a total DTI analysis would make much more sense to me. It doesn't matter if financing is being used for your car or for your property...it should all be aggregated together to come up with a total financial picture. If it seems like reducing debt might be better, then pay it off. If you purchase a property, I'm sure you will be able to get something with a CoC higher than the cost of financing your car. So, obviously it isn't going to hurt your bottom line to increase your assets and increase your liabs. But you also want to ask yourself how much debt are you comfortable with...which will be affected by various other things, like how close you are to retirement, etc.
0 Reply
Chad G.
Real Estate Agent · Bradenton, FL · Member since 2015 · 71 posts · 15 votes
6y
Originally posted by @Tony Kim:
Originally posted by @Chad G.:
So for instance, if the car with depreciation costs you 10% annually, but you get an estimated 15% CoC return on your rental (I would avoid including appreciation on the property since that is speculative, whereas depreciation on the car is guaranteed)... then the rental would be better. On the other hand, if the car costs you 10% annually and you are only getting 7% on your rental it would make more sense to pay off the car.

If buying a rental would provide you with 7% CoC, how would paying off the car which would lead to a 0% return make more sense? I'm not necessarily saying that buying a rental is better. I'm just trying to better understand your analysis.

As alluded to by previous posters, a total DTI analysis would make much more sense to me. It doesn't matter if financing is being used for your car or for your property...it should all be aggregated together to come up with a total financial picture. If it seems like reducing debt might be better, then pay it off. If you purchase a property, I'm sure you will be able to get something with a CoC higher than the cost of financing your car. So, obviously it isn't going to hurt your bottom line to increase your assets and increase your liabs. But you also want to ask yourself how much debt are you comfortable with...which will be affected by various other things, like how close you are to retirement, etc.

Sure, DTI could certainly be another variable in your analysis, but in and of itself, I don't see that being the end-all, be-all unless you are in a really bad state from that perspective. Being "sure" you will get something of a CoC higher than cost of financing the car is a gamble without validating that assumption, which is what my point was: work the numbers out to gain confidence in that common sense. In engineering we have a saying that all problems look like nails when all you have is a hammer. As real estate investors we are biased to buying more real estate, but we shouldn't make decisions without verification to what our gut tells us.
Circling back to your first question, you seem to look at things differently than I do. Eliminating the cost of financing of a depreciating asset would be far from a 0% return. In order to eliminate a negative return, which is what the car is, requires a positive return to bring it to zero.

0 Reply
Anthony Wick
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
6y
@Karl McGarvey. I'm going to go a different route here. Tell me more about this boat that you owe on. Surely it cannot be at a better interest rate than 2.5%. How often do you use this boat? Should you be paying that off, or maybe even selling it? Also, have you been looking for a rental, and know they are there for the taking? I'm all loaded up after two cash out refi's this summer, but every 4-8 plex I've been looking at this year simply will not cash flow. This pandemic sure hasn't stopped people from asking too much for their properties, or prevented the same old people from overpaying for them either.
2 Reply
Jeremy MyersPro Member
Realtor · Houston, TX · Member since 2013 · 15 posts · 12 votes
6y
@Karl McGarvey
Your interest rate on your vehicle is historically low.
One thousand percent:
Buy another rental, or leverage your money and buy two.
0 Reply
Jonathan Feliciano
Accountant · Miami, FL · Member since 2020 · 89 posts · 57 votes
6y
@Karl McGarvey That plan sounds perfect man! All the more power to you!
0 Reply
Sam Shueh
Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
6y
rental that is a no brainer
0 Reply
Tony Kim
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
6y
Originally posted by @Chad G.:
Originally posted by @Tony Kim:
Originally posted by @Chad G.:
So for instance, if the car with depreciation costs you 10% annually, but you get an estimated 15% CoC return on your rental (I would avoid including appreciation on the property since that is speculative, whereas depreciation on the car is guaranteed)... then the rental would be better. On the other hand, if the car costs you 10% annually and you are only getting 7% on your rental it would make more sense to pay off the car.

If buying a rental would provide you with 7% CoC, how would paying off the car which would lead to a 0% return make more sense? I'm not necessarily saying that buying a rental is better. I'm just trying to better understand your analysis.

As alluded to by previous posters, a total DTI analysis would make much more sense to me. It doesn't matter if financing is being used for your car or for your property...it should all be aggregated together to come up with a total financial picture. If it seems like reducing debt might be better, then pay it off. If you purchase a property, I'm sure you will be able to get something with a CoC higher than the cost of financing your car. So, obviously it isn't going to hurt your bottom line to increase your assets and increase your liabs. But you also want to ask yourself how much debt are you comfortable with...which will be affected by various other things, like how close you are to retirement, etc.

Sure, DTI could certainly be another variable in your analysis, but in and of itself, I don't see that being the end-all, be-all unless you are in a really bad state from that perspective. Being "sure" you will get something of a CoC higher than cost of financing the car is a gamble without validating that assumption, which is what my point was: work the numbers out to gain confidence in that common sense. In engineering we have a saying that all problems look like nails when all you have is a hammer. As real estate investors we are biased to buying more real estate, but we shouldn't make decisions without verification to what our gut tells us.
Circling back to your first question, you seem to look at things differently than I do. Eliminating the cost of financing of a depreciating asset would be far from a 0% return. In order to eliminate a negative return, which is what the car is, requires a positive return to bring it to zero.

I don't disagree with your first paragraph, but to be honest, I really don't see how it differs...or even opposes what I said. You're just saying that when evaluating your DTI, make sure it's accurate. Well of course! That goes without saying!

I agree that we use very different ways to calculating the utility of money. In Finance and Accounting...we also have a saying. The cost of financing on anything.....regardless of whether or not it appreciates or depreciates, should be based on the cost of financing.

When you say, "On the other hand, if the car costs you 10% annually and you are only getting 7% on your rental it would make more sense to pay off the car." you're using the cost of depreciation in evaluating whether or not to pay off the vehicle. That makes no sense to me because even if you pay off the vehicle, you're still getting the 10% depreciation.
0 Reply
Jonathan Emery
Rental Property Investor · Allentown, PA · Member since 2009 · 79 posts · 5 votes
6y
@Karl McGarvey Have you considered maybe starting a life insurance policy and still use that money to buy another investment or pay off your car and so much more? I did last time I refinanced my property.
0 Reply
Pranav G.
Investor · Blackwood, NJ · Member since 2015 · 91 posts · 36 votes
6y
I would buy another rental. If that's my clearly defined goal is
0 Reply
JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
6y
Originally posted by @Maurice Smith:
nope, the moment you pay off your car the account falls off your credit all that positive payment history stops reporting your score will drop. get rental while your auto loan still reports. lender like to see a health mix of accounts on your credit.

Who told you this? I still have car payment records on my credit from the 1980s. Nothing good ever falls off your credit. Your score will increase without the car payment because your debt load will decrease.
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