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 · 979 votes

Keep the payment and buy another rental.

Good luck.

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Eduardo Calle
Rental Property Investor · Atlanta, GA · Member since 2018 · 65 posts · 29 votes
6y
@Karl McGarvey I would sell the car and buy a buy a reliable one in cash! and then use all your money in real estate investments.
Good luck.
2 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.:
Originally posted by @Tony Kim:
Originally posted by @Chad G.:

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.

Right; it doesn't oppose what you said because I agreed that using it can be beneficial. The downside of forum posts is the propensity to oversimplify. Clearly an analysis can and should include various angles of view, but no one method is going to reign supreme. It's knowing what all to use, when and how as well as understanding what is important to you personally.
You are free to ignore the depreciation in your analysis of these kinds. Yes, you will have it on a car either way, but when that depreciation is being financed it adds a multiplier effect to that cost in my view. I believe it's a poor decision to finance a depreciating asset, perhaps you don't.
In any event, I was adding additional perspectives on how the OP could look at the situation. It wasn't intended to be the only thing to consider and I am not here to convince you of something you don't believe. I wish you the best; have a great weekend.
0 Reply
Michael A DeAngelo
Columbus, GA · Member since 2020 · 51 posts · 31 votes
6y
@Karl McGarvey Fint let fave Ramsey see this post 😬. But if you feel comfortable with your cash reserves I would say leverage and get that rental cash flowing property. But if your cash in the bank is low maybe safer to get rid of personal non cash flowing debt.
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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.:
Originally posted by @Tony Kim:
Originally posted by @Chad G.:

I believe it's a poor decision to finance a depreciating asset, perhaps you don't.

I like how you bring all these new outliers to the discussion, lol.

Ignore the depreciation? No, I'm not ignoring it. Depreciation is there for both options, therefore it is not a variable. Seriously...this should not be a difficult concept.
0 Reply
Kris L.
San Antonio, TX · Member since 2019 · 930 posts · 836 votes
6y
@Tony Kim
I fully agree it’s not good to finance a depreciating asset, but in this case, the financing was already done, and vehicles depreciate in a non-linear fashion, where more depreciation happens early. In this particular case, there is a good chance the op is actually underwater on the vehicle, in which case the most sensible solution is to drive it until it is no longer financially viable to pay the growing maintenance costs.
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Tony Kim
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
6y
Originally posted by @Kris L.:
@Tony Kim
I fully agree it’s not good to finance a depreciating asset, but in this case, the financing was already done, and vehicles depreciate in a non-linear fashion, where more depreciation happens early. In this particular case, there is a good chance the op is actually underwater on the vehicle, in which case the most sensible solution is to drive it until it is no longer financially viable to pay the growing maintenance costs.

Exactly. The financing has already been done.... Best to just drive it on a long-term basis....
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Ray Valdez
Rental Property Investor · Harriman, NY · Member since 2020 · 27 posts · 2 votes
6y
@Karl McGarvey There is Good debt and bad debt. Unfortunately the debt of the car will never go away and have no real value but you still need to pay....so get rid of that debt and start pocketing the money to go and buy that other rental. That car payment is not an asset but you still need to get rid of it. Then you can focus all your income and cash flow into the new rental
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Brandon Penn
Rental Property Investor · Erie, PA · Member since 2018 · 84 posts · 462 votes
6y
Is the election going to really change what you are going to do with your business? If so then wait, but I just don't really see how it is going to matter when it comes to your rental business unless you plan to liquidate and leave the country. If you are still going to have a rental business in the U.S. no matter what the outcome of the election is then definitely buy another property. Interest rates are at historic lowes and we never know when they are gonna go back up. Lock that cheap debt in now.
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Maurice Smith
Member since 2018 · 211 posts · 164 votes
6y
Originally posted by @JD Martin:
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.

lol who told me? I own and manage a credit consulting firm, so i would say i'm pretty qualified to understand how everything works. Yes of course nothing falls off your credit ( good or bad) unless it is disputed and removed. If you have a paid off account from the 80's, that is exactly what you have a paid off account. A closed account is not helping your credit at all. The length of time the account has been OPEN and positively reporting is what helps your credit. Only thing closed account is helping is your dti, but he mentioned his car is his only other debt so dti shouldn't even be a concern.
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Ibrahim Hughes
Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes
6y
@Rudy Avila
I hear your credit score gets a boost if you make at least 12 payments.
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Josue Vargas
Real Estate Agent · San Antonio, TX · Member since 2017 · 814 posts · 466 votes
6y
@Karl McGarvey

I would keep the auto loan and try to keep saving for a future deal and be on better position vs a lot of competition with cash. Also I would not count on better deals before or after elections. It would not really matter, unless you are a developer to pour money down in the right time, depending on new incentives/codes/laws etc. You are better off looking out for hot market in your area for buyers, or the well known strategies for buying distress properties etc.

Good luck.

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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes
6y
Originally posted by @Maurice Smith:
Originally posted by @JD Martin:
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.

lol who told me? I own and manage a credit consulting firm, so i would say i'm pretty qualified to understand how everything works. Yes of course nothing falls off your credit ( good or bad) unless it is disputed and removed. If you have a paid off account from the 80's, that is exactly what you have a paid off account. A closed account is not helping your credit at all. The length of time the account has been OPEN and positively reporting is what helps your credit. Only thing closed account is helping is your dti, but he mentioned his car is his only other debt so dti shouldn't even be a concern.

? Late payments come off your credit after 7 years. Bankruptcy after 10 years. He also did not say his car is his only other debt; he has a boat loan, personal mortgage and rental mortgage.

The length and nature of your credit absolutely helps your credit score. I'm not going to derail the thread with a long discussion of this, but I've had credit experience for more than 30 years and I think it is bad advice to maintain a car payment in lieu of reducing overall DTI as part of your credit score. The number one reason people get turned down for loans on rental property is the bank's opinion of your ability to pay back the loan based on your DTI and stability of employment. That's a big reason why otherwise successful self-employed people often have trouble getting loans.

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Rudy Avila
Rental Property Investor · El Monte CA · Member since 2018 · 134 posts · 66 votes
6y
@Ibrahim Hughes you dont need credit score if your paying properties cash... or seller finance
1 Reply
Natisha Phouphayly
Member since 2019 · 10 posts · 8 votes
6y
Hi Karl,
I would personally buy another rental. Then I would use the profits from my rental income to pay for my debt. Repeat this until all your bills are covered from your rental properties! That way you will be building your credit long term and you are spending your money on something that is appreciating.
Have fun investing and be safe!
0 Reply
James Sexton
Rental Property Investor · IN (indiana) · Member since 2020 · 7 posts · 0 votes
6y
@Jonathan Feliciano using cash is still costing you interest because it’s costing you interest you could earn. If you can’t earn 2.5% on your money you should pay it off. If you can earn 3% or more on your money you should invest. I can’t see how you can lose in a property if it cash flows at all to be honest. 4 ways to earn in a property taxes, appreciation, cash flow, and mortgage pay down from tenant. Car pay off 1 way to get more cash flow the payment in pocket. All money has interest associated with it even the cash you have in a savings account. That’s a longer discussion but putting your money to work for you is always the best use of a dollar.
0 Reply
Ryan Fox
Member since 2019 · 27 posts · 7 votes
6y
@Karl McGarvey
Nice question. I teach a personal finance course and the topic of debt pay down vs investing comes up a lot with varying opinions.
Just curious, cause you mention economic concern (election), how many months is your emergency fund? It may be best to boost that using some of the extra money.
Conventional wisdom says don’t worry about paying down low interest loans. If you get another rental you could have the same cash flow that goes to the car but of course with principle pay down, and all the other benefits we on BP love.
I would (and most financial advisors) recommend holding on to that cash until you feel more certain to invest it.
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Ben Hampton
Rental Property Investor · Cloverdale CA · Member since 2019 · 7 posts · 4 votes
6y
@Karl McGarvey I was recently in a very similar situation. However my truck still had about 24k left to paydown.
Your goals and how close you are to freedom makes a big difference in what the "right answer" is in my opinion. But this is what I did.
I chose to refinance it with a local credit union as a business loan under my business tax ID number instead of my SSN because I use it for business part of the time. This removes it from my personal credit report so for purpose of loan applications on rental properties I had removed it from my DTI.
In my mind using that money as a down payment allows me to build wealth faster than just making the payment disappear to save the about $300/m.
Best of luck.
0 Reply
Wale LawalBusiness Member
Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
6y
@Karl McGarvey I will suggest you keep the payment and buy another rental. The car payment interest rate is low so I would not bother about it.

Good luck.
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Ebi Amiri
Investor · San Diego CA, United States · Member since 2019 · 33 posts · 7 votes
6y
CASH IS KING!
Argument to those saying pay off car first:
Basically you pay X dollars to avoid 2.5% interest. What does it mean? It means your are gaining 2.5% annual on your money!
On the other hand, a rental is an asset and adds to your wealth via cash flow and appreciation. I am sure (hopefully) your Return on Cash on rental is more than 2.5%.
Conclusion:
Buy a rental! :)
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Lawrence Rutkowski
San Antonio, TX · Member since 2013 · 87 posts · 42 votes
6y
Leverage is good with interest rates so low.. I would buy another rental, and if possible, refinance the vehicle to a lower rate. Sub 2% seems to be common right now for used vehicles. If you've got the credit of course.

1 Reply
Alyssa Dyer
Rental Property Investor · Oklahoma City, OK · Member since 2017 · 1k+ posts · 694 votes
6y
You save/generate money either way, I suppose. One will appreciate, have another individual paying your principle, etc.! I'd buy the rental. Plus, your interest rate is so, so low.
1 Reply
Dan W.
Rental Property Investor · Princeton, MN · Member since 2020 · 13 posts · 9 votes
6y
I agree with others who have suggested buying a cheaper car for cash. Can't really leverage debt on a quickly depreciating asset so why have it. I'd pay the car off ASAP.
0 Reply
Marcus Johnson
Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes
6y
@Ray Valdez
And what’s crazy is the less payments you have the more income you can use to produce a hefty down payment to buy a rental property that has great cash flow. The more debt you have the less disposable income you have.
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Marcus Johnson
Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes
6y
@Jaquetta Turner
What’s interesting is you believe 100% of the time an investment property will work out and cash flow. This is ridiculous and not true.
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Jaquetta T Ragland
Real Estate Agent · Winston Salem, NC · Member since 2014 · 486 posts · 303 votes
6y
Originally posted by @Marcus Johnson:
@Jaquetta Turner
What’s interesting is you believe 100% of the time an investment property will work out and cash flow. This is ridiculous and not true.

Nothing is for certain...it’s all risk and taking chances. You could buy a property today and have no one at all wish to move in and no one at all wish to buy it or That same property increase in value by 100%. So I never believe 100% in anything except God.

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