Be debt free or invest? - What would you do with 160K?

53 Replies

Hello All,

I know this is a very common question, but I'm curious what people will say. We recently sold a duplex that was no longer a good investment and made about 160K off of it. I still have about 50K in student debt and 15K in a car loan. Sometimes I want to just pay off those debts and and invest the rest, and other times I think it's better to just invest all of it and make more money with that money. So I'm wondering, what would you do? We are realtors just starting out and would like to invest in short term and long term rentals. Deals are pretty hard to come by these days, but we're hoping that will change soon before the value of our money decreases with inflation. Thanks for your feedback in advance! 

I'd pay off the debt while deals are hard to come by.  Save those payments to rebuild your opportunity fund.

While prospecting for listings also view from the lense of a buyer and capture leads for purchase.   Good luck and congrats on your sale!

What are the interest rates on the loans?  If you pay them off, you will still have enough to invest and you won't have to worry about those loan payments.  Those debts will also limit your borrowing power.

@Kirsten F. I would definitely say pay off the debts then use the rest to invest. Even after that you have a good amount on a down payment. I’m not sure which market you’re looking to invest but you definitely will have enough for a great down payment on your next property!

@Kirsten F. I finally got out of debt, it wasn’t that high but it was credit cards and cars. Since then I haven’t gotten back into debt, I make sure I can pay for everything up front. So it’s a mindset and puts me at ease. My only debt are mortgages. If debt free eases your mind and stress, it’s hard to put a number on that. Quality of life is important. Not everything is about maximizing money, or we’d all live in a tent to save more.

@Kirsten F.

I guess I'll be the contrarion. I'd love to borrow 65k at 2%. It's difficult to believe that you can't find an investment that will pay you more than 2%. For instance, buy a SFR in Montgomery, AL. for 65k that rents for $700/mo. After paying for management, taxes, insurance, etc. you should have enough left over to make the payments on those debts. So, in essence, you'd still have your debt paid off, but instead of a zero balance it'd be getting paid off by an appreciating asset. (Having said all of this, I think there are better uses for that money, but it's the first thing that popped into my mind that runs around 65k).

Just a though as I know it's an emotional decision and I always lose this argument!  haha.

Best wishes with whatever you choose.

@Kirsten F. , it really depends on your style of investing, how much money or down payment you need for the next deal, and how fast are you generating saving to replenish your income. If you're conservative, I would agree with most of the recommendation to just pay off debts. But if you feel that you'll be able to generate more money by investing them in something, then use them as your dry powder. Another option is to have a HELOC on your primary as your spare safety, where if you need emergency funding you can tap them and pay off later. Regardless your student loan and auto loan seems to be at 2% which is a very low rate. I wish you well with your investments.

@Kirsten F. those rates are extremely low. Unlike my sister-in-law is paying 12%on her student loan. We are paying 3.2 for our car loan. Give yourself some time to come up with an idea on where to put that money for a higher return (5% or higher) then invest it instead. If you dont come up with an idea after 2 months… pay of those debts.

@Kirsten F.

Invest it. When you rack up a lot of debt the bank will tell you to pay it off so you can buy the next deal and then you’ll pay it off with the extra income that you’ll be making from the investment. That’s what I did. It works too.

@Kirsten F. Pay off the debt! Pay off the debt! The shortest path to success in 2021 is getting debt free and saving more cash along the way. It's a sacrifice most people are not willing to take. Be different. Live like a broke person and see what happens. You'll have more buying power in the future if you do so. 

Yeah inflation sucks but don't get caught up on that. It happens ever year and don't expect the government to do anything about it. Get rid of bad debt and graduate to the next level. 

Some good ideas here, thanks guys. We're going to try to find a property that cash flows enough to pay off our loan (and more hopefully) and in the end we will at least have a property from that money instead of nothing. If we make enough money in a couple years we can always just pay it off too. Hoping that is the case! 

"For instance, buy a SFR in Montgomery, AL. for 65k that rents for $700/mo."
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It's easy to say "keep the debt, just buy something that fits the one-percent rule," but it's rare to find places that legitimately fit the rule, and neigh unto impossible with the bubble we are in.

I like the responder who said to pay off the debt and then rebuild the stash with the payments. Her personal decision, of course, but we all know that lenders like clean balance sheets.

@John Clark

I just wanted to defend myself a little bit on the SFR in Montgomery comment. I was seeing those deals all day long about a year ago, but I decided against Montgomery and I haven't looked since, so it's definitely possible that's not a thing anymore.

However, I am under contract for two quadplexes for around 380k each with current rents of $3200/mo and market rents of $3600-4000/mo.  I don't think they need to hit the 1% rule with current interest rates being so low though.

Having said all that, I don't think the quadplexes are anywhere near a home run, but I think they should pay for themselves and leave a little leftover... but mostly I have an itchy trigger finger right now.  haha.  Anyway, I feel like singles and doubles are still out there right now.  If rates increase and the market tanks, I feel comfortable with being able to lower rents if necessary and being able to hold onto them.

In the end, I want to borrow as much money at 2-3% as people will let me as long as I can buy properties that I think will pay for themselves.  Over 15-20 years, I'm hoping it will work out.

Originally posted by @Kirsten F. :

@Theresa Harris I think my student loans are 2.5 or 2.75 and our car is only 1.75 so it’s very low. All the debt is under my name so my husband makes all the purchases for our properties.

 That's some low debt.  I'm sure you could find better return in the market, but if you'll sleep better at night, then pay it off.

It's all personal, and you need to know what makes you comfortable.

I personally would use the debt as a private lender or invest in a note fund paying 10% interest, but that's just me, you need to choose the road you want to run.  I currently have a lot of debt(just bought a primary residence, as well as the debt on the investment property I own), but still choose to invest and grow the capital I have available, while using the proceeds from my job and investments to continue to pay down my debt at the low rates I have (2.65% and 4.25%).  And yes I know many will argue that the 4.25 isn't low, but that property is making me 13% cash on cash while I pay an additional $100 a month towards principal every month.

@Kirsten F.

Personally I would pay off the student loan for sure. Possibly keep the car payment for now if you don’t want to pay all your debt off at once. Then send the money you were sending to student loans in addition to your car payment to pay it off much faster.

I know a guy who’s paying his student loan and he’s 50 yrs old! I mean come on already!

My 2 cents.

@Kirsten F. Overall I'd say this is not a bad problem to have and it depends on your situation and comfort levels (do you want/have emergency funds?  Does your income cover the monthly payments on the loans, do you want to have money ready to deploy?, etc).  The loans are low rates so I believe you could arbitrage and get a higher and safer yield, but something to keep in mind is if you have a 2% interest loan you'd want to aim to get a 4%+ yield (because of taxes).

Ultimately I think it's a personal choice.  If the idea of having outstanding debt is mentally draining it's great that you could easily pay it off and just give yourself that peace of mind.  You could even pay off the higher of the two loans and just keep the one under 2% interest so it's one less bill to manage.

I would pay off all of the debt, take a few months off and go have some fun with some of what's left over, then come back and hit the ground running.