Want more Cashflow.. Pay off debts or Use cash for property?

Question

I have about $37,000 worth of debt between student loans and used car payments.  My highest rate is 6.5% student loan (tax deductible) the lowest is the car loan at 3%.  I want to break into RE investing with my biggest goal being monthly cash flow first, and wealth building for our retirement years (which hopefully would come sooner) second.

I have enough cash to either clear out all my debt or invest in our first property.

Clearing the debt would save us $670 every month.  Investing would hopefully generate $300 cashflow but would also come with all the other perks.  Otherwise the loans should be gone in about 5-6 years.

Getting the $37,000 back would probably take a year, putting our RE investing on the back burner once again.  Or I could take the $300 RE cashflow and apply it to my debts every month adding $3,600 worth of payments.

Trying to balance both financial smarts, cash flow goals, and overall peace of mind..  Being debt free may also make the jump into RE investing a bit less stressful.

Steve Vaughan · Answer

$670/mo savings (cash-flow) risk-free and tax-free on $37k without effort is unbeatable in RE.  I'd pay off the debt.

I paid off $87k in consumer debt and the payments I no longer have to make help propel me to complete freedom.

When I was getting out of debt, my plow-back (re-savings rate) was huge and I saved my money back much faster than anticipated.

My guess is you will buckle down and re-save the $37k more quickly than you think.  When we get laser-focused, things happen!

Congrats on saving the $37k in the first place @Eric P.!  How did you do that?  Much better than most!

Eric P. · Answer

All excellent points..  Maybe I can do a bit of both.  Pay down the car, that would keep $300 in our pockets each month and should only take about 6 months to build back up, it might take me 6 months to find the first property I like.

I actually have 5 student loans left in total ranging from 4%-6.5%.  I could snowball and pay off the 3 that are over 3.5% that should set me back only another 4 months.

Then the ones that are left will be lower, freezable, tax deductible loans that are probably only costing me $100 a month total.. at that point maybe I should start really looking?

I'm just always worried I'll find another reason not to go for it.. like we get pregnant, or my wife moves to a new unfamiliar department, I start a new job.. who knows

Eric James · Answer

Consider the educational loan and car loan separately. For example, maybe one (e.g. the car loan) has a high payment but a relatively low loan balance. Depending on details like that, I might pay off one but not the other.

Thomas S. · Answer

Bad debt is any debt that is not earning a return. The mortgage on a personal home is bad debt.

Anyone wanting to invest can justify their decisions any way they choose. Advice is free and usually based on past experience.

Investing is high risk, investing while carrying any bad debt is very high risk. As long as risk is not a issue then it really doesn't matter what you decide.

Anyone deciding to invest that does not acknowledge they risk losing everything is a ill informed investor.

Eric P. · Answer

My goal getting started by the way is to find a property around $100k that needs maybe $20k worth of work tops and either use BRRRR or possibly trying a flip depending on how it all comes out when I'm done.  My numbers include 15% (have a lender), 6 months of expenses, and the rest for closing costs and updating.  After all expenses (property manager, vacancies, cap, surprises, etc.) I'd like to be cash flowing $300 a month.

Eric P. · Answer

I don't know if I'd call it "bad debt".  The student loans are all federal so could be placed in deferment if they really had to and the other debt is just a used car loan, I imagine plenty of people get their start while having a car loan.  We don't have credit card debt or a heloc or anything like that, if we did I would def get rid of that asap.

Might be worth noting my wife works in state government with a very safe job.  If I froze my student loans her income alone would just about cover all our expenses and I keep a 6 months emergency fund just the same.. so bankruptcy would have to come with extremely hard times that I may not have been able to prevent either way if it gets that bad

Thomas S. · Answer

Absolutely clear your bad debt first.  Investing is very high risk and requires the investor to not be burdened with bad debt that will negatively impact their finances during hard times.

Investors that believe using positive cash flow to pay down bad debt often end up in bankruptcy when the hard times do hit.

Eric P. · Answer

Its a new loan so all the interest is front loaded.  Its at $340k now I think.  We also have NJ property tax at $9,800, some student loan interest, and we make a few donations every year.  So we actually blow past standard deductions by like $15k.

Steve Vaughan · Answer

@Eric P. putting money you are not spending into a savings account is a great idea!  I heard that strategy recently on an optimal finance daily podcast.  He reads personal finance blogs to you. Each episode is like 8 minutes long.  It's pretty cool.

The $9k buy-down to eliminate PMI was awesome as well.  Great return on investment! PMI does nothing for us.

My wife and I got so frugal, we didn't eat out much at all.  Bring a picnic to the park or something.  Frisbee, ya know.  Still had fun and good experiences, just didn't want to spend money on what turns into no more than a future bathroom visit.

I have a primary at 3.375%, too.  Got it on a 15-yr in 2012 when 30-yr rates were 4% (it's a 2-family, but not a typical duplex).  As much as I love getting out of debt, I don't accelerate it.  The rates too good.  Surprise your mortgage is tax deductible.  Interest on it gets above your standard deduction?  Over $11000 ish per year?  Must be a monster mortgage.  I stopped itemizing when the rate dropped to 3%.  Only pay $7k or so in interest per year.

Anywho- well done!  I like what you are doing!

Want more Cashflow.. Pay off debts or Use cash for property?

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