Should I be debt free before investing?

Question

Over the past few weeks a good friend of mine and I have discussed the potential of starting to invest in multifamily properties together. Both he and I have dabbled in rentals alone in the past, transitioning former primary residences into buy and hold rentals. At this point, we both have some non real estate debt that is lingering, and have differing views on whether or not we should eliminate that debt before going all-in with RE investing.

If I focused on paying off my non-RE debt, I would be done by the end of this year sometime (November/December 2020 likely). My friend would likely take an extra year (December 2021). Since I can see "the light at the end of the tunnel", 9 months of focus is feasible, however he rather get started investing now, with the notion that if we did 2 flips, he and I could make enough potentially to pay off said debt.

Thoughts/advice welcome.

Jim K. · Answer

@Mike Lee

You're going to get a mixed bag of responses. One thing almost everyone does agree on -- any high-interest debt you have, vampire credit card debt, payday loans, outsized car payments on fast-depreciating vehicles, gambling debts, personal loans, you should pay that off. Get out from under before you start investing. On the other hand, student loans, mortgage payments, stuff with an interest rate below 5%, again, almost everyone agrees that's debt you can work with in reasonable amounts.

There's also a broad base of consensus that you need to have a significant sum set aside as a reserve, in easily-tapped resources like cash, sitting equity in your primary residence, easily liquidated assets. How big? I think $25K is a good number for my business model as a handyman investor. Others would tell you something closer to $5K.

The thing I can't emphasize enough as a personal opinion is that you have to have a handle on your spending. You have to know exactly where your money is currently going. You have to take stock and get full control of your personal finances before you start working on putting together your first business plan and go on the hunt for what you want. This will save you a LOT of time I wish I had back.

Nathan Gesner · Answer

I differ from most people on this subject. I believe the wise thing to do is invest only after you have paid off your debts and demonstrated financial discipline. That creates a firm foundation from which to build wealth. If you fail to demonstrate the discipline first, your lack of discipline will likely rear its ugly head in your investments.

Mike Lee · Answer

@Jim K.  - This wouldn't be my first deal - I have done a few solo. This would potentially be the first deal with a partner.

Jim K. · Answer

@Mike Lee

One thought, reading your response:

Your first deal should not be a home run. That might be the worst possible thing that could happen to you in the long run. Look for a single. Look for a bunt. Start worrying if you're seriously considering what might be a stand-up double. A vanishingly small number of people are born under lucky real estate stars. Bad luck and capricious changes of fortune are the norm in this business.

Mark Gallagher · Answer

@Mike Lee if I waited to invest until I paid off my debt, I would have never paid off my debt.

My goal was always to make the money to pay off the debt.

If your debt costs you 6% but you can make 7%, then you're covering your debt and then some. If you can make more than your debt costs, why would you not invest?

Mike Lee · Answer

Thanks everyone for the initial feedback. I will try to reply to all...

@John Teachout  - I do not have to partner ideally, however the idea came up as the potential to purchase larger projects would be possible by partnering. I am debt averse myself as per my original post, which is why my focus to pay off the remaining consumer debt has been priority for me vs. my potential business partner.

@Joseph Cacciapaglia  - Very comfortable making payments, however payments are not something I want to do forever. I also work in an industry that is attached heavily to the stock market, so this year could be a bit of a roller coaster.

@Michael Ablan  - How much more is a bit speculative. If we found a homerun deal, then ideally debt could be wiped out in 90 days. That is a big if.

@Nathan G. - Appreciate the thoughts

John Teachout · Answer

Does your strategy require you to "partner" or could  you continue to do solo investments?

I am debt averse so I would say to get any consumer debt paid off first. If you paid your debt off and then invested, you could probably do one solo property while your partner pays off their debt. Then you could both go in on a property from a strong position.

John Fortes · Answer

There are different camps and ideas of how to achieve it. Some would rather wipe the debt while others might invest to help with paying off or towards a debt. You have to always consider the risk as well as consider your experience. I don't think there is a person here that can truly answer this question for you for the simple fact that it is a personal choice. Happy investing!

Joseph Cacciapaglia · Answer

How comfortably are you covering your debt payments? I think that's the most important question. If you are having no problems making those payments, and you will still have some cash reserve after investing, it seems pretty safe to jump in today. If not, I would be pretty hesitant. As people above mentioned, you should only invest if you are very confident that your rate of return will exceed the interest on your debt.

Michael Ablan · Answer

@Mike Lee  Well, how much more could you earn if you invested that money today?  Could you outperform the interest on your current debt?  Would you be able to pay down your debt faster if you found a great deal to invest in?

It's really hard to say without knowing the specifics of your situation and what kind of foundation in real estate you're starting from.  It may take you 9 months just to be comfortable to get started if you're coming into this on ground zero,...

Should I be debt free before investing?

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