Orlando, FL · Member since 2011 · 176 posts · 23 votes
Preamble: Real estate investment is less certain than paying down debts and the safest thing to do is get to 0 debt before investing.
With that out of the way, how would you advise a real estate investor holding non-REI debt but a good amount of savings to approach a potential investment? What is is a good savings cushion as a percent of the initial investment? How much higher of an ROI should be targeted to justify the added risk of buying an SFR instead of paying down debt?
In lower cost areas (in terms of median home value) I'm seeing IRRs north of 20% which seems like a good setup to invest provided the savings cushion is there.
Investor · Minneapolis, MN · Member since 2017 · 86 posts · 34 votes
9y
Hi Gary,
Of course, I cannot say what YOU should do, but I can tell you that we have a lot of consumer debt AND decided to start buying investment properties anyway. We seem to pay off our consumer debt with our savings and then just run it right back up again, so this time we decided to keep up with our consumer debt payments plus pay a LITTLE extra and put everything else into real estate investment. Even though the Suze Ormans of the world would absolutely die over this decision of ours--and it's very possible we may be paying more in consumer debt interest than we are currently getting in returns on our real estate investments (we are about to close on our 4th turn-key buy-and-hold)--we just have come to know ourselves over the years and we thought if we didn't get started now with real estate, we never would. So we're doing BOTH--paying down consumer debt AND buying investment properties.
Rental Property Investor · Lawndale, CA · Member since 2016 · 38 posts · 14 votes
9y
@Gary Dezoysa Great question and one I've had myself. I agree with @Account Closed that this always comes down to a personal choice that is unique to your particular situation, personality, comfort with risk, etc. That said, there are useful guides. First I'd say if someone waits until they're 100% debt free they'll likely never invest in real estate at all. I think many use that approach as a convenient excuse not to make the jump into REI. Second, a common rule of thumb for savings on hand is at least two to three months of expenses for each investment. This would cover the mortgage and expenses plus a buffer to handle vacancies. Planning for vacancies up front in your expenses also helps with this buffer (generally 2-5% vacancy rate annually on average, but totally dependent on the local market and type of investment property). Third, pertaining to debt payoff vs investing, I like to approach it from the perspective of which provides the better return, i.e. if the rate of return from the investment exceeds the interest rate of the debt, all else being equal, it generally makes more sense to invest.
One surprising way I learned to balance this in a realistic way was by playing a game. Many might argue differently, but I found Richard Kiyosaki's (author of Rich Dad, Poor Dad) game called "Cashflow" a very realistic way to practice balancing investment vs debt payoff. It really taught me how to make that trade off in an abstract but retainable way.