Start now or pay down debt

[Tony Wooten]

I'm 27 and looking to soon start a career in real estate investing (rentals). I have a job that allows me to pay my bills comfortably and pay down a small portion of my student loans and credit card debt each month. I also have a 15 yr mortgage (14 yrs left) on my house. Would it be wise to pay down my debt first , which would take about 2-3 yrs,or go for it?

[Aaron Montague]

@Tony Wooten you need to do the math on this. Paying down debt is essentially the same % as investing that money over time.

Making this up, lets create a real world scenario. Everything is a 5 year term.

10k Student Debt at 4.5% (-184 per month)

10k Credit Card Debt at 15% (-238 per month)

10k Investment opportunity at 20% Cash on Cash return (2000 per year or $167/month)

At first glance, this doesn't look awesome. Your best investment of your 10k cash TODAY appears to be paying off your credit card.

But creativity is what drives real estate forward. And leverage is your friend. With an FHA loan, your 10k can turn into a 200k 4 family house that pays for itself AND gives you an apartment for free. (BP will tell you exactly how to do the math on this.)

You'll probably have to borrow another 5k to make that happen, mostly to cover closing costs. We'll put it on your credit card so now your monthly CC payment is 357/month. Term is still 5 years.

But you've purchased your multi family, rented it out and have a roommate. Your out of pocket rent expense is now $0/month. Assuming you used to pay $500/month you are now doing rather well from a cash flow point of view.

If you'd paid off your Credit Card with the 10k your scenario looks like:

Take Home Income (W2)
-$500 Rent
-$184 Payment on Student Debt

If you bought a multi family that left you with $0/month in rent payments and everything else was covered:

Take Home Income (W2)
-$184 Payment on Student Debt
-$357 Payment on CC Debt

You are winning by $143/month by buying the house in this scenario. The next step would be to refinance your expensive 15% debt into something lower. My bank offers unsecured personal loans at 10.99% with no fees. Any way to make your debt cheaper is a good thing.