Income Tax Return - Buy or pay on Debts?

Question

Hi everyone,

I am new to BiggerPockets and Real Estate. I currently rent. Last year I had my second child but only 3 months into my pregnancy I was placed on bed rest and have yet to return. Living paycheck to paycheck has become difficult to say the least. We are expecting close to $10,000 from taxes. We have racked up about $35,000 in Debt and dropped our credit score drastically. Though everything is being paid on time, the use of credit escalated. I have watched homes in my neighborhood sell for $20,000, while I pay the highest rent at $750. When most of the homes are mortgaged at $250 - 300.

Not knowing when I will be returning to work, should we take our income tax return and single income and pay down debt while looking for a no money down rehab or take a fha with 3.5% down - higher APR since our scores have dropped- fixer upper. With hopes of the reduced housing expense furthering our investing abilities while truly gaining Real Estate knowledge and reducing our debt ....eventually. Oh currently we are reduced to an income less than $30,000 so to flop would be devastating and if it helps in the least our zip-code is 32754. Thank You all so much for your time. I stumbled over BiggerPockets on you-tube will researching Budget Wedding's of all things, another decision weighing so heavy on my mind.

Well I will be tossing and turning in hopes of some great ideas and some helpful advice!

Thank You All.

Lynn Knights

Lynn Knights · Answer

Thank you for the over sites. At the moment the cards have 0% apr. Till later this year. So what I am looking at now after further advice is to pay down what I can, than find yet another card offering 0% Apr for a further date next year... Do a balance transfer ( maybe finding one with travel points for wedding purposes, still researching.) Continue researching ways of buying our first house. I have cut many many expenses so far, we do not have cable or phone, I hardly ever take my car out, I have been couponing for years now and have no cost for this year for general merchandise. Truely food costs are pennies on the dollar for anything other than meat, dairy and fresh fruits/ veg's ( which I am going to try a garden but I am afraid, I can even kill fake items lol.) Shelling out $750 in rent each month is what is bothering me the most. Finding another rental may be beneficial and a search I have not spent time on. My lease renews Feb 1st.... And my landlord is wonderful.... Ugh.... Such decisions Thank you again..Lynn

Jeff Cox · Answer

Sorry i got side tracked i meant to go this route. If your paying high monthly rent then you can always find a cheaper place since you will have 10k in money for deposit and kinda kill 2 birds at once. use the extra money you save to put towards your credit card and the rest of the 10k you had.

Jeff Cox · Answer

based off basic numbers you threw out there and some assumptions i will make on my own i will put it this way.you are asking if you should pay off credit card debt that is probably like 29%+ that is more than houses in your area are going for, or if you should get a house at hopefully a lower interest rate and increase your debt but lower your monthly so you can pay off the higher interest debt?Now if you could get a loan for the credit card amount at a lower interest rate then ya, but getting more debt on a gamble to maybe save 100-200/month to pay off your insane interest rate CC doesn't seem like something i could ever do.Granted everyone has their own situation and not any situation is the same but based off what you have said soo far, even paying your credit down now, you are not sure how long your single income is going to last for so you will probably be using that Credit card and accumulating more debt. So buying a house and using the extra money will only slow down the debt accumulation while adding more debt to your situation then paying the 10k and maybe putting it right back on the credit card for the next 4-6 months.IMHO and im not a lawyer or anything but i have been in situations like this before when i was younger, take care of your credit card debt ASAP, its what will ultimately screw you out of being truly free. i was single no kids at the time so i basically sacrificed everything but work and just lived like i was in college for a year. Now that im free and clear of CC debt its crazy how much money i had left over and it adds up fast.just my 0.02

Daniel Cho · Answer

Lynn, welcome to Bigger Pockets! Without specific numbers, I think it's hard to say which way would be better to go since actual comparisons can't be made. For example, what is the APR on your credit card? I have a friend who was in a similar position to yours and because of his lack of credit and not-so-wise decisions, he got caught on +20% interest rates on his credit cards and +20% interest rates on his car payments and he has a couple of young kids. In a situation like that, I think paying off the debt is far more important because the interest rate is way higher than any other returns you could get on a flip (realistically speaking). So since credit card debt tends to run on the high side (which I consider to be 8% or higher), I would live on rice and beans and pay all of that debt off as quickly as I can or it will suck out any potential for investments.