Paying off debt prior to investing

[Tyler Northrup]

Currently I have a plan to pay off all debt accept my home prior to investing in real estate. I want to focus on Single family homes around $50,000 which I plan on paying cash for. Basically I would live off of a single income (my wife's) and put all of mine towards investing. With this method I would be able to purchase one home per year. My end goal is to quit the 9-5 and live off of my investments; however at this rate it is going to take years to accomplish especially since we will not be debt free for another 2.5 years, meaning I will not purchase my first investment property for another 3.5 years. All of this stems from Dave Ramsey which I'm a big advocate for. I know there are other discussions on here about him and paying cash for investments. I realize the difference between good and bad debt and will possibly still use some financing for future deals but overall it will be cash. I guess I'm just curious on other opinions/ advise on how to go about this and if it's a viable option. I don't want to wait years before investing yet I want to be out of debt and have financial freedom. Have any of you bought properties this way?

[Cindy Szponder]

I love Dave Ramsey and think he has helped a lot of people get back on track financially. That said, I believe his audience is people who have run into serious financial problems due to a lack of basic financial knowledge and money/personal management issues. One advantage to financing your properties is that the rate of return is much higher and you have less money at risk. You can also purchase more properties. That said, start slow with one property and get used to managing that property efficiently and well. Set up cash reserves for each property so that when repairs and/or vacancies occur you won't be put into a tailspin financially. I like to have six months of mortgage payments in the bank as a backup. Sounds like you have the financial wherewithal to begin investing and I'd recommend you do so. If you can afford to live on one income and invest with the other, you'll figure out a way to invest in real estate and pay down your personal debt, too. If you haven't already done so, read The Book on Rental Property Investing from Bigger Pockets. They outline 4 strategies for building your portfolio safely and realistically. Much success!!

[Steve Vaughan]

Hi @Tyler Northrup!  I like your plan, but the paying cash for properties part is tough.  I know of DR well, and don't have any consumer debt either.  I do like the idea of paying everything off but your home as well.  Folks that sacrifice to win in that way are in a better place to invest fiscally and hear and mind, IMO.

With 30 yr rates hovering in the 3's, I just can't pass up prudent leverage.  I would leverage up a bit to get a better asset class.  $50k can be tough on you. I have some small-town $75k homes and don't expect any appreciation really.  Better assets in better area are worth a bit of leverage for I think.  If I had done the DR plan as outlined, I would have 2 - 3 mediocre homes free and clear.  Prudent leverage magnifies things.  Personal choice, but I wouldn't be so against intelligent borrowing for RE assets.  Hope that helps!

[Thomas S.]

Paying cash may be fine for the most conservative investors, we all know real estate is a slow path to riches, but for me paying cash would be a snails pace.

I prefer leverage to speed up the growth. The faster you can grow the better, appreciation begins as soon as you own the property even if 100% leveraged. You can work hard to buy with cash or work easy and have tenants buy it for you.

Using cash simply restricts your growth speed.

[Tyler Northrup]

Great comments thus far guys! I appreciate all of the insight.

[Bryan O.]

I agree with @Steve Vaughan on this one. I think the 0 debt concept should be applied to consumer debt, not necessarily intelligent leverage.

[Mike Hanneman]

In a perfect world 0 consumer debt would be awesome and the goal. However I wouldn't let that stop you from making a property purchase, on a good deal. Who knows what will happen in 3 years, plus in 3 years you'll wish you started earlier.

If you find a good deal, then your debt shouldn't really matter because that property will be paying for itself and a little to you on the side.

[Al Williamson]

@Tyler Northrup I like your plan. But let me add that you can watch the rate of appreciation in your market and get a pretty good idea when to sell. People mostly get in trouble when they fall in love with their investment and put blinders on.

If you have a strong upticking market, consider getting something that you can refinance your debt into, then selling once the rate of appreciation slows.

That's how I paid off my wife's nursing school loans.