When to Pay Debt or Save for a Real Estate Investment?

Question

First off, I'm new and have been educating myself for the past two months.  The Rich Dad book my cousin recommended, completely changed me.  I've been listening to BP podcasts, webinars, networking with local investors, and analyzing deals that pop up on saved searches I have in my "farm".

I don't have cash laying around for moving forward on an investment, but feel very comfortable finding hard money.

I have a positive cash flow every month and use the extra money to pay down debt aggressively, but have a hard time thinking I can actively invest in real estate while paying down debt.

Any words of advice?

Thanks All!

Keywords: Grand Rapids Michigan

David Dachtera · Answer

@Neil Henderson & Co.,

Here's a slightly different look at "high interest" debt.

If you have a mortgage, look at your truth in lending document. I think that's the one which will have the total of payments on it. Compare that total to the principal balance at inception. You're likely to find that the total of payments is between 2 and 3 times the initial principal - that's 100+% over the life of the loan.

Remember also that amortized loans are "front loaded": at the outset, the bulk of the payment goes to interest and very little gets applied to principal. The lender probably gave you an amortization schedule. Check it out. Think about that on your next refinance: yes, you may be lowering your APR, but you're also "restarting the clock". If you refi 10 years into a 30 year loan, your rate of principal reduction is impacted negatively.

Think about that next time you're tempted to refinance!

David J Dachtera

David Dachtera · Answer

@Austin F Waggoner,

Here's a little different take on investing with (bad) debt: Invest for income and use that to pay off the debts. When the debts are gone the income stream(s) will remain.

You'll want to rethink the hard-money idea. Private lenders would be a much better idea because that's a win-win: you're helping them avoid losing their money on Wall Street, they're helping you get you projects done.

My $0.02...

David J. Dachtera

Chad McClain · Answer

If the debt high interest, pay it off first.

If the debt is lower interest, or at least lower than a conservative cash on cash return from the potential investment, then decide if you have enough risk tolerance to buy.

Make sure that in you CCR that you account for all expenses and allowances like maintenance, vacancy, turnover, cap ex, etc. as well as an upfront cash reserve above the initial investment.

Think of it as pseudo arbitrage. If you can gain a higher return from your investment than you are paying on debt, then it may be worth it.

Crystal Smith · Answer

Since you're familiar w/ the book Rich Dad I recommend you find a group & play the game.  Here's what you'll find- There will be times that you're best move is to pay down debt, but as long as you're in the game opportunities will be presented to you & you'll have to make decisions based on your balance sheets.  Some opportunities you'll have to pass on & continue to pay down your debt, other opportunities will be too good to pass because the positive impact on your balance sheet will be greater than paying down the debt.  The message:  Stay active in real estate, looking, evaluating opportunities while you're paying down your debt.  If an opportunity presents itself that has a greater impact on your cash flow than paying down the debt then invest in that opportunity.

John Casmon · Answer

@Austin F Waggoner I'll go against the grain here and say get started in real estate focusing on cash flow that you can use to help pay off the debt. Waiting to be in a perfect situation to invest just means you're waiting. Take action, don't wait.

Jake Thomas · Answer

I have been in your shoes before. I attempted to invest while having debt and it never works out as you always have bills that consumes the majority of your income. Once the debt is gone you will see that saving cash for that first property is much faster. Also, the stress of the debt and the burden it has on you is gone. It also will push you harder to get rid of the debt asap.

Good luck

Thomas S. · Answer

Pay down all your bad debt first. Saving to get ahead while carrying debt interest payments is counter productive and will negatively impact all aspects of investing. Unless you are over 50 time is on your side. All choices in life are optional.

When to Pay Debt or Save for a Real Estate Investment?

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