Buy property to pay debt? Pay debt to buy property?

Question

Many people feel you should be debt free before buying an investment property, while I feel if numbers are right that investment property can help you pay off the debt although theres definitely risk. What do you all think? Should one try and pay off all of their debt i.e; student loans, credit cards, car payments before a home? Or, buy the property and have cash flow assist in paying debt?

Joe Villeneuve · Answer

Buy property to pay debt every time.  After the debt is paid...you still have an income property.

Account Closed · Answer

@Darryl Jennings In my experience, if I would've never jumped and invested in real estate, I would still be in a mountain of debt. It took me 3 years ONLY 3 years to pay off my debt entirely (minus mortgages). Of course this included the resale of property and not just rental income but the rental income sure did help pay down debt too. Yes, 3 years may be a lot to some but the projected debt pay off plan was wayyyy longer.

Chris Teti · Answer

Hi Darryl, my opinion is that if you try to wait until everything is perfect, it won't ever happen. There is also "good debt" and "bad debt". I work with a company called MB Capital Solutions where we not only help you get access to capital to do your investing (without using your own cash), but also to recommend best practices to position yourself the right way. I've seen too many investors dig themselves into holes trying to do a deal that they aren't really setup to do and run into trouble.

Ben Sears · Answer

@Darryl Jennings I think when people wait to purchase real estate in order to pay off debt they are missing the boat. I invest and have plenty of "normal" debt such as a mortgage, student loans, etc. I separate this personal debt through my LLC and as long as the company is profitable it helps pay down my personal debt. Having said this, I think people need to control their debt and work on improving their credit scores prior to being in real estate investing heavily.

Joe Villeneuve · Answer

"... I’d say compare the bad debt interest rate vs ROI % on a property, ..."

This is a common mistake.  Percentages lie.  You can't compare these two percentages thinking they are on the same playing field.  They're not even playing the same game.

I had someone tell me that they were getting a 15% annual return from their stock market investments, and tried to compare that to the average REI return of 5%, and say that's why they invested in the SM.  Bypassing the fact he was taking a higher percentage in the SM, and telling me I couldn't do the same (I had to use the average), I proved that 5% in REI blew away 15% in the SM.

How much ask?  Let's say that both options started with the same $100k.  The SM's total return after 5 years, based on reinvesting all returns and assuming the above 15% return on the face value for that year = $101,136.  That means they started with $100k, and ended up with $201,136.

However, the REI, starting with the same $100k, the REI's total return after 5 years, based on reinvesting all returns and assuming the above 5% return on the face value for that year = $570,048.  That means they started with $100k, and ended up with $670,048.

...and as the years go on, the spread just gets wider.

Math usually doesn't lie, but percentages, used here as a comparative tool, does..

Morgan Madill · Answer

@Joe Villeneuve that makes a lot more sense I see what you’re saying it’s apples to bananas to compare interest rate on consumer debt vs a percentage on real estate ROI

Thanks Joe!

Joe Villeneuve · Answer

Here my problem with what you just wrote,..."...apples to bananas...".

I like both.  LOL.

John Morgan · Answer

@Darryl Jennings

Buy the property if it cash flows and slowly pay off debt. If this is working, then buy another and keep repeating. That’s what I’ve been doing and I’m up to nine SFRs. My tenants are paying off my mortgages and I use any left over cash flow to pay off debt. And I have plenty of debt, but it’s what allowed me to snag deals. However, I have W2 income to pay off debt each month in case my rental flow takes a hit for a month or two due to a major maintenance expense. But when my rental flow is coming in without major expenses, I throw it all at debt..and it’s dwindling down fast now. Debt allowed me to grow and I have no regrets for expanding this fast in five years. Just always have plan B and C for when the music stops.

Calvin Ozanick · Answer

I would say the faster route is going to be paying off your debt. I would also say that being debt free with multiple loans paid off will help you get a better loan when you do purchase a property.

Joe Splitrock · Answer

Real estate is not a magic bullet to financial success. If someone has trouble paying down debt, taking on more debt isn't always the best idea. Bad debt can be a sign of bad financial choices or financial impatience / restraint. If you carry those bad choices into your business, it can get you in big trouble. An investment property requires operating capital for vacancy, repairs and capital expenditures.

People also need to consider what happens if you loose your job? Do you have 6 month cash reserves to cover all your debt? The economy is great today, but it goes in cycles. We are headed for a rough patch in the future. There is lots of political turbulence right now that puts the economy at risk in the coming years. Now is the time to shore up your position, not gamble your future.

Investing from a position of financial strength is much safer, but risk tolerance is an individual choice. Higher risk means either higher reward or more damaging loss. Just be smart and look out for yourself. We can all give you advice, but in the end, only you have the consequences of your decisions.

Buy property to pay debt? Pay debt to buy property?

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