What should be the focus Credit card debt or buying the first house?

Question

I have plenty of Credit card debt but I wasn't sure what's better immediately focus on the debt or don't worry about it for now and look on buying a house with the idea of flipping the house and using the profits to eat the credit card debt? ( I have a plan for dealing with the debt as outlined in the book start late finish rich but that specific question wasn't addressed)

David Morrow · Answer

Maybe we should talk more about other details of your life situation.

Such as - does your current income easily pay your current bills?  Do you currently own or rent?  Do you have a a long or short term RE investment plan?

Depending on answers to these questions, perhaps shopping for an owner-occupied multi family would be a good starting point.  You may be allowed to buy with as little as 3.5% down, and the rental  income would offset your living cost, which would free up money to throw at cc debt.  Meanwhile, your building equity and learning from experience about buying, landlording, and budgeting maintenance and repair costs, etc.

Your profile and the OP say your interested in flipping, but it also says you haven't read much yet.  Nearly everybody will tell you that education is critical for getting started (and for everything afterwards, too).  Maybe check out the Ultimate Beginners Guide here on BP and search for book recommendations.  The Millionaire Real Estate Investor by Gary Kellor is one title you'll see endorsed more often than most.

Maybe none of this is the advice you're seeking, but I believe you have to crawl before you walk, walk before you run, and run before you fly!

Aaron Mazzrillo · Answer

Your post really needs a very long winded answer and at 1:51AM I'm not up to it, but I would say if you have a deal lined up that can pay off all that debt, do the deal. If not, that high interest debt (bad debt) is eating your financial freedom for breakfast, lunch, and dinner. You need to stop spending money on those cards and start getting your financing house in order. If you can't pay it off in 30 days, you should be buying it.

I use credit cards ALL the time in my business. It is cheap financing. I have a $50K line of credit with one card that only charges me 4% in points and 0% in interest for 12 months. As long as I don't pay the debt back sooner, the net effect is a $50K loan at 4% interest. I've lined up several cards with similar offerings and use them to close gaps on deals that I don't want to shore up with my working capital. And I don't care about DTI ratios because I am not looking for conventional loans on the deals I do.

You might want to read Good Debt, Bad Debt by Jon Hanson and Stop Acting Rich by Thomas Stanley. Oh, and don't charge them to your credit card.

Robert Steele · Answer

Sorry dude. Time for you to go back to school. Those sneaky credit cards always tricking people.

You are paying more than 4% interest. Why? because you are paying the interest up front on the full amount. If you took out a 12 month loan @ 4% on $50K you would end up paying $1090 in interest. The way you are doing it you are paying $2000 in interest. That is a 7.3% interest rate.

David Espinoza · Answer

I didn't need to. Basically what was happening before was my paycheck wasn't really lasting me. I had met a very old woman in my line of work and I noticed she always would say $3.00 for a coffee that's outrageous $2.00 for that that's outrageous! I was actually thinking she was "old fashion" but I was easily spending $20.00 most days on food and coffee and I felt broke all the time. So after thinking about it sometime I thought well I can make my own coffee why I am spending $6.00 for a chicken sandwich when I can buy a whole pack of them for $6.00? I also realized that most days I end up eating the same thing everyday. So I go to the grocery store buy chicken breasts cook it myself and I feel no less happier cooking myself and I know the old woman was right $3.00 and $2.00 for this and that is really outrageous. Now that I am not spending money I am paying my bills but not all of them and my interest rate is high so I guess I will focus on that first with lowermybills.com and other sites and if I can't find a happy solution than technically it would make no difference to try to make a deal happen where it could help me...

Raymond B. · Answer

David Espinoza,
I see that you have cut down on spending money.
Have you ever done a 30 day spending diary?

Raymond

David Espinoza · Answer

I appreciate everyone's reply and time taken to reply. I will go back and read the beginners guide and in the mean time ill keep myself busy moving forward.

David Espinoza · Answer

I have gotten way way way better at not spending money. (Actually it has made me feel richer) I use to waste money on eating out all the time now heck I can be just fine on $20.00 for the week maybe even less than that. I have not used my credit cards in some time (a few years however my debt is still high) I don't have any specific deal lined up because I haven't looked but my question is more where should I put my focus first? Try to find a deal or try to lower interest rate try to consolidate and do all that stuff or should I be out looking for a house?

Brian Mathews · Answer

What did you buy with the credit cards?  If you haven't fixed the reason why you are in excessive debt with cards. You'll just run it up again after paying it off.  I'd fix the problem before doing anything.  As David said, if you're in debt up to your eyeballs, you try to flip a house and something goes wrong, you have no cushion, in which case you'll be in debt on cards and house.

David Morrow · Answer

Aaron's answer is excellent, and I agree 100% with his advice.
AND, since I DO have the time to pontificate at length at 4:11 AM, I will add some thoughts:

While I have not read the materials mentioned, I would venture that everyone agrees that high interest, long term credit card debt is BAD. DEBT.  Usually, when people refer to GOOD DEBT, its in reference to the low interest, tax deductible, secured debt like a home loan.  What many people seem to ignore, but what real estate investors know very well, is the OTHER kind of good debt - borrowing money to put it to work to make more money.  This is exactly what we mean when we use the term LEVERAGE.

SO, if you have money and your choice is to pay off debt or invest in a profitable venture, that is functionally no different than having no debt, having no money, and borrowing against (LEVERAGING) your credit cards to fund the venture.  In that sense, it makes sense to invest for profit, and utilize that profit to alleviate debt.

The flip side to this equation is your extra risk factor.  If you go over budget on your rehab, or if you can't sell and get overwhelmed by carrying costs, you've just exacerbated your debt situation exponentially.  Be very, VERY confident in your deal, because it sounds like a make-or-break situation.

Cameron Ellis · Answer

Your Credit Card Debt will effect your DTI and overall purchase price you can afford.. I would say pay your cards down to at least 20% of your limit..

What should be the focus Credit card debt or buying the first house?

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