Pay off car loan or buy first rental?
Lockport, NY · Member since 2015 · 41 posts · 8 votes
Pay off car loan or buy first rental?
Most Popular Reply
Alexander FelicePro Member
Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votesPay the difference between what it's worth, and what you owe. Then sell the car, buy a $1500 beater, the FLOURISH.
I drive such a beater that when I went to leave my last closing, where I paid cash for a house, my truck wouldn't start and I was out front of the law office with the hood popped trying to finagle the thing to start.
cars will always lose 100% of their value, pay as little as you can for one.
68 Replies
- 10yRobert GuilfoylePro MemberMount Laurel, NJ · Member since 2012 · 125 posts · 36 votes@DanielLehman - try applying with DCU (Digital Credit Union) - I think you make a donation to become a member. The refi autos. Or try Pentagon Federal Credit Union. They also have great auto refi rates.
- 10yDarren DennisPro MemberFlushing, NY · Member since 2016 · 21 posts · 5 votes
@Daniel Lehman - These are just my $.02... If you have a 70 mile commute to work everyday, you'd better be pretty sure that whatever you're driving is reliable because if it isn't, you're going to be either late to work, or not even making it to work when the car breaks down. If the car continues to do this, the job you're going to may not be there much longer and suddenly it becomes more difficult to get involved in this thing called investing. You have a honda civic. Those don't break down much. I think you have to think about the condition of the car and what you could get if you sold it. Also, you live in rochester... how much rust do you think a beater around where you live will have? My wife's subaru spent 4 years in Madison, WI, and 4 years in buffalo. Car ran great after that except for the holes in the frame that i could poke my finger through, not to mention the leaky gas tank. I vote for buying the car out.
EDIT: or refi the car and keep cash in your account.
- 10yStephanie MedellinBusiness MemberMortgage Broker · CA · Member since 2014 · 1k+ posts · 644 votes
@Daniel Lehman I assume you're buying a multi unit property with your VA loan to live in one of the units?
You should be able to get a pretty good lender credit to cover most or all of your closing costs, even at a competitive rate, so you shouldn't have to use too much cash for that. You could also ask for a small seller credit for the rest of the closing costs if needed.
Next, while it's a good idea to have reserves and I don't know the rest of your financial situation (ie how much disposable income you have left over each month), you said without the car payment you would be able to save up quickly.
What if you kept the car, bought the property with the reserves in the bank with very little out of pocket (shouldn't be too hard with 100% financing and credits for closing costs), then paid off the car loan with your cash, and then quickly replenish your reserves?
It might be a little riskier for a few months but could help you achieve both of your goals now. Assuming you find a building with solid tenants in the other units that has been well maintained, your risk will be a little lower.
Stephanie Medellin, Loan Factory58 Reviews - San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes10y
Originally posted by @Daniel Lehman:
well guys, I think it's unanimous. Lol. I'm currently paying $294/month. And I bought the car (Honda civic) Bc I need something reliable for my 70 minute drive to work. But perhaps if I sell the car and get something for around $2-3k it would be reliable enough. I'm putting about 3k miles a month driving. So I should look into selling.
I have a different idea. I'm like that lol.
The Honda is a good investment. If you take care of it, you will get 300K or more out of it without much maintenance costs.
Let me tell you how my daughter and I figured out how she could get enough money together to buy a home when the market crashed and she didn't have enough for a downpayment. She changed her withholding on her paycheck. She's in payroll, so she knew the max she could claim for dependents without it flagging the IRS. It think they get flagged if you put 9 dependents, so she must have put 8 dependents.
What this did, is it gave her about 20% more take-home money. She saved that, and within a year, she had her downpayment.
Now, this is basically a debt to the IRS, but it doesn't show as debt on the credit report. And you can show on your bank accounts, a steady savings amount being put into your account every month.
Then, you buy the house, change the deduction back, and when it's time to file taxes, you go ahead and file honestly. It takes the IRS a few months - I think it was around July (after filing in April) that they contacted my daughter about what she owed and they worked out a payment plan.
I think my daughter said she figured this worked out to a loan at around 4%.
The IRS will then tell your employer that you're not allowed to change your withholding until you have paid your debt to the IRS.
You can also use this extra money to get the car paid off. I really think your Honda is a good investment. And if you pay off that loan quickly, you won't be paying the full interest rate.
I had a couple of friends who also used this technique so they could also buy during the crash and it worked for them, too. Everyone was honest with the IRS that they needed to save money to buy a house and they just worked out a repayment plan. People change their deductions all the time, especially around Christmas, etc. So, it's not illegal as far as I know, since you aren't intending to defraud the IRS, and are willing to pay the penalty. Anyway, it's a creative option that might work for you.
- Investor · Emerald Coast, FL · Member since 2013 · 45 posts · 11 votes10y
If you qualify for a VA loan, you probably qualify to refi your car loan - check out USAA's rates. Also, Bank of America just introduced a 3-5% down mortgage. Could be a way to get a duplex and then rent it out.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes10y
I agree to pay off the car loan first, no brainer. Not to be overly harsh, but sounds like it may be wise to work on your personal finances before investing in Real Estate. Learn to manage your income and expenses wisely first ... you'll know you are there when the money you need to invest magically starts accumulating in your bank account. Managing a rental property is mostly just analyzing and managing income and expense, the only difference is you are doing it with financial leverage, so the stakes for screwing it up are much higher. Thus you should learn to do it consistently and effectively in your personal life first while the stakes are lower.
- 10yJohn CasmonPro MemberCincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes
@Daniel Lehman Selling the care doesn't really fix your problem since you have no equity. You need to get the interest to a reasonable amount and lower your payment. You have an 8-year old, 100k+ mile, "reliable" vehicle, it's not like you have a 2014 Mustang. The problem isn't the car, it's the interest rate payments.
An $8.900 loan at 5% over 60 months would be a monthly payment of $168. How would you like to free up $126/mo without selling your car? Talk to any lender you have a relationship with - personal bank, current auto loan lender, etc - about your refi options. If you've improved your credit you should be able to get better terms (side note - work with a credit repair company as well to help clean up your history, remove the inquiries and improve your credit score).
I had an auto loan in college and once I got a "real" job, I started making extra payments and paid off the note two years early. I would suggest getting the lowest interest rate and longest length of terms to increase your cash position so you can save up for the VA loan. You can always make more payments and these would go directly to your principal, thus reducing your actual interest payments. - Architect · Saint Charles, IL · Member since 2016 · 2 posts · 1 vote10y
Paying off the car loan seems to be the best option as most people have stated, but how comfortable are you with doing your own car repairs? Often times dealers will offer maintenance packages, whereas a 2-3k car will keep coming back with problems.
How much is the peace of mind worth it to you? Are you able to stay up later and grind harder because you don't have to worry about a car? This is a strange, albeit valuable way to quantify these expenses.
Originally posted by @Daniel Lehman:
Originally posted by @Thomas S.:
Good decisions. Wasting money on a depreciating asset is ridicules at this stage of your investing plans.
Having expensive car loans, even having expensive cars is for fat cat rich investors.
I own a 2006 Dodge Caravan With now 450,000 K on it that I bought 7 years ago for $5000 and it has served me very well. I am now looking to buy a 2009 caravan as is for $1000. Reliable is the key, appearances are irrelevant. That is the kind of approach you should be taking when starting out. A vehicle is only transpiration designed to get you from A to B. Don't waste money, be frugal, save ever penny for investing.
I shouldn't have gotten the car at such a high % interest rate, but it's not like I went out and bought a Dodge Viper lol. I bought a 2009 Honda Civic. But yea, i need to get out from this bad decision.
Daniel, just wanted to say good job for being smart enough to recognize you need to address the situation. We all make less than ideal decisions from sometimes.
Don't lose sight of what you're trying to accomplish (being financially independent through real estate)!
- Real Estate Investor · Madison, WI · Member since 2013 · 31 posts · 6 votes10y
I saw your post and i thought it was a no-brainer to buy a rental property first, worry about the car payment 2nd. After reading all the posts on here I STILL think this is an easy decision.
Regardless of the interest you're paying, your car loan *should* be paid off in 5 years or less...the rental property should generate income for a far longer period of time. Find a property where the cash flow covers your car payment and you can always try to refinance your car payment with another bank or at a later date as well.
Also, a lot of people seem to have car hate here, I honestly don't get it (it's all subjective though). Investing in real estate is all about making money to do the things we want. Some people want to drive a nicer car...that doesn't mean a lambo or lamborghini necessarily, but buying a 'beater' car isn't going to change your life for the better one bit.
Not trying to be the contrarian here, but I feel like a lot of people posting here get pretty worked up about cars all the time. We get it, they are a terrible investment.
- New Haven, CT · Member since 2016 · 90 posts · 99 votes10y
@Lucas Wagner
Just an FYI, I drive a nicer car than my boss, and my bosses boss. I thought it was a great decision 4 years ago when I got my first job because I felt like I was making a million bucks a year. Now I understand that even a $412 car payment was way way way too much, even for the good income I produce now. That car payment had it not been paid off, would have taken $80,000 out of my total approved loan amount on a mortgage.. 80k!!!! As long as he has that car payment on his credit report, he will always/most likely qualify for a lot less. I wanted to clear that up just to let you know I don't drive a beater and love nice cars (something I happen to enjoy), merely suggesting someone with a 24% interest rate and not in the best financial situation shouldn't be paying $300 a month for a Honda Civic (pretty sure even an older one would be just as reliable that he could find for 2-3k). Either pay the car off, refinance down to <5%, or sell it for the highest amount possible and use what cash you have to purchase another vehicle.
Originally posted by @Daniel Lehman:
The car has 112,000 miles on it. At the rate I drive I put around 3,000 miles/month on it. The payoff amount is $8,900. I did the Kelly Blue Book value for it and trade-in value is around $4,800 and the private-sale amount is $6,200. I actually just listed the car on craigslist for $7,000/bo so if I could sell that for no less than $6,200 I could use that towards paying off the car and I have a credit card with a $3,000 limit that I could pay the rest.... Oh wow... just realizing that that won't work. That would be enough to pay off the car but then I won't have the money for a car around $2-3,000. UGH!
Maybe I'll just keep trying to refi with other places but they're going to keep running my credit which is what I wanted to avoid.
Why would you sell it for a loss, then buy something else for another loss plus more losses for endless repairs on the next crap car?
Just pay it down, pay it off before you do anything. Over time you will dollar cost average your bad purchase into a good one. In a couple of years you'll be driving a paid off Civic with relatively low miles and lots of life left in it for years to come and have only minor repair bills. In other words you'll have (1) reliable, (2) low cost (3) paid for transportation. Then stay out of debt and save that payment for your first real estate investment.
Selling it is the last thing you should do. Refinancing is the last thing you should do, you don't want to extend the debt, you just want to pay it off and be debt free and own a vehicle that is low to maintain and reliable.
- Portland, OR · Member since 2008 · 123 posts · 73 votes10y
I agree with @Mike F. It's a Honda, pay it off and drive it into the ground (do basic maintenance yourself, it's not as hard as the dealers want you to believe). In 5 years you'll have a car that has 300k miles on it, then you can sell it to someone on BP who loves driving old beaters :) Buying a total POS and expecting reliable (and comfortable) 70 minute drives isn't the best strategy IMO. If you have the cash pay it off today, if you don't have it all, think about paying it down as much as you can and then try to refi the loan.
By the way - I suspect, but correct me if I'm wrong, this car loan doesn't show up on a credit report and is doing nothing to build your credit. 24% interest smells like a buy-here/pay-here lot, not a traditionally financed automobile loan.
- Real Estate Agent · Austin, TX · Member since 2014 · 636 posts · 486 votes10y
@Daniel Lehman, now that there's more information on the table, I think some people might alter their advice a bit. Since you only owe $8900, I don't know that selling it and buying a beater is the best move for you. I did the reverse math just like @Erik Johnson and came to similar conclusions. That means you have a Civic that you bought for 11-12k. If you were super lucky, you'd be able to sell it for only slightly less than your loan amount, meaning you'd still have to put your own cash in, and then spend more to buy a beater which would likely also have higher maintenance costs. You might come out 1-2k ahead, but that's not worth the loss. That said, 24% is insanely high, so you really need to shop around and find a lender that will help you. I promise you they won't be hard to find.
Now here's the good news; it doesn't matter! You have the VA loan. This means you don't need money to start investing. I also started with the VA, and it's a great vehicle (pardon the pun) to get started. Buy a small, 2-4 unit multifamily (preferably a quad, but whichever deal you can find is best) that needs repairs, and move from unit to unit fixing it up while you gradually raise rents. At the very minimum you'll save a ton on rent, and most likely you'll be able to live for free and make a profit. After you've completed the whole thing, if you have savings, keep the place and buy another, if you don't, sell it and use your VA to buy the next one.
Originally posted by @Alexander Felice:
Pay the difference between what it's worth, and what you owe. Then sell the car, buy a $1500 beater, the FLOURISH.
I drive such a beater that when I went to leave my last closing, where I paid cash for a house, my truck wouldn't start and I was out front of the law office with the hood popped trying to finagle the thing to start.
cars will always lose 100% of their value, pay as little as you can for one.
Lol, I've been in similar straights! After I paid cash for my first house, my truck broke down. I had to buy a new car at the dealer. Had cash to cover but only put 5K down on a 10K car. No car payment now and driving my now 117K mile Honda 5 years later. Stuff is starting to fail but still cheaper than buying a new used car. I do have my eyes on a 2014 Leaf with 16K miles for 10K if this car dies. The Leafs are pretty cheap and their batteries last a long time and are not that expensive to replace. Point being I have a plan...
OP, even though your interest rate is high, I would still try to buy property in an equity market. Why? 24% interest on say, 10K, even 20K is not that high compared to what you could make in RE in a year. If you have 60K to put into an equity property that nets you 60K in a year between appreciation, cash flow and principal pay down (like one of mine did), you're way ahead. You always have to calculate the opportunity cost...
- Littleton, CO · Member since 2014 · 195 posts · 72 votes10y
@Daniel Lehman Have you figured out how much the one time funding fee that the VA charges for Mortgages for the multi family investment property that you are looking for? How much equity do you have in your current property?
The fee is usually 2.15%.
Here is a link to a page that lists 5 things to know about VA Loans:
http://www.bankrate.com/finance/mortgages/getting-...
You stated that you are using two Credit Cards. Are you doing this to get cash back or points?
How much do you have saved up to pay for repairs or vacancies?
Do you have 3-6 months of your living expenses saved up?
I would hate to see you lose your property if you get into an accident or laid off and did not have a safety net in place.
If I were you, I would write down a very strict budget. This will allow you to find out how much extra a month you can pay on your auto loan.
Then write down your short and long term goals.
Post it somewhere where you will see it daily. Put a picture of something that you will reward yourself with when you meet your 1-3 year goals. It could be a Vacation to somewhere or a knowing that you are out of debt except for a Mortgage.
Have you checked out if Prosper will give you a loan for 12%? It might not be for the full 9K, but even at $4,500, you could use it to pay down your higher Auto loan. 12% is higher than what Credit Unions would charge, but if you were turned down for a refi, your debt to income ratio might be too high to qualify for a 4-8% loan.
Good luck in your short and long term goals.
- Falls Church, VA · Member since 2016 · 2 posts · 0 votes10y
Out of curiosity, why are you living 70 miles from where you work? A long commute hurts your net worth in several ways: you're not getting paid to commute, you're spending a lot on gas, and you're putting a lot of wear and tear on your vehicle. If you're not tied down with a spouse with a job at your location and no kids' school districts to worry about, I think a short commute is the best 'investment' you can make.
What if you found a property to rent within 5 miles (or found a place within walking distance of public transportation)? You could even bike to work in good weather and get healthier while saving on commuting costs. A short commute would save you a considerable amount each month.
To echo others, I would take that savings and pay off the car loan, then worry about investing. You're essentially making a 24 percent low-risk return paying off the car loan, which would be difficult to beat in most investing scenarios.
I know you're excited to start investing, but it requires a disciplined approach and you need to minimize the expenses in your life. Then you will have enough freed up capital to leverage in real estate.
Good luck!
Join the conversationCreate a free account to reply, vote on answers and follow this thread.