New to Real Estate · Sarasota, FL · Member since 2020 · 22 posts · 6 votes
Good evening All,
I'm trying to figure out if it's more beneficial to pay off debt to change the debt to income ratio, or use that cash for a down payment.
Currently I have $4,000 left on my vehicle loan. Would I be better off paying that off and reducing my monthly bills by $340, or using that for a down payment on a rental property. There only 12 months of payments left, but I'm not sure how much the decreased monthly payments would increase the borrowing power.
So you're going to need a loan, so DTI could be the overriding factor.
But in general, what is the total interest remaining if you repay as agreed? That's the opportunity cost of NOT paying your car off now. What is the total return on the $4,000 from now until the term of your loan expires? That's the opportunity cost of NOT investing that money right now. Go with whatever costs you the least.
Rich, thank you fur your response. I wasn't indicating $4,000 would get very far, but which way it is better utilized. If I use it for a down payment and the down payment requires 20%... That means the $4,000 can leverage $20,000.
Do you have any idea how much borrowing power paying off the $4,000 or reducing my monthly payments by $340/mth
Jeff, good for you for thinking ahead. Talk to lender(s). Ask them for what you can afford under both scenarios, 1st being max loan amount they will give you based on your current situation with the monthly car payment, 2nd being max loan amount they will give you if you were to have no car payment. They will be happy to speak with you and this is a good chance to build your network of lenders. Then you can make an educated decision versus guessing
For the lender it will be a simple DTI calculation where one scenario has the car pmt factored in and the other scenario does not. Take your fico score and deduct 20 or 30 points from it to be conservative. Tell the lender(s) to use that in this proposed scenario. Don't do any hard credit hits in this case. There are many lenders who will do this for you w/o a credit hit.
While $4k may seem insignificant in the scope of real estate, that could cover all or most of closing costs on a property of with a low downpayment FHA loan or a 5% down conventional on a single family, a chuck of the downpayment. Do your research before you dump all the $4k into the car loan. Think to yourself, if I drop all 4 grand into the car loan, how long will it take me to get that $ back via savings from dayjob etc.
Not sure what interest rate your car loan is, but if you keep the loan, you could always look into refinancing into a lower rate if possible, or selling that car and using the proceeds to buy a less expensive car outright, where you'd have no loan/monthly pmt
Good luck and if you have any questions keep em coming!
@Jeff Young the best path to wealth would be to payoff all consumer debt and have at least 6 months cash reserves before considering investing in real estate.
@Jeff Young I personally would pay off your existing car loan of $4K and start with a fresh slate for real estate once it's paid off. In making these decisions, I would normally look at the difference between the loan rate and the rate you could be making from that money if you put it to work in a real estate deal.
Another important aspect to consider is not only the down payment required to pick up a property but also the adequate reserves that you need in case issues arise (i.e. repairs, vacancy, etc). I'd recommend having a funded reserve account of 6 months in expenses for each property. Some lenders will require this on investment property loans, but not likely required for a primary residence.