Personal finance - pay off debt?

Question

I keep a monthly cost of living spreadsheet that list all of our personal living expenses like the Mtg on my home, car payment cell phones, food cost utilities and blah blah blah.

My goal is to have over 100% of this cost paid for by our rentals.

We own 4 rentals that currently cover 24.9% of our cost of living.

I have a secured loan from awhile ago that is costing me $370/month or about 9.6% of our monthly COL. The loan matures 12/2016 so its nearly all principle right now (120 month loan) and the balance is $4,950.

Typically I wouldn't consider paying the loan off now since I understand how money works. But I can't think of anything I can do with $5k that would come anywhere close to making $370/month. Saving $370/month is like 1-1/2 rental house of income. And it won't really hurt me to let go of $5k liquid cash, and I get to lower my COL by 9%.

So why shouldn't I pay this off?

What would you do differently with $5k

Dawn Anastasi · Answer

This is exactly what I did -- but not only monthly expenses but reserves for my own housing repair (just like a renal) and money to go into savings every month.  I would also have a sheet that would include my net income from rentals (after expenses and reserves) and have a calculation that took my net income less my monthly cost of living.

Every time I bought another rental, it would go into the spreadsheet.  It was very exciting to see the number creep down to zero and eventually be covered.

David C. · Answer

He's still paying whatever the interest rate is.  Getting to the end of the amortization has lower interest only because you are paying interest on a lower balance.  There's no other magic happening.

a 12% loan is a 12% loan in year one and in year 5.

In year one - its 12% of a high balance.

In year 5 its 12% of a small balance.

What is the rate on this loan?

Chris Adams · Answer

Thanks Michael Seeker

This $5k will in no way hinder my ability to purchase additional properties.

With with all that I have learned in the 8 years since I got this loan. i would never do a loan like this again. But I was younger, and financially less sophisticated (stupid) back then.

I do however agree with your ideas in general. In my case I add rentals to my portfolio w $0 down so this $5k won't slow me down.

David C. · Answer

A risk-free 7.9% return is hard to come by these days.  If it won't impact your next investment and you have emergency funds, I'd pay it off.

Chris Adams · Answer

@David C.  7.9%

@Dawn Anastasi I'm a spreadsheet geek also, financial spreadsheets are like playing chess with money

@Chris L.  Thanks for the ideas, I have a pretty big LOC atm. The last thing I want is another CC lol, tho I'm extremely good with them.

Now since I posted tis is did some digging and I was wrong about the payoff date of the loan. The loan matures on 2/28/15 not 12/16 like I thought. So thats a mistake on my part.

Because of that I will just let it run rather than pre pay. But the reason I was going to pay it off is called Global Debt Service.

This is the combines income/debt of all your personal and business interest. And its a very important ratio when banks underwrite you. My global is ok but not as good as I'd like to see it. That was the only reason I was going to loose the debt.

Thank you all of the ideas.

Chris L. · Answer

Chris,

Is there a property that you could set up a line of credit on?  If so, pay off the debt and have access to the line of credit should you need it?

Or, set up a new credit card with a zero percent interest rate to back up the 5K should you need it.

Just a couple of thoughts.  Based upon your responses, I would pay off the 5K if I were in your position.

Best of luck with your decision.

Michael Seeker · Answer

Do you have personal reserves for an emergency?  Or for two emergencies?  With the weather we've gotten here, I'm sure there are people that got hit with a car that wouldn't start and freezing pipes bursting at the same time...sprinkle in some medical bills and you could really be hurting.

If it were a 12% interest only loan then I'd say pay it off immediately.  But you're hardly paying any interest at this point, so save the cash unless you need to clear the debt off your credit for some reason.

Chris Adams · Answer

Ok @Matt Devincenzo

And if I do fantastic and get a 10% return I make $500 a year. Not really enticing me but I like the idea.

Matt Devincenzo · Answer

In that case put it into a SDIRA or i401K. If you don't necessarily need it to grow your portfolio of properties then at least put it where it can grow your retirement savings.

Michael Seeker · Answer

If you're trying to get to 100%, it sounds like you'll need to purchase additional rentals.  Why not save that $5K plus as much other money as you can scrape up to start purchasing additional units?  Are the 4 properties you own free and clear?  Since the payments on this is almost all principle, you're effectively paying down the rest of a loan that doesn't have any interest left on it.  If your remaining payments add up to $5000 principle and $200 interest, you've got to weigh the fact that you're essentially paying off the debt and only making/saving $200 by giving away $5000 immediately.

Sure, $5K might not be enough to buy another property, but it's sure a lot closer than $0K.  I'd keep the cash and try to find a way to put it to work on another property somehow.

Personal finance - pay off debt?

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