Debt Versus Investments

Personal Finance
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Debt Versus Investments

Jameson Wildwood
Chapel Hill, NC · Member since 2013 · 53 posts · 18 votes

So I have a very complex personal finance situation, one that's perhaps causing me more constraints than I'm fully aware of because of it's complexity and obligations. I feel totally ok with sharing some ballpark numbers because it puts things in context.

1) Student Loans,
I have 46k at 4.75%, and 15k at 5.5%

2) Credit Cards,
$23k in debt. I have a variety of credit cards, all the significant balances are being carried at 0-3% because of prolific balance transfer offers. However it still adds up to a fair amount.

3) Real Estate
I own 1 house on my own (~$100k value), and 2 houses (~$50k each) in partnership with my father. These were all bought last year. All of these have conventional 75%LTV financing. I bought these from my trading portfolios and ROTH withdrawals.

4) Good job, work in Software in San Francisco, but that also means my living expenses are high, probably reducible somewhat.

5) A business that I own that throws off a little cash, but it's mostly a "professional hobby" type endeavor. I run social dance events in the city.

Ok, so here's where I get to the crux of why I'm posting. I'm trying to figure out where to put money next. I could:
A) Pay off CC debt
B) Pay of Student debt
C) Buy more houses (I could probably grab two more this year in the market I'm looking in, if I really stretch)

Some of the things I'm considering while debating this in my head.
- Real Estate is much more mentally stimulating than paying off debt, but that could be reframed if necessary
- I'm concerned that if I pay off my CC debt that old habits will put me right back into it
- I'm a Math guy, so it feels difficult to justify paying off a loan at 5% than investing money at 15-20%. It feels like taking on debt to increase passive income is a better way to go. Even though the CC could be considered "bad" debt, and the Student Loans "neutral" debt.

Thoughts? Considerations? Opinions?

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Sharad M.Pro Member
Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
12y

Hi @Jameson Wildwood

That's a tough situation. The math guy in me says buy the houses at 10%+ ROI and pay off CC and Student Loans as monthly payments. In order to do this, you will need discipline to be sure that you invest your savings and not spend them.

But at the same time it would be a huge mental relief to pay off the debt and start fresh without any monthly obligation to worry about. You can not put a price on peace of mind.

I have changed my investment strategy to where I am buying properties using cash only and not taking any more debt and it gives me a peace of mind which is very important to me.

It's a very tough call, but if I were in your situation, I would probably pay off the CC and student loans first and then move forward with RE investing debt-free.

Dave Ramsey will be so proud :)

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  • Adam Kent
    Investor · Indianapolis, IN · Member since 2014 · 69 posts · 17 votes
    12y
    Originally posted by @Bryan H.:
    For me, the CC debt looks like a ticking bomb. Playing games and transferring to another card is not good a financial practice. The student loans are OK as they are low interest without the 'deadline' factor. I'd look at when the 0% rates expire and set up automatic payments to have them paid off a month before they are due to go up. Then, I would save the remainder to put towards additional investment properties.

    Time-Bomb is correct. I would not keep transferring to keep my interest rate down. Spend the time to formulate a plan to pay down your debt. I can tell you from my experience only, but when I paid off my cars, student loans, credit cards and just got down to just my real estate debt, things got really fun. Yes, I am a big Dave Ramsey Fan.

    0Reply
  • Jameson Wildwood
    OP
    Chapel Hill, NC · Member since 2013 · 53 posts · 18 votes
    12y

    Something else I've decided to do in the last month, is to put my CC payments on Weekly payments instead of just monthly. I'm using Capital One 360 to do this, I like getting the email once a week saying "You paid $200 to xxx" Plus then when I log in, I see the number changed more often. It's tricking myself into a sense of progress and momentum

    0Reply
  • Jason Farmer
    Corona, CA · Member since 2014 · 154 posts · 100 votes
    12y

    @Jameson Wildwood There's a lot of mathematical ways to look at this. You can throw numbers and % around left and right, You can transfer debt here and there to lower interest rates, but the reality of it, your closed to tapped out on your debt to income ratio. Nobody going to give you money with that much debt attached to you.

    Sometimes REI is strategic and you make moves leveraging debt or properties etc...But a lot of times REI is just good ole common sense...You have a good stream of income (between your job and business) coming in PAY OFF AS MUCH DEBT AS YOU CAN...The most important thing is peace of mind. what happens if you get laided off? You get hurt? The market dips again? You a very bright guy imagine what you could do debt free....

    0Reply
  • Jameson Wildwood
    OP
    Chapel Hill, NC · Member since 2013 · 53 posts · 18 votes
    12y

    Yes the DTI was actually a recent problem getting the properties last year, that's a reason I brought in my father actually. I work in software in San Francisco, so I make good income, but with those kind of payments, it's easy to get above .5 DTI when I'm going for Single Families right now.

    It's also a big reason why I'm paying down right now and not getting another property (or a new car)

    0Reply
  • J. MartinPro Member
    Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
    12y

    @Jameson Wildwood ,

    I use credit cards strategically with RE purchases and rehab, then revolve them down, or roll them over at 0%. but keep at least that much in cash to pay all CC balances off, and have access to other cash. Just got another 0% offer for 18 months on a $20K line. (3% fee). With cash to cover, and high excess cash flow to be able to pay it off quickly, I don't sweat it. That's a great rate IMHO.

    But I know a lot of people sleep well at night without certain kinds of debt.. The DTI can become an issue though, as you said.. btw, how come I don't see you around at our meetups every month? Check out my site, or stay in touch @Johnson H. when he's back setting things up in SF..

    0Reply
  • Christopher Leon
    Realtor · Schaumburg, IL · Member since 2011 · 289 posts · 118 votes
    12y
    Yes, take Dave Ramsey's Financial Peace University and get control of your money since it sounds like your money may control you. Levity aside, I would recommend you pay off any high interest debt first. Buying more property is great but what happens when you have those unexpected expenses? Some people do not have reserves set aside or an emergency fund as Dave would call it, so having your credit cards with no running balance is a great shock absorber to those unexpected repairs or costs. Just my thoughts.. Good luck.
    0Reply
  • Jameson Wildwood
    OP
    Chapel Hill, NC · Member since 2013 · 53 posts · 18 votes
    12y

    I've actually found a remarkable program that has made budgeting somewhat fun. (crazy right?!) I just did my budget for July and am looking forward to spending my limits and tracking things.  Plus now I get to earmark spending money and know exactly what I have left for the fun and the necessary things.

    It's called "You Need A Budget"  YNAB.  I've found it really remarkable.  

    Yes my spending definitely controlled me, but YNAB has felt like I'm able to take some control back slowly.  I'm also surprised at how many things I'm starting to anticipate that I had no ability to anticipate before and as a result consistently overspent by a little amount. Much better than any of those online programs (Mint for example) that just make things more confusing, and don't really help become aware of spending.  

    http://ynab.refr.cc/2PNRX73

    That's a code for $6 off.  But Really, the program is incredible. And if there are any other people who read this and feel like you spending is out of control, and you want visibility and awareness and the ability to plan, this might be for you.  

    I don't work for YNAB or have any interest in the company, I merely find their product amazing and life changing.  

    0Reply
  • Jameson Wildwood
    OP
    Chapel Hill, NC · Member since 2013 · 53 posts · 18 votes
    12y

    Also, my total debt is now down to 19,125.90  I was doing well until I had to move apartments and then my debt jumped by 2k with moving costs.  

    I'm also using YNAB to consciously save money for a emergency fund buffer, my debt repayments, and retirement contributions.  

    0Reply
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