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Updated over 9 years ago, 07/15/2015
60K to Invest or pay off debts?
Hey guys, I am new to BP, but am very impressed with the amount of experience and knowledge on this forum and its members. I need some financial advice.
I have 2 Rental properties where I am owner occupant of one of the multi units.
I have 60k in equity in one of the properties that I will like to use to consolidate debt or continue buying more rental properties for an additional cash flow with a HEL at 4.50% interest.
I have debt amounting to $1,500 / month that I can consolidate with a Home equity loan and be free and clear or use the 60k or a portion of that amount to continue buying more rental properties at 20% down where decent SF or Multi Units go for 60k.
car loan at 440/month - 17k left
installment loan 375/month - 30k left 8.5 interest
credit card 500/month - 7k left at 0% interest for 14 month
HELOC - 200 / month - 9k left at 3.50% interest
I would say pay off the 8.5% interest loan.
Sell your car and get a cheaper one.
after that you can invest the rest.
Hi. Here's what I think:
Figure out if your return on investment while buying porperties is higher than the interest you pay on your debt. If so, then you could invest in rentals. Your ROI on paying off your debt is the combined interest rates applied to the debt. An idea of what you could do is using your property equity, pay off all the debt with an interest rate over that 3.5% (HELOC) and use the difference to invest. This is called ''Debt Consolidation'' and it allows you to save as much as you can on interest while investing since you can bring debt like a car loan with 8.5% interest to a 3.5%.
However, if you find out that your return on investment with rental properties is let's say 12%, you could just don't bother consolidating your debt, and put that whole 60K into that 12% investment (IF you feel comfortable with the amount of debt you have).
This is what I think.
Pleaser, consider that this is only a general advice. Before acting, you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.
Best regards,
Kevin
If you were to invest the money, what is your expected cap rate?
Great answer @Austin Youmans
@Fernando H. You know how we love the passive income of owning rentals, well banks love that too! That 8.5% you're paying on the 30K is their passive income, they do nothing and you fork over money to them.
The car is also a depreciating asset, so I would find a way to eliminate that loan as well first before investing. These two actions should boost your credit profile with the lower debt-to-income ratio, and then you get even better rates on your HELOC.
Originally posted by @Kevin Bellavance:
Kevin, thank you so much for your feedback.
Calculating my Yearly ROI on a 65k 2 family house with 20% down - 30 yr mortgage - 4.5 interest if Rent is $650 for each unit. is 50.2% Yearly ROI on only 1 multi unit.
Originally posted by @Victor Olowu:
Great answer @Austin Youmans
@Fernando H. You know how we love the passive income of owning rentals, well banks love that too! That 8.5% you're paying on the 30K is their passive income, they do nothing and you fork over money to them.
The car is also a depreciating asset, so I would find a way to eliminate that loan as well first before investing. These two actions should boost your credit profile with the lower debt-to-income ratio, and then you get even better rates on your HELOC.
Yes, The Car Loan being a depreciating asset and is killing my debt-to-income ratio, it will be smart to consolidate with the HELOC.
The 30K loan at 8.5% interest is a little higher interest than what I would like but it gives me flexibility to get a straight cash deal without having to jump hoops to finance later on. My ROI on one property will exceed the monthly cost of that 30k loan, more if its a multi unit.
Thank you as well for your assistance.
If your goal is real estate transactions, then yes, use your equity and buy more. You are on a path to achieving your goal. If your goal is financial freedom, then you probably should pay down high interest debt and debt of depreciating "assets" first, and then think about re. Obviously, when you draw equity from your re, your cash flow situation will worsen, which needs to be taken into the calculation.
Originally posted by @Andreas W.:
If your goal is real estate transactions, then yes, use your equity and buy more. You are on a path to achieving your goal. If your goal is financial freedom, then you probably should pay down high interest debt and debt of depreciating "assets" first, and then think about re. Obviously, when you draw equity from your re, your cash flow situation will worsen, which needs to be taken into the calculation.
Yes, that is where I'm having difficulty on what path to take. Real estate transactions VS Financial freedom. I know I will definitely consolidate the Car loan / depreciating asset and It might be a smart to also pay off the high interest 30k loan as well even if my ROI will be higher on using those 30K on purchasing a multi unit and renting both units but is a risky move.