Pay Off Debt or BRRRR?

Question

Hey BP community, my wife and I are trying to make a decision about how to best deploy our savings. We have about $25,000 in liquid savings, which is enough for us to buy a single family BRRRR deal in our target market. In an ideal world everything would go great and 6 months later we would have our capital back and be earning $300-500/mo in cash flow. Unfortunately that doesn't always happen. I do have some experience investing, but am by no means an expert, and I've never attempted the BRRRR strategy.

Our second option is to pay off around $14,000 of debt (low interest rate, around $4%), which would save about $350/mo in expenses, allow us to get closer to FI, and increase our savings rate. This is a guaranteed return compared to investing, but obviously not the most optimal as we could potentially get much better returns in Real Estate. We also could pay off some 0% interest debt which would free up another ~$200/mo (These are interest free cell phone/laptop financing). If we paid this off it would be after paying off the debt with interest first.

The most optimal route seems to be the BRRRR deal in terms of ROI, since in 6 months (assuming I can pull my money out) I could pay off the debt at that point AND have the extra cash flow.

Thoughts??

Thomas S. · Answer

In a ideal world you invest and your income pays off all your debts. In the real world when you invest with bad debt and your investment hits the inevitable bump in the road your bad debt will sink you. This is a major contributing fact to failures in real estate investing.

Smart investors do not begin having bad debt as a albatross around their neck.

Dan H. · Answer

With the current interest rates, 4% is free money.  The S&P 500 historically has returned almost 10%.  My RE investments have returned far greater than the S&P 500.  There is no way I pay off a 4% loan early.

Dave Ramsey‘s advice is only sound for the 90% of America that have no financial discipline.  I guarantee you that the mass majority of the top 5% of wealth do not follow the Dave Ramsey approach.   Using his approach there is no leverage and therefore is difficult for accelerated weath creation.

I would borrow money all day at 4% and I have a great credit score (approaching perfect).  Anyone who suggested paying off a 4% loan want to lend a very good credit risk (me) money at 4%. I would of course provide credit score (near perfect score) and financials so that you would know that I am good for the money).

Good luck whatever path you choose.

Jake Thompson · Answer

Thanks everyone for the advice I really appreciate it! I knew what Dave Ramsey would say but I was curious to hear from the BP community. The interest bearing debt is 2 auto loans.

I think the risk factor will be the ultimate deciding factor for us. We have 2 young kids as well so we don’t want to put our family in a bad position where we’re stretched too thin. We wouldn’t invest without having adequate reserves but I still think the advice is spot on to go ahead and pay off the debt first. Thanks!

Jose Linares · Answer

@Jake Thompson If the $14K debt are only two auto loans... I agree with @Dan Heuschele, go for the BRRRR strategy all day!  If any of the debt is related to credit card debt, absolutely tackle that first before investing.

It seems like you are going out of state for a $25K SFR down payment.  Do you have your team in place for long distance investing?  That will help alleviate the fears upfront on how to execute on the BRRRR strategy.

Craig Curelop · Answer

@Jake Thompson - As with almost any answer, it depends :). What is your goal?

Do you want to attain FI as quickly as possible? If so, I would think paying off the debt makes more sense.

If you are trying to build a large net worth, accumulate properties, and be comfortably FI over a longer period of time, then leaving your debt and BRRRRing makes more sense.

Best of luck!

Jaron Walling · Answer

$25,000 to purchase and rehab a property, that cash flows a good amount? That doesn't seem realistic. I agree with the previous postings to pay down your debt! There was a person on Dave Ramsey Show that had the same question... he could tell the guy wasn't listening or going to pay the debt off. Having debt and taking on more is wrong path into real estate.

Kevin Sobilo · Answer

@Jake Thompson, I disagree (potentially) with the previous replies. If you're regular income is inconsistent or not secure then I agree with them.

However, if you feel secure in continuing to pay on your low interest debt with your normal income, then I would invest most of your savings as you are thinking. Time and leverage are powerful. The sooner you start investing the better.

Alyssa Paros · Answer

@Jake Thompson how much are you paying on the debt now? Are you making minimum payments or overpaying? I wouldn't tackle the 0% first. If anything, you'd want to start with the highest interest loan first. And would this BRRRR be exclusively for rental income? Or is it a house hack?

My husband and I started with student debt and decided on a hybrid of paying off our debt and investing, but we started with a much higher amount of debt.

Pay Off Debt or BRRRR?

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