Pay off credit cards or buy a 3 family in July?

[Ricardo S.]

Hey BP!,

Since graduating I found myself anxious to get into real estate asap! I keep reading all these success stores and I feel I am ready but the only thing holding me back is thinking should I get out of debt first or buy a property?

Here are my finances;

Age 23. 

Career: Electrical Engineer (straight out of school) July 2015

Salary :42k + OT= ~45K 

Debts:  Chase credit card $4500 (15% interest), Citi credit card $4600(14% interest). 

Total $9,100. Monthly payment $250~

Expenses: (personal) -$100/monthly + credit cards = $350/monthly

I live with my mom and I pay some bills and "rent" in order to stay there. = $850/monthly

Total Expenses= $1200/monthly

Total Monthly income before tax: $3500

Property location: Newark NJ 

3-4 unit multifamily

Price range 50k-90k 

Loan Program FHA 203k

Rehab budget: price+ rehab= $150K (Max amount)

Estimated taxes $6500 

Estimated insurance $1200

Estimated ARV: 200k (conservative)

Estimated Rents for the neighborhood I want to invest:

1BM= $700

2BR=$1000

3BM=$1300

Downpayment: 3.5%

Credit score : 670 

After 1 year I will refinance to a conventional loan.

Even with the debt that I have. My debt to income ratio is still low enough to be approved for a FHA loan. The bills and money I pay to my mom will go away once I move out. If a property contract is accepted I will ask for a 6% seller concession for closing costs ( I will increase accepted offer price to offset the 6% concession so the seller will agree)

What are your thoughts?

[David Dachtera]

@Ricardo S.,

The question you ask is the source of much disagreement.

Since you posted it under "Investor Psychology", I'll answer this way:

The "consumer" mindset says, "be debt-free". Hence, the recommendation to pay off your credit cards.

The info you didn't post is key here: You owe $9,100, but what is your total available credit?

Age of credit (how old is your oldest open account?) is part of the score calculation. The older the better. Young people are at a profound disadvantage here.

At your age, the most important factor is going be credit utilization: that $9,100 is what percentage of your total available credit? To maximize your credit score, you want utilization to be no more than about 25% to 30%. As long as your payment history is clean this will support a higher score.

Another factor in your consumer credit score is mix of credit: installment, revolving, secured, etc.

The consumer mindset wants to be debt free, yet to have the best credit score you need to never close an account, carry some debt and maintain a good payment history. If you pay off your accounts every month, you have no payment history - only a payOFF history which is not tracked by the credit bureaus. This LOWERS your credit score. I know - that's a bit counter-intuitive, but that *IS* how it works.

The entrepreneurial mindset says, "Invest for income", then use THAT income to pay down your debts or fund your next investment. As an entrepreneur, borrowing is going to be a common element of life in the business world. You may be asked to provide a personal guarantee and, starting out, much or all of your traditional borrowing is likely to depend on your personal credit worthiness. Having no debt and no payment history will be a serious impediment to your business-building progress.

Seek to understand: you cannot "save" your way to financial freedom, you *MUST* invest for income! If you want to "save" $1 Million, then (at current bank savings account interest rates) your income over that saving period must be $1 Million IN EXCESS of your day-to-day needs. If you start with a smaller amount and grow that through prudent income-producing investments you can grow that small amount to something much larger, you can do it more quickly and you can do it without living in a refrigerator carton under an overpass.

So, the root question is:

Are you a typical consumer?

...or are you an entrepreneur?

Food for thought.