What is Risk Worth to You?

[Ethan Peyton]

So I have a choice to make. The two options are very different, but can both be quantified, so they may be comparable.

1. Pay off my car
I owe $7,085 on my car, and monthly payments are $236.
That would make the cash on cash return 40%.

2. Purchase a duplex
I am looking at a few duplexes around $100,000.
My down payment would be about $4,500 (FHA).
Rents at $100 per door would make the return 53%
I would also be living in one of the rooms in the plex.

So the question is, obviously the return rate of the duplex is higher than the car, but there is a huge amount of risk difference.

What would you do in this situation?

(Dave Ramsey vs Robert Kiyosaki death match :) )

[Stephanie Dupuis]

Correct. The $236/mo you'll gain from paying the car off will only last as "cashflow" for a short while. Then it stops (b/c had you kept the car and paid it off per your contract, the contract only lasts for a period of time). Whereas, the rental lasts as long as you want to keep it - indefinitely if you want. Further, (and only theoretically) rent may increase and tenants pay down your mortgage which increases the value of the rental - so you get double monetary value.

For example:

Car = max earnings of $7,085 (maybe you have a 6 yr. loan, I dunno)

Rental = $12,000 after 10 yrs. *this is a simple calculation of CF only after 10 yrs. If you keep the rental longer, you make more money. Plus, you're getting tax benefits and pay down on the mortgage, so this number is actually bigger. If you raise rents during this time (even just slightly), you make more money.

I have a student loan and instead of paying that off, I'm buying property. The student loan will go away - the property will be with me after the student loan is paid off. At this point, I have enough CF from property to cover my student loan payment. This was my first goal: Eliminate bad debt through CF.