Real Estate Investor’s Debt Dominance
“Budgeting has only one rule: do not go over budget." -Leslie Tayn
If you'd love to get out of debt, raise your hand.
I'll assume you are raising your hand. According to a Pew Survey on Debt, at least 80% of Americans are trudging through some debt to their name.
Two forms of debt reduction are not acceptable for real estate investors. They both have financial downsides.
- Debt Settlement involves inviting a third party to negotiate your debt. You often pay more out of pocket than if you had just paid off the debt.
- Debt Consolidation involves combining all of your debts. Usually, this results in a lower interest rate. The downside is that you will be in debt much longer.
Consider this more straightforward process for getting out of debt. Full disclosure: This is a challenging fix. But if you put on your track shoes and get off the blocks, you reduce your consumer debt with each forward stride.
Real estate investors are a special breed. When most folks talk about being debt-free, they are usually talking to W-2 earners who are in credit-card trouble.
We are not of that ilk. Debt is the lever we pull to make investments and build wealth.
Consumer debt is what we are referring to here. This debt is the stuff that sucks your cash flow and slows your momentum toward cash-flowing investments.
Start with a bang (the starter's gun), and you're off the blocks with gusto.
STRATEGIZE: List out all debts (ALL DEBTS)
It is much easier to achieve your desires and outcomes with a clear picture of where you want to be and the obstacles in your way.
List all your debt on a whiteboard (this is a photo opportunity).
Do not be discouraged. This is getting to know the enemy. We are looking for the 'soft underbelly' of each debt so we can strategize our approach to trimming debt down in the most cash-efficient way. Now you can look the 'enemy' in the eye; you know who you are fighting and how to mount your attack. Refer to this list as you continue on the track to debt dominance, which is the mindset of taking control of your debt and not letting it control you.
CASHFLOW INDEX
Quickly calculate each debt to strategize, first knocking out the least efficient debt.
You are calculating each loan's Cash Flow Index (CFI). The CFI is a measure of how efficiently you are using your cash to pay off your debts. Select each loan balance and divide it by its minimum monthly payment. A high number (over 100) means the loan is efficient and will apply to most mortgage loans. A low number (under 50) means it is inefficient. Select the loan with the lowest CFI number: Pay this loan off first. A quick insight: it doesn't matter what the interest rate is on the loan.
Focus on how efficient each loan is, which is the Cash Flow Index. This process may seem counterintuitive, but the results are what matter. I have seen numbers for all the popular strategies for paying consumer debt, and CFI wins—every time.
Then, think small. The lower the CFI number, the less efficient the loan is. Start with the lowest CFI debt. Use maximum funds to pay that off and minimum payments on EVERY other debt.
How do you run a footrace? One stride at a time.
When you have paid off the smallest CFI debt, acknowledge your accomplishment. Then apply the amount you were paying to the lowest CFI debt (now paid off. Congratulations) and add that payment amount, on top of the payment, toward the next smallest CFI debt. That will get the next debt paid off on an accelerated timetable. This should feel like a weight off your shoulders! Acknowledge your latest accomplishment. Avoid adding new debt to the pile. Continue through your list. You are doing something few others have accomplished.
Persistency and consistency get you around the track until everything under a CFI of 100 is dealt with!
When you run a footrace, persistence is IMPERATIVE. Persistence applies to eliminating debt. Remember, every small step you take is closer to your financial freedom.
YOUR WAR CHEST
With this momentum and your ‘track record’ of conquering debt, it's time to save 3 to 6 months of expenses in a separate savings account as a prudent backup.
Reserve funds are vital for real estate investors whose income may be irregular. They cover living expenses and bills in case income is disrupted.
Keep going. Other runners have their lane, and sometimes, they may seem faster. Good for them! It's an accomplishment worth celebrating. You have YOUR race to run. You might take more steps. What you accomplish for your business and family will prove worthwhile.
REAL ESTATE INVESTMENTS
Now, you have freed up cash for your investment fund. Remember: DUE DILIGENCE!
Everyone's story is different -- everyone's story is essential.
BE THE ROAR not the echo®
Warmly, Janet
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