Should I Pay Down Debt or Buy Another Rental Property?

I think I finally found a way to talk about my finances without throwing my numbers all up in your face.

If you haven’t noticed… I don’t talk about my specific monthly budget on my blog.

I don’t talk about my specific income on my blog. I talk to you about stuff that helps you, real estate, credit improvement, general personal finance tips, random rants and my annual networth update.

Well…. why is that Dom?

Number 1, my not so silent partner doesn’t like it. So as 50% owner of this company I like to call my marriage, I have to listen to the board.

Number 2, I will not be relatable. I’ve tried this on other social media platforms and unless you’re deep in debt, talking about how hard life is or how you’re living paycheck to paycheck, gets you no love.

Number 3, screw you, those two are enough! Seriously, though, I don’t think it helps YOU. I don’t blog for me… I blog for you dammit. I wasn’t sure how talking to you about me or my family would help you… until today.

I Have a Solution!

My wife and I talk about finances all the time, despite her not being the nerd in the house. She listens or seems like she listens to me babble every other day about our goals, how close we are to them, how to speed them up etc. She’s like my sounding board, literally the only person I can brag, boast or complain to without feeling shitty afterwards.

So my solution is simple… I will let you in on those conversations that we have, then simply ask you, “What would you do?” You will quickly realize that sometimes personal finance isn’t just math. Now, since I don’t know you like that and you don’t know my intimate detailed numbers, you’re just going to have to work with what you’re working with or ask the appropriate question before you just blindly issue advice.

You know what’s funny? The same question I’m about to ask you, is similar to the same questions I face during financial planning, coaching or an email from a reader.

So What’s the Question?

I took to the mean streets and asked a few people and a few readers, “What would you do?” Here is the exact question.

I need your opinion on an article. As usual the comments chosen will get a PR4 link back to their blog. All comments welcome.

Here is the scenario, Mrs. Brown and I were having our monthly which turned into weekly finance talk/update. I noticed that in April our newborn will be in daycare and realized that the bill of $1297 will push us over our predetermined ratios for “must have spending” of 50% of net income.

In short a “must have” is something you have to pay regardless of having a job or not. We were originally well under 50%, but kids are expensive.

Anyway, we have several options. One of them will free up $564 per month and that option is to simply pay off the cars. Now, we have the cash on hand, but the interest rate is 1% and the term is 4 years, and the total cost is 29k.

Option 2: We finally start taking some money from various business/side hustles on a monthly basis to handle the car payment. Thus achieving the same result as option 1 but with a tremendous upside.

The Monkey Wrench

As many of you know I can procure real estate really cheap and bring in more than $564 per month with some risk, of course, of things like possible maintenance, vacancies etc.

So what would you do…

Use the money to pay off the cars and pass on the real estate deal or continue on with buying another property. Keep in mind there are risks to every scenario/action. One is a guaranteed 1% gain on money the other is cap rate of 15%+ minus the associate risk.

 

The cool thing about this question is it’s a real life scenario. Something that my wife and I were just talking about the other day. Granted, there are way more options than the 2 I presented in the question, but I think it would be rude to ask people, which of these 20 options would you choose? I figure you have stuff to do just like I do, so I only gave you 2 options.

What’s Missing?

There is a lot of information missing from the question above. I didn’t specify if this is all my cash, I didn’t specify how long it would take me to save up 29k, I didn’t specify the price of the real estate deal, I didn’t specify any future increases of income.. I left a lot out of this equation.

However the most important thing I left out was my tolerance for risk and my wife’s tolerance for risk. We are at polar opposites of the spectrum. However, being a unit we have to move as one. Now that I think about it, she is the reason we buy the properties all cash now (no refinance trick) and live on predefined arbitrary ratios. However, she is the reason the fun money is so high.

I would have us investing every penny and living like bums if I could. She’s the safe and fun one. I’m the invest it all and cheap one.

So what did the readers think?

So I laid the question out there and let people provide their opinion on the matter. I was surprised by the mixed bag I received. I’m going to do this… The people who were risk adverse we are going to call them Sheena’s team, and the people who are all about real estate we’ll call them Dom’s team.

Sheena’s Team

I’m not a financial genius by any means, but I did take 3 econ courses in undergrad, so here goes: I would pay off the cars. While the interest rate is great, the fact is that they are a depreciating asset (Econ/Accounting words), and you won’t gain any return on them so there’s no real reason to have a monthly note unless you’re trying to demonstrate a good payment history, which I’m sure you have already established. While it does lower the availability of cash in the short run, in the long term you’ll be better for it. -Carmen

I got a good chuckle out of this one… “I’m not a financial genius, but I did take 3 econ courses”

I’d go with Option 2. Mostly because paying off the cars now would be pointless. A smart guy like you can definitely earn more than 1% a year on cash so holding on to the cash and paying the cars off as you earn would be better. I’d stay away from getting another property for now because 1: you just bought one! and 2: you just bought one!- Latisha

Another great comment, but this seems more neutral to me. Basically a just wait a little bit longer move. However, I did just buy a property closing on 4/12.

For starters, I’m not sure that daycare fits your definition of “must have spending.” You stated that this category is for expenses that “you have to pay regardless of having a job or not.” Would you still have to pay daycare if you didn’t have a job?

Setting that aside, I would lean toward paying off the debt. I fully understand the mathematical arguments in favor of carrying low rate debt. I say this mainly because I value simplicity.


You’re a busy guy. By simplifying your situation, you’re freeing up valuable mental space. And with all the things you have going on the side it won’t take long to replenish your stash — minus the car loans. – Michael

I’m not sure about the freeing up valuable mental space, but you’re absolutely right about replenishing the money. It would take less than 4 months! Hmm…

I would pay off the cars with the cash that you have today. I prefer to not use debt at all as I am a big fan of bootstrapping and using the resources that you do have to buy things. I understand the mathematical side of things, however, I think it is more what do you need to do in order to achieve your financial goals. On another note, I have owned rental real estate and it can be a headache at times. Another question you should ask yourself is this: “Do you need one more thing on your plate?” Sometimes it is not worth the stress and aggravation involved for the return that you get on your money. – Deacon

Great question about goals… as you see we didn’t specify any in the question.


I use plenty of leverage with our investments (rental property, mortgages, equities, options), but I also have the safety net of a military pension. No matter how badly I screw up on the leverage, I’ll still be funded at a minimum standard of living.

In your case, maybe it’s time to either change your 50% rule or to dial back the risk a little. I vote for dialing back the risk.

If you pay the cars off now, you’ll miss the next real estate opportunity. But you’ll also reduce a monthly expense and be able to use the cash flow to start saving up for the next rental property (or for replacement vehicles). You’ll be in a stronger financial position if you get hit with multiple vacancies, an eviction, property damage, unexpected repairs, or higher property taxes (or surprise family expenses). You won’t be dependent on your side hustles (and Google’s ranking algorithm, and other factors out of your control) to service your debt. Your lower debt load will make it easier to get an investor’s mortgage or to take out home equity loans on your existing properties.

Your life seems pretty full of challenges, and you’re already winning the game. There’s no need to run up the score. Give yourself (and your newborn) a little breathing room for the unexpected. Best of all, you and your spouse will sleep better at night. Or at least as much as a teething baby will let you sleep… Doug

This is hands down the best comment for not going for the real estate deal.

Dom’s Team

I think such ratios are arbitrary. Baby Brown will go to preschool (?) soon enough, and you’ll see a $16K windfall until the years when after school activities start to cost a small fortune. Try paying for a teen’s 12 dance classes (yes, 12 per week). But, the first few school years you’ll be well under the 50% and that will make up for it now. If you are comfortable the real estate deal looks cash positive, I’d go for it. – Joe

Another dig on my beloved ratios! Great point about daycare being temporary.

I would take the real estate. You can think of it on two levels. On a personal level you are still in the building wealth phase and need a solid offensive plan. Real estate provides an inflation adjusting income you can never outlive. Paying down debt is defense. It is still important to winning the game, but when your team is down 17 to 3 at the half you need your offensive team on the field putting points on the board.The second level is pure science, and it states you should focus investment capital on whatever provides the highest after tax return. It’s the math of the terminal wealth equation. – Todd

Great analogy. NAILED IT!

Question for you – is it in the area where your current property manager will be able to pick it up?

If yes, put me on team real estate. I trust you can make it cash-flow, even if you buy in cash and refi in a month. Question is, what leverage are you comfortable with, Net Worth/Debts? 2:1 means 50% loss wipes you out, 4:1 a 25%, etc. That’s for you to decide (for a benchmark – estimates are 28% of AAA CDOs went bust in the RE bubble pop… from estimates < .2%), and probably includes some math on your ‘non necessary expenses.’ Even a negative net worth is fine if you’re young and you’ll swing back to positive without too much trouble. – PK

Leave it to PK to throw in some math. To answer your questions… Yes my property manager will pick it up, we also no longer refinance the properties, we just buy them out right save for a few months and buy another one.

So What Did You Do?

We made our decision prior to asking for comments, but this was fun. We decided to move forward with another real estate deal. Property #4 hasn’t closed yet, the lawyer is running the title and double checking everything as we speak, but we hope to close on that property on 4/12. This article has more to do with property #5, which my property manager and agent are going to check out for me on 4/4. I’m not going to use this post to go over the numbers of that deal. Once we are under contract, I’ll throw another post up going over all the numbers and why we picked the property.

We went with real estate because of the tremendous upside, current savings rates and our previous goal. Our goal is to get 10 of these properties under or belt or 80k passive income, what ever comes first, before we eliminate any remaining debt. There is a good chance that it could take another 3-4 years to find qualifying properties. Hell, the car notes might be paid off by then. Also, it only takes us at current savings rates 4 months or less to save 20k, we also have a rather large emergency fund, and we have the option to reduce spending if need to.

Truth be told at this time we don’t have to play defense as Todd would say, our initial game plan and spending plan is very conservative. How many people do you know who live on 50% of their net income? The new budget (I’ve made some adjustments) with just W2 income is 54.59% must have, 31.92% Savings and 13.49% Fun money. I can live with these numbers, especially since it’s only including a portion of the income.

In conclusion, there is no right or wrong answer, just informed and uninformed decisions. Also no financial plan is set in stone, stuff happens every day. It’s okay to adjust the plan based on new information, I do it all the time. I’ll probably have a new idea to bounce off Sheena next week. Moral of the story is talk it out and get on the same page.

When was the last time you reviewed your financial goals? When was the last time you talked to your spouse about the numbers? Did you make adjustments?

 

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