Pay Down The Credit Cards or Buy An Investment Property?

It’s amazing how much consumer debt people will carry on credit cards.  And then the decisions revolving around that debt can be puzzling.  So let’s think about this for a moment.

Here in Kansas City if you work with me to purchase an investment property I’m gonna direct you towards a rental property that will have a Return on Investment (with appreciation) somewhere in the 22%-32% range.  Without appreciation your return will likely be in the 13%-21% range.  That’s on a yearly basis for the first couple years. 

But what if you are carrying debt on a credit card costing you 15%?  18%?  My sister has a card at 25.9%?  Did the Sopranos earn that kind of interest?  I wonder. 

Anyway, if you are carrying significant consumer debt while pondering whether or not you should become a real estate investor I would like to encourage you to give paying off the consumer debt some serious thought.  Let’s say it’s gonna take you $15,000 grand to buy your first investment property so you are saving fervently and leaving the money in a money-market account earning you 3%.  But in the mean time you have $10,000 in consumer debt, spread over a couple plastic cards, that is costing you 18% a year.  Well, then you have a -13% growth rate.   That’s not good.

Let’s look at it another way.  Let’s say that you concentrate first on paying off the credit card.  At $10.000 you are probably paying around $425/mo in payments to the credit card companies.  Instead of paying those minimums and putting the additional $400/mo in a money-market account earning 3% why don’t you take that $400 and slap it down on a credit card.  Should you do this you’ll make 16 fewer payments (14 vs. 30) and you’ll have earned an average annual return of 19% on your debt investment

After retiring those credit card debts you can take $825/mo, put it in a money-market account until you get to your down payment for a rental property and you can do it with a clear conscious knowing you are on your way to a Retirement Worth Having.

I have been accused of being too conservative with my investments.  But I don’t see the sense of paying interest on consumer debt when paying it down means the returns are likely to be similar to what I can help you get with a rental property.  And without the hassle of tenants.  Therefore no time expenditure.

Of course, $10,000 is a huge chunk of money to some people and not so much to others.  If having $10,000 on your credit cards still amounts to only 1 month’s take home pay, then it’s not a big deal.  But if you make $30,000 a year and you owe 1/3 of that towards consumer debt, you might want to get your priorities in order. 

8 Comments

Filed under Misc. Real Estate, Personal Real Estate Opinions

8 responses to “Pay Down The Credit Cards or Buy An Investment Property?

  1. You keep knockin’ ’em outa da park.

  2. Another Investor

    Real estate is not a passive investment with a completely predictable net income, no matter how well managed. Your property will not perform exactly like the pro-forma, and there will be unanticipated expenditures and/or losses. Even if you account for these on an annual basis in your income analysis, you still need to fund them when they occur.

    No one should be out buying illiquid investments like real estate until they have adequately stabilized and protected their financial position. For most people, this means paying off consumer debt first, especially that nasty, high rate stuff. Once that is done, the prudent investor will fund a personal emergency fund separate from the property reserves. The next step is saving the down payment for the first property plus an adequate reserve fund.

    In real estate, you can minimize the risk of excess operating costs, unexpected capital improvement expenditures, and vacancy and collection losses to your financial well being by maintaining adequate cash reserves. If you fail to set up adequate reserves, you could end up in high interest rate debt again with the first large expenditure or loss. You can turn a cash flowing property into an alligator if you are not careful.

    Conservative and boring? You bet. However, this strategy will get you where you need to be at retirement time, without a lot of unnecessary risk. Ask those folks in that real estate investing group Chris wrote about. That’s how they did it.

  3. Thanks for the comments. For me it goes;

    – Zero to very small consumer debt. (Very small is a moving target relative to who it is that is holding it.)

    – One month’s liquid reserve. (Think money-market account.)

    – Three to six month’s investment reserve. (i.e., PITI plus repairs, etc.)

    – Investment cash for real estate.

  4. The way you have given the importance of investing on property is really very great.The amount invested on property will always fetch good results.

  5. Great post. Very important to pay down your high interest debt.
    Another thought to remember is the 18% credit card interest is AFTER tax dollars. If you are in the 50% tax bracket you would need to gain at least 36% in that same year to technically break even. That might be the interest rate for the Sopranos 🙂

  6. Thanks for the comment. Don’t be a stranger.

    Obviously, it seems everyone is in agreement here. So get started getting those cards down, everyone!

  7. The Credit Card Of Today!

    There are very few individuals over the age of eighteen who do not have a credit card of some type. It may be a regular credit card bearing the traditional logos or it may be a department store charge card. College students are often found with a credit card bearing their schools mascot and logo. Still other credit card companies let you choose the type of card you prefer to carry and even go so far as to allow you to customize the picture and design of the card. It is a wise decision for those who can responsibly use a credit card to have one or two on hand.

    Credit cards are used at just about every store and location offering goods for sale. You can purchase fast food items with a credit card. You can also get your best coffee drink by way of a credit card and a drive through window. Take your pick, there are so many items that credit cards can buy and which offers the user easy options for payment.

    Credit cards offer security in purchases and help you to watch them carefully. It also prevents thieves from stealing cash you may have been carrying around with you for a specific purchase. Having cash on hand will also cause overspending on needless items. By having a credit card, there is a special limit set and the amount of spending can be monitored to keep it in check. The interest rate alone will get you to guard the amount you charge on your card.

    The credit card is necessary for anyone who wants to rent a car or hotel room for the night. Many places simply do not want to deal with cash transactions unless they absolutely have to. It is much more convenient for the money to transfer from the customers account into theirs and be readily available within a day or two or in some cases, a few hours time.

    The card companies will protect the items you purchase and may allow you to have access to special and extended warranties not normally given. If someone makes a charge on your card without your consent, there is protection in knowing the card companies will refund your money and prosecute the offender for you. The stolen cards will be deactivated and you will receive a new one. Any purchases made by the one who took your card will be covered and not held against you personally.

    Those who are responsible credit card users are not only providing themselves with a good source of financial freedom but help other consumers by keeping costs low. With the right sort of budget in place, paying your minimum balance each month should be easy as it is rarely a high amount. The best thing to do is to pay the entire balance due each month when your statement arrives. It frees the card balance for new purchases and keeps you on a positive road to better credit and payment histories.

  8. Wow! You make me want to get 5 more cards!

    Facts are credit card companies market to people they know will not pay off their cards every month. They market to college students who don’t even have jobs yet!

    I’ve been called by a certain Visa card provider and told that I would have to pay a yearly fee if I didn’t start carrying a balance! I told them if they charge me the fee I will close the card.

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