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.
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.