Should you pay off debt before investing in real estate? The answer depends on your goals, knowledge, and appetite for risk.
Let’s say you’re a young couple wanting to purchase a rental property. However, you have mortgage debt and student loans. Should you eliminate those first or move straight into investing?
Many people find themselves in a similar situation. They have enough money saved for a downpayment on a rental property but could also use it to pay off their debt for good. If you’re in this position, don’t be overwhelmed. Either way, you’re in a great position to make some money moves! The choice as to whether you should pay off debt before investing in real estate is unique to you.
Here are two quick options for what you can do:
Option #1 (Safer and Slower)
1. Pay Off Debt Completely
2. Save for Emergencies
With this option, the first step is to pay off your debt. Pay the minimum monthly payment(s), and then find your winning percentage. Your winning percentage is any excess income you can put toward debt payments after you meet the minimum payments. We recommend rolling your entire winning percentage into the debt that can be paid off the quickest.
After your debt is paid off, the payments you were making toward your debt can be redirected to saving for your emergency fund. Most professionals recommend 3-6 months’ worth of expenses. Then, once you reach a number you’re comfortable with, that percentage of your income can move towards investments.
Option #2 (Riskier and Quicker)
1. Make Minimum Payments on Debts
2. Save for Emergencies
3. Invest in Real Estate BEFORE you’re out of debt.
4. Use the earnings from real estate to pay off your debt.
This option is riskier for apparent reasons. Every investment carries a degree of risk, and there’s no guarantee that you will make money. If you don’t know what you’re doing, you can lose significant cash and end up in a worse situation than you started with.
However, it’s also true that no great wealth has ever been built by earning and saving. In fact, many people know how to earn and save money, but few know how to invest and make money. So, if you want to accelerate your wealth-building journey, investing in real estate before you pay off debt could be a good route. You may have your debt longer, but you’ll gain assets quicker.
How Building Wealth from Buy & Hold Real Estate Works:
- Buy a property for less than it’s worth.
- Make sure you can rent the property for a monthly rate that can pay off your PITIM (principle, interest, taxes, insurance, and management fees) AND provide $300+ per month on top of that.
Your tenants will pay your mortgage, and you can put the excess cash toward your debt(s). In due time, your debt will be paid off, AND you’ll already have an asset.
So, should you pay off debt before investing in real estate? We encourage you to assess your resources, bring in wise counsel, and pray about your decision. Ultimately, if you have enough saved for emergencies and continue to pay the minimum balance on your debts, either option could work in your favor. Let us know what you think in the comments!