Can you be investing in real estate in spite of being in debt? Of course you can, the question is: “Should you?”
This is such a debatable topic. Some say “No, it’s better to pay off your debt before investing in real estate“, while others say “Go for it!” The decision is more of a personal matter. You see, it all depends on the type of person you are because paying down long-term debt can be exhausting and boring if you are not the type of person who puts your shoulder into a task and keeps pushing until it is done. For many real estate investors who are paying off their debt, it seems like they are struggling to get to the point where their normal financial life once was. You know, back to the life of saving and investing. There is good and bad in every situation we encounter in life and debt is no different, it’s just a matter of using debt correctly and wisely.
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A lot of the common thoughts going on today are that there is “good” debt and “bad” debt. Good debt is debt that is against a house or a business or anything that is appreciating in value or possibly might make you money through cash flow or sales. This is the type of debt that is OK when investing in real estate. Bad debt is debt that is against credit cards, student loans, or car loans: basically, consumer goods that won’t go up in value and will probably go down and are not going to make you any money. This is debt that you should probably avoid when investing in real estate. Robert Kiyosaki says that debt is OK if you borrow good debt because “Good debt makes you rich, and bad debt makes you poor.” Good debts pay for themselves. For example, debts used to buy income producing real estate assets bring in more money than the debt takes out. Let’s take a look at 3 different types of debt and how each one will affect your decisions when investing in real estate.
Related: The Student Debt Crisis and Its Effect on Real Estate
1. High-interest debt
We all know that the higher the interest rate, the more money you lose in the long run. This is like your credit card. If you have any kind of balance on your credit card or any other type of high-interest debt for that matter, then you should postpone investing in real estate for a while. Paying down your debt in this situation should be your priority before starting to invest.
2. Low-interest debt
Low-interest debt is like a car loan or a personal loan from a bank. With this type of loan, real estate investors still face pressure when investing in real estate, yet this pressure is much less than with high-interest debt. It is much less frightening to make a portfolio that returns 12% than one that has to return 25%.
3. Tax-Deductible Debt
And we’ve come to it! This is what investors like to call the “good debt”. This type of debt includes mortgages, student loans, business loans, investing loans, and all the other loans in which interest paid is returned to you in the form of tax deductions. This debt is typically low interest, so real estate investors can easily plan on investing in real estate and pay down the debt with no fear.
Related: Top Ten Traditional and Airbnb Rental Property Tax Deductions
A lot might argue otherwise, but investing your money in real estate instead of paying off your debt quicker will leave you thousands and thousands of dollars ahead of those who prefer to go for what seems the safer opportunity. You see, your rental property can offer much more security and give you more options if you were to lose your other source of income. Just because the experts tell you to do it, it doesn’t mean it’s more reasonable to pay off a mortgage early. Think about where you are putting your money and what kind of returns you are getting before making any major financial decisions.
So, is it OK to be in debt when investing in real estate? OF COURSE! The question that now makes you wonder is: “How can investors use real estate to take control of their debt?” If you are a landlord and own an investment property, one way you can reduce your balances is to utilize the equity in your home. This can be done by refinancing your existing mortgage, cash-out refinancing, or taking out a home equity loan.
- Refinancing Your Existing Mortgage: With mortgage interest rates being low most of the time, one option to help free up cash is to refinance your existing mortgage at a lower rate, reducing your monthly obligations. The money you save can be used to pay off other debt you may have.
Related: When should you remortgage to buy a rental property?
- Cash-Out Refinancing: Another strategy homeowners can use is to take a new, larger mortgage that pays off the old one and leaves them with cash at closing to pay off other bills. This option, known as a cash-out refinance, requires that you have sufficient equity in the property. Your equity is the difference between the market value of the property and how much you owe on it.
- Home Equity Loans: An additional strategy used to help reduce debt is to apply for a home equity loan, also known as a second mortgage. If you have equity in your property, you can use it as collateral to secure another fixed-rate loan and pay off other debts.
Related: What are the best real estate investments when you don’t have money?
In the end, being debt free is every person’s dream come true. Yet, being in debt should not stop you from investing in real estate. There is always a way to manage your priorities and at the same time benefit from debt. Once you are ready to buy an income property – whether debt free or while in debt – visit Mashvisor for many, many properties across the country.