About This Episode
Episode #247 – What if you’ve accumulated mountains of credit card and other personal debt as a result of getting started in real estate. How do you get out from under this debt? And should you even bother? That’s the question Coach Carson tackles in this edition of the Ask Coach Podcast.
Episode Transcript
[00:00]
Let’s say you were strapped for cash when you got started as a real estate investor. In order to get the cash for your down payments or your repairs, you borrowed money from credit cards, or maybe you borrowed money from a personal loan or a home equity line of credit. But the point is, now you have a mountain of debt and you want to figure out how do I get out from under it? That’s the question I’m going to tackle in this edition of Ask Coach, and we’re getting started right now.
[00:31]
Welcome to the Ask Coach edition of the podcast. I’m your host, Chad Carson. You can also call me Coach, and my mission here is to help you get out of the financial grind so you can do more of what matters. In the format of the Ask Coach podcast is where I do my best to answer your burning questions about real estate investing and personal finance. Today’s question comes from all in San Antonio and let me read the email he sent to us with his question.
[00:52]
I have seven single family homes in rural North Carolina where I’m originally from. However, I’m a retired Air Force veteran living in San Antonio, Texas, and I wanted to ask Coach the following what is the best way to get out from under mountains of credit card debt as a result of using them to get started in real estate? Thanks in advance. I wasn’t sure if your questions were covered in the earlier podcast, so I asked a follow up question. I actually emailed Al and just wanted some more clarification on how he used the debt and what his background was.
[01:18]
And this was a reply to that. I use credit cards for repairs and paying some labor costs, and I have a farm in North Carolina that I also borrowed against to buy some rural houses. So I’m assuming like a home equity line of credit or something on there and those properties fell to me due to the families passing away. All in all, I still owe about 45,000 from farm equity and down to 32,000 and credit card debt. So now I’m sitting at seven houses and a 65 acre farm, and I think I should hold there until I can get the debt under control.
[01:46]
Your thoughts? First of all, Al, thank you for your question and for sharing the details of your situation so we can answer it here on the podcast. I’m going to give you both a short answer and a long answer. The short answer is my hunches you should be attacking the debt and trying to pay it off. I want to unpack that a little bit and explain both why I think in your situation, just reading between the lines, it’s probably a good idea, but also want to explain why it’s a good idea.
[02:10]
In general, I’m just a believer in paying off your personal debt especially. Of course, there’s some exceptions there are some things I’ll talk about here, but I also want to talk about how you can do that because that’s part of your question once we go over the why when I get into the how. And so just reading between the lines of your situation, al, you said you’re a veteran from the Air Force, which thank you for your service there, and I’m assuming you’re getting some kind of pension, assuming you have some income coming in there. Don’t know if you have any other jobs or other things going on there, but you’re kind of in this retirement mode or semiretirement mode and you have these long distance properties. So assuming you’ve got some good properties there and you have a farm, getting those paid off will be a good stable foundation upon which you can build you can basically build your own pension with these rental properties.
[02:53]
And the other reason, and this is a general principle for me, that not all debt is equally good or bad, right? So having a mortgage on a property and you buy an investment property and you have a 4% mortgage and that property produces positive cash flow and it’s a long term 30 year mortgage, that is an example of a good type of debt. You’re making money on that. Yes, there’s some risk the rent could go down, you could have a great depression and you can still have some negative cash flow there, but a lot lower risk than, let’s say, a credit card or a lot of other personal kinds of debt where not only is there an adjustable rate interest, you probably have a higher interest rate and even a home equity line of credit. Eventually you have to pay that back.
[03:30]
It’s not like a 30 year fixed financing in many cases, I don’t know the details of yours. So all of that to be said, in most cases, I’m a big fan of paying off your personal debt. Now, that doesn’t mean that on your first deal or two as a new investor, you have to take some risk. And I took a lot of risk when I was a newer investor. Sometimes you have to borrow money to come up with some of your down payments.
[03:50]
Sometimes you have to use some credit cards to pay for some repairs. Not a big fan of that. You want to pay that off really quickly. But if you do, you have to take a risk, you have to take a chance, then you have some debt. The next step is once you get a property, maybe two, to take a break and use all of your income, all of your excess cash flow, to pay those off.
[04:08]
Now, why would you do that? Why do you do that? You do that because there is risk of a downturn. There’s risk of things happening. There’s risk of you having some medical issues and you’re not able to produce as much income.
[04:20]
So just having debt is risky. It’s also restrictive. Things can happen if you want to go have flexibility. I’m traveling to Spain. Here.
[04:28]
Coming up when I’m recording this, having the flexibility of no debt, of very low personal expenses is a big deal. It gives you financial oxygen. It’s freeing. And sometimes there’s just an emotional decision. But it’s also there’s a structural piece that if you have a bunch of debt, you’re very rigid and you have to keep working, you have to keep making income.
[04:47]
And if you want this lifestyle that’s flexible and retired and you can do whatever you want, reducing your debt, whoever you are, is a big deal. And it’s not just a touchy-feely kind of emotional thing. It is also a very practical thing to help you have a lot of freedom. So that’s my best case on explaining the why both an Al’s case and for a lot of you personally. So I do think paying off your personal debt is really important.
[05:09]
There’s some notable exceptions. If you have a long term mortgage on your house, that probably wouldn’t be the first thing I would be looking to pay off before spending money on other investments and things like that. I would kind of set that aside. Also potentially, if you have any student loans that are low interest and longer term, that’s a whole nother story. I have a friend, student loan planner Travis is his name, who does a lot of content on student loans, particularly if you have a lot of student loans.
[05:32]
So pay attention to some of those exceptions. But other than that, credit cards, personal loans. So even with a home equity line of credit, my recommendation is to get that paid off so you can then have it to use again. So that’s the case for why I think it’s important to pay off your personal debts. And definitely here in Al’s case.
[05:50]
But now I want to talk a little bit about how you could do that. And there are two options that I see as a path forward both for all and for a lot of you out there. The first one is going to be actually refinancing your properties. Ultimately you might want to also get out of debt in one or more, maybe all of those properties, but sort of an interim step. The big issue I see here is that he has short term credit card debt.
[06:13]
He has a home equity line of credit. These are tools that are best for the short term and with a credit card maybe even not at all like paying that off completely when you have 1012 percent interest rates and you have revolving credit, not a great long term habit to get in. So paying off the short term debts is really important. But how you pay them off, either with your own cash I’m going to talk about here in a second, or by refinancing it. A lot of real estate investors use those short term tools but then they go back and especially if the properties have gone up in value a little bit, try to go and get a long term mortgage on those properties themselves.
[06:47]
That is a good situation especially if you’re still in the growth mode where you’re okay having some debt but you want to have that cash back, the short term kind of revolving credit, credit card type stuff back so you can do it again. So that might be an option for Al. I’m thinking though with these kind of rural lower priced properties may or may not be as easy to get mortgages on those if they’re lower price. A lot of banks don’t like making loans, smaller loans on properties. You might be able to get a commercial mortgage and look at that but even that might not be that much better in his case.
[07:17]
In his case I would probably lean towards option B which is doing something like a debt snowball. He has $70 to $80,000 in total debt and by just attacking it with this process where whatever extra income he can make trying to do that side hustle, maybe he has a part time job, maybe he’s flipping houses a little bit, whatever he can do maximize his income especially for the short run, even if he’s going to take a break later on, minimize his expenses. So whatever you can do to save money for a short period of time, maybe six months, maybe a couple of years, that is worth it if you can get a lot of this debt attacked and paid off. So increase your income as much as you’re able and willing cut your expenses and then the process is lay out all of the debts you have from the smallest debt to the largest debt. So if you have $100 credit card bill that be at the top of the list.
[08:05]
If you had a $50,000 personal loan or home equity line of credit that be at the bottom of the list and a debt snowball just means you start taking all of the extra income you have and you pay it down on one debt at a time. So you don’t split it up and pay off a little bit at a time on all those you take all of it. So if you have an extra $1,000 per month you attack just the smallest ones first. What that does there’s some benefits, there some psychological benefits is that you feel the progress. Hey, I’m making progress here.
[08:32]
I paid off two debts in the last two months. That’s great. That keeps you excited about it and don’t underestimate the power of that positive psychology of being able to keep forward moving. A lot of people with a spreadsheet nerds and they focus just on the math but that is a really big deal. Success is very much in your head getting these things done.
[08:49]
The second benefit though is very practical as you increase your cash flow every time you pay a debt off. You’ve now freed up that payment that was going to the credit card company or the debt. And now you can use that to add to your snowball, this building to pay off the second one, the third one, the fourth one. So that’s just a summary of the debt snowball. That’s the approach I would take, al, just be committed, take this debt and just be committed to paying it off as quickly as I can.
[09:14]
With a $70,000 debt, you’ll be amazed how quickly that thing can go away. And when you’re done with that now, like I said earlier, you have this foundation, you get cash flow from these properties, you’re farm free and clear. You’re not at risk of losing those things. And now, if you have your pension, if you have this income from the real estate, you’ve now kind of got a double source of income that you can then build upon it. If you want to go grow more and build more wealth and buy more properties, you still can.
[09:39]
But you have the kind of peace of mind knowing that this is taken care of. Hope you enjoyed this edition of the Ask Coach Podcast. If you like to have your question featured in a future episode, just send an email to [email protected]. Or you can also leave a comment on the YouTube video if you’re watching it there, and just let me know. This is a question for a future episode.
[09:58]
We get more questions than we have the ability to publish, but to increase your chances, please number one, keep your question as clear and as short as possible. And then number two, keep it relevant on the topics of real estate investing and personal finance. If you like the show, I’d like to invite you to subscribe to my free email newsletter at coachcarson.com/REItoolkit. In addition to weekly updates, articles and behind the scenes tips from me, my email newsletter subscribers get my real estate investing toolkit, which includes a property closing checklist that I actually use when I buy properties, a real estate deal worksheet, a tenant screening criteria checklist, and other spreadsheets and goodies that will help you on your journey to financial independence using real estate.
[10:38]
You can get it all for free at coachcarson.com/REItoolkit. I also want to take this time to thank the people behind the scenes who make this podcast possible each and every week. This includes my podcast editor extraordinaire, Michael Nguyen, my amazing virtual assistant, Megan Thompson, my wife Kari, who helps me behind the scenes and is my partner here at Coach Carson. And of course, thank you to all of you, the listeners of the show who make everything possible. This show exists for you.
[11:02]
It exists because of you. And I really appreciate you being here for another episode. Everything I’ve shared with you in this episode has been for general education purposes, I have not considered your specific situation or risk. Before buying your own investments, be sure to consult a financial, real estate and or a legal professional. Until next time, I’m Chad Carson.
[11:19]
You can also call me coach. And this is a show are all about helping you get out of the financial grind so you can do more of what matters. See you next time.
Links & Resources
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My video on How to Pay Off Your Rental Property Mortgage Early – The Rental Debt Snowball https://youtu.be/_hUIoK6Pz7I
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