About This Episode
Episode #238 – If you had a big chunk of cash, would you be better off paying off your debt to play defense or reinvesting for more growth? Coach Carson shares his opinion on this decision in this episode of Ask Coach.
Episode Transcript
[00:00]
James in Arizona has done very well financially. He’s got 18 rental units, ten houses and four Duplexes, and he makes over $1 million per year as a real estate agent. On his rental properties, he owes about $1 million in debt, but he also has $2 million dollars set aside in cash that could easily pay those debts off. So James is at a crossroads. He’s not as passionate about being a real estate agent anymore.
[00:24]
And he has a family. He has a wife and two young kids who he’d like to spend more time with. So he’s tempted to just play defense and play it safe, use some of his cash to pay off the rest of his debt, and then work less and live off his investment income. But he’s also torn because he wants to save that cash for a potential market correction where he can use that cash to buy some really good deals. And he’s also not so sure that paying off three and a half percent to 4% mortgage debt is the smartest move.
[00:50]
I’m going to give my thoughts in this edition of Asked Coach, and we’re getting started right now.
[01:03]
Welcome to the Ask Coach edition of the podcast. We haven’t met yet. 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. And in the Asked Coach series, I do my best to answer your burning questions about real estate investing and personal finance.
[01:19]
Today’s question came in by email from James Mishner. I want to thank James for letting me share the details of his situation with you. I’ve actually had some back and forth emails with James, but I want to read part of his original email to me, and so I shared some of the details of his properties and how much he owes on those properties, but he also says the total cash flow would be $260,000 if I paid those properties off. I’m 34 and I have two beautiful kids and an amazing wife, and I’ve been thinking of playing it safe and paying these properties off to save time for my family to have peace of mind and just playing defense and working less. I hesitate though, because when the market corrects, I want to be able to take a full advantage of it.
[01:59]
And my rates on these debts are between three and five point 25%. What’s your advice? Answering this question is very nuanced and very personal, and in a way, there’s no way to give you an exact this is what everyone should do type answer because it’s going to be so unique to what your situation is. But I chose to answer this question because I feel like it’s very real. I have also been in a similar situation in the last four or five years of deciding, Is this enough?
[02:25]
What should I do? Should I plow back money should I keep growing and keep investing? And so it’s something I’ve dealt with, and I want to share some of my thoughts. And my thoughts kind of fall into two different categories, James. One is on a personal front, in your own mind, in your own career, and your own journey as an entrepreneur, as a professional, as a father and life.
[02:46]
The other is more practical, just about the actual numbers and the money and where to invest it. I’m going to start with the first part of it, and I just want to say that you have done really well. So if you just need to hear from an external source, you’ve pretty much made it. He didn’t say it in the initial question, but his total net worth is about $6 million. And even having debt on that portfolio, if you have a million dollars in debt, this long term debt not very risky.
[03:11]
It’s covered very well by your income. You have a $6 million net worth that includes real estate, includes a lot of cash, includes some stocks as well. It’s diversified pretty well. That is a really good place to be in. And part of what I got just kind of behind the scenes between the lines of your question, James, is that you’re leaning towards just needing a break, just taking a break, slowing down.
[03:33]
But I also relate to the fact that there’s this kind of being torn when you’re a professional like you are. You’re an entrepreneur, you’ve hustled for so many years, you’ve made over a million dollars per year. You’ve saved a lot of money. You’ve done all this. You get in a mindset and a habit that you want to keep hustling a little bit.
[03:47]
There’s a part of you that doesn’t want to let go of that, and I totally relate to it. And so one of my recommendations to you is not to make any big, huge decisions right off the bat. So you have that cash set aside, you have your investments there. You have long term debt. One of the cool things that’s been great for me is taking what I call many retirements and just taking a break for a period of time and give yourself some space to think about your life and what you want to do professionally.
[04:13]
So being a real estate agent, you’re hustling, hustling, hustling, doing lots of showings. I would definitely consider just plowing back on the time I spent on that. And if you’re a salesperson and you’re good at that business, you can always ramp it back up. And I know there’s some momentum and things you got going, but where you are financially and you’re in a good spot, giving yourself permission to for three months, six months, maybe a year. I’m taking a year in Spain right now, and I’ve done this in the past as well.
[04:38]
Going to Ecuador, just pressing pause on life, seeing what happens. You don’t necessarily need to travel, but you could just stay here locally and maybe you have to kind of dial back and go part time a little bit. But if you could find a way to build in a huge break in your life, I think a lot of the other financial questions and career questions are going to make themselves a lot clearer. And you have the financial ability to do that. You’ve got a big runway with your cash.
[05:01]
You’ve got income already coming up in real estate investments. So financially you can do it. So that’s the personal part. I think you would really benefit from that. And maybe out of that you have time to think about what’s next.
[05:10]
Because even when you make it financially and you pay things off, one of the big reservations a lot of people have is like, hey, I’m a go getter. What am I going to do with my life? I can’t just sit around and do nothing. Even though I love being with my family, even though I love just having space, me personally, I had to have something that I can contribute to make an impact on, even if it didn’t make money. And so for me, for example, starting a non profit locally and finding some causes that didn’t make money, but they were really important.
[05:35]
And only somebody who’s a little bit more financially independent could spend a bunch of time on these things. I’m doing a lot of trying to build biking and walking trails network around my town, alternative transportation, exercise, getting outdoors and nature. Those things are really important to me. And nobody really can make this happen because everybody’s busy working. And so I’ve been kind of a catalyst.
[05:55]
Having my time to do that. Also, writing and sharing and teaching has been a big outlet for me, and it’s become a business as well. So maybe during that time you’ll find some other things. You mentioned, maybe hard money lending. You mentioned there might be other things.
[06:08]
It might be a different role within the real estate business where you have more hours that you can just mentor people and help other people out. Who knows what it’s going to be? But give me yourself space. That’s part one. Part two.
[06:19]
Let’s talk about the money and the finances. If you get to the end of the road, end of that year, six months or whatever, you can then make decisions. You’ll have that cash in the bank. You can think about it. I could see any kind of different Forks in the road.
[06:32]
But what if you took the $2 million and having 10% to 15% of your net worth set aside in cash for opportunities, it’s not a bad thing to do. So if you have $600,000 to a million Bucks that you just leave in a fund and you can use that for opportunities. If you do have a correction in the market or even if you don’t, that’ll be your opportunity money that you could play around with and just have set aside as a huge runway that you could use the other million dollars, whether you pay off your existing debt and just have that be done. That’s tempting to do that. Or could you just use that maybe for hard money lending or to buy new properties and buy those properties free and clear if you want to expand a little bit more, that’s sort of the Avenue that we took in our own business.
[07:12]
Instead of us paying off everything, we were pretty comfortable that we had a low risk portfolio with our current debt. We paid off a lot of debt, all our high risk debt that we used, any extra capital we had to buy new properties or to loan money to other people and hard money. So that’s probably a higher return activity with not that much more effort. And you could do one of the two of those or maybe diversify into other investments as well. What you do, having a big split of that cash, not going all in on one or the other, not paying everything off or not just sitting on the cash is a nice approach, I think so those are just a couple of thoughts.
[07:47]
Practically speaking, you’re not going to make even depending on what path you take, you are probably going to be in good shape either way. You’ve got good properties, you’ve got long term financial habits that are really good. You’ve got opportunities to contribute and make money as a real estate agent, you have skill sets, so you’re in good shape. I think the most important priority is giving yourself space, time to breathe, time to relax a little bit. What an opportunity to do that.
[08:13]
But sometimes you have to give yourself permission and you got to build that into your life and practically take that step. I hope you enjoyed this edition of the Ask Coach podcast. If you’d like to have your question featured in a future episode, just send an email to [email protected], we get more questions and we have the ability to publish. But increase your chances. Please.
[08:30]
Number one, keep your question as clear and as short as possible. And number two, keep it relevant to the topics of real estate investing, personal finance, and also talk a little bit about personal development and growth on the show as well. If you like the show, I’d like to invite you to subscribe to my free email [email protected]/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. You can get it all for [email protected]/REIToolkit.
[09:14]
I also want to take this time to thank some 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 Thomson, 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. 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.
[09:40]
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. You can also call me Coach and this is a show 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 the Rental Debt Snowball: https://youtu.be/_hUIoK6Pz7I
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