• Should You Pay Off Debt or Invest in Real Estate?

    With the real estate market offering up favorable conditions over the past few years, you may be thinking that now is the time to invest in real estate to make those passive income dreams come true. But perhaps you have some outstanding debt and wonder if you would be better off tackling your own mortgage or student loans before going down the path of real estate ownership.

    So, should you focus on paying off debt before investing in real estate?

    You should first consider the type of debt you have.

    Whether you should take on a new debt burden or make a real estate investment will depend largely on your existing debt. Is your existing debt of a low fixed rate based on a sensible purchase such as a home mortgage, car loan or student loan? Or is the bulk of your debt on high-interest credit cards or personal loans?

    Take a hard look at all your debt and the interest rates you are paying over time. You should pay special attention to any debt over 4% interest. Work on paying off high-interest credit cards or loans, and analyze the rest of your debt against your potential investment.

    Do the math.

    Now that you’ve determined what kind of interest you’re paying on your current debt you need to ask yourself what kind of returns you will gain from your new real estate investment. The goal here is to always remain in the positive, so if you add up the gains on your investment versus the losses on your interest payments – will you come out on top?

    For example, let’s say your high credit card payments result in a loss of $500 per month in interest payment losses; however, your new real estate investment is returning $800 a month profit for you. Ultimately, you’re coming out on top and the investment will allow you to contribute an extra $300 per month toward paying off your debt. It’s a win-win and will continue to be more so as you pay down your debt.

    Consider your mindset.

    It’s easy to approach the decision to make a real estate investment solely on the numbers, but you should also consider your mindset when going into the endeavor.

    Are you disciplined enough to carefully monitor the return on your investments versus your debt? Are you able to continue paying down your debt in addition to making your investment or deep down do you know you’ll accumulate more debt through property renovations or hiring expensive property management companies?

    It’s easy to quickly get in over your head or to overestimate the return on your real estate investment. You always need to consider the expenses, both expected and unexpected, that go along with overseeing a real estate investment.

    All things considered, you shouldn’t let something like a little debt get in the way of your real estate investment ownership dreams so long as your debt is manageable; however, if your real estate investment results in an overall financial loss for you, it isn’t much of an investment at all. You’d be better off paying down the debt and investing later.