Pay Off Student Loan OR Save For Down Payment On Rental Property

[Frugal Face]

Hey everyone,

I'm brand spankin' new here so forgive me if everyone has heard this all before. I'm trying to make a decision about what I know is a somewhat common debate - paying off debt or investing/real estate investing. I know paying off loans, especially high interest ones, is typically the first thing anyone should do before investing but I'd like a little feedback on my particular situation. I have a $240K mortgage ($1,500/month), $8,500 (5.75% interest rate) in student loans, and $4K (just transferred balance to a new card - 0% interest for 15 months) in credit card debt (I make 55K a year and the wife is a stay-at-home mommy). I have decided to sell one of our two cars (both are paid off), along with some other junk I don't need and when I'm done, I should have about $9K to work with. I know I should probably just put that all towards paying off debt but I'd also like to get started on saving up for a down payment on a rental home. With my current salary and bills, I know I can't save much very quickly, which is why I'm thinking maybe a portion of the $9K should go towards saving up for a down payment and not all towards paying off the debt.

Thoughts?

[snuggler]

Pay off debt first. That is a guaranteed return, while return on investment property is much more speculative and by no means guaranteed.

[MrsPfennig]

I'll second paying off the debt. You are so close to being debt free. You can see the light at the end of the tunnel.

[nereo]

Your 0% credit card offer is only for the next 15 months - what does it jump to after that?  9.9%?  14%?  more?  There's also often fine-print where you pay interest from the time of transfer of the remaining balance after the initial 15mo, so make sure you understand whether that applies to you.

I'm generally in favor of investing over paying down low-interest debt, bit in your case I'd definitely pay down your student loans and cc first - 5.75% isn't "low" by any stretch.  Pay them down and free up your cash-flow.  With $9k coming from selling your car you could have those debts eliminated within the year.

Also - you made no mention of utilizing your tax-advantaged accounts (IRAs, 401(k)s, etc.).  Make sure you are taking advantage of those before you start investing in taxable accounts - at the very least if you have a 401(k) you should be contributing enough to get any company match.

[PARedbeard]

I'd also pay off the debt. Since you're supporting a family on one income, I would crush the loans and alleviate any kind of issue that may come down the road if you get in an accident or get laid off surprisingly. Then, take any of the money you were paying on those each month and start socking it away for your downpayment.

I would second nereo's mention of the taxed-advantaged accounts. Depending on your plans, socking the money there might make more sense, especially if you won't be able to save enough for a downpayment within 2-3 years.

[frugaliknowit]

On top of the Sl's, you have a large mortgage for your income, in my opinion.  Your mortage is 4.3X income, your mortgage payment is about 32% of your gross income with your wife not working (red flag).

No investment property with a mortgage, in my opinion, until your wife works or you have a smaller mortgage amount.  Pay off the SL's.

[Easye418]

On top of the Sl's, you have a large mortgage for your income, in my opinion.  Your mortage is 4.3X income, your mortgage payment is about 32% of your gross income with your wife not working (red flag).

No investment property with a mortgage, in my opinion, until your wife works or you have a smaller mortgage amount.  Pay off the SL's.

Bingo.  I thought my mortgage to income multiple was bad.....2.8X.... multiple is dropping to 2.3X soon.

[Frugal Face]

Thanks for the feedback everybody. You're absolutely right on the mortgage being too high for my income...unfortunately, I just got into my house only 6 months ago when I had my priorities mixed up and didn't know the way of the mustache. I'd love to go back in time but alas....now that I'm in this house, is there a time I should wait before I look at selling? (assuming I can talk the boss lady into leaving :) I assume it just depends on the market and what I want to get out of it?

After the 15 months of 0% interest on my credit card ends, it goes to a variable rate, which a rep told me is currently at 12.99%. The interest does compound on the transfer amount after the intro period so one of our main goals is to make sure the card is paid off by the end of the 15 months, if not sooner.

By the way, my wife has a 401K that she contributed to when she was working a few years ago but my current employer doesn't offer one....boo. Does anyone know how 401Ks work after you've left the job you had it at? Could she or I pick up on contributing to it at some point? Also, when I am able to start saving up for a down payment on an investment rental, I wouldn't want to put that in a 401k because I would be penalized for taking anything out, or I wouldn't be eligible to take anything out at all, right?