This is a guest post by Patricia Sanders.
Is it possible for someone to invest in real estate while being in debt? The simple answer would be yes. But the point is…should you opt for this option just because you can? Is there any logic behind it?
It will be too complicated to decide whether or not to invest in real estate while having debts. Many individuals would support debt payments as a primary goal of their life and consider it as a perfect financial decision as it may improve your credit score. On the other hand, many of us would prioritize investment over debts and call it a wise choice.
The actual decision you make should be based on your circumstances.
If you look closely at the market, you’ll find many real estate investors who are paying off their debts with lots of struggle. They are even facing difficulties getting back into the normal life flow. But still, they are continuously investing in the real estate market. Why? Is there any logical reason?
The logical reason
In recent trends, there are concepts of “good” debt and “bad” debt. Good debt is considered when you are taking out debt for buying an asset such as a house or business that is appreciating.
But other debts such as credit card bills, student loans, or payday loans won’t appreciate and will probably increase the debt amount further (through interest and fees, etc).
Such debts may be called “bad” debt. Such debts should be avoided while investing in real estate, or you may say…if you have “bad” debts on your shoulders, don’t go for investing in real estate.
So, by investing your money in real estate instead of paying off your existing debts can make you thousands of dollars ahead compared to the people who engage their money to get out of old debts. Choosing the safer option is good, but you must also admit a fact, that is…No pain…No gain!
For example, if you take out a loan and buy a rental property, you’ll get an asset, more security and give you more options to income if somehow you lose other sources of income.
If you own an investment property, you may use it to pay off your existing unsecured debts. You may use the equity in your property and get enough money to pay off your debts. You may choose to refinance your existing mortgage, cash-out refinancing, or take out a home equity loan.
Why is it beneficial to invest in real estate?
As per Investopedia – “Based on July 2018 data from the National Council of Real Estate Investment Fiduciaries (NCREIF), private market commercial real estate returned an average of 9.85% over the past five years.”
There are some great reasons why real estate investment is best!
- Real estate has a high tangible asset value.
- Real estate values will almost always increase, it just takes some time.
- Real estate always gives you better returns compared to stocks, bonds, and other investments, without as much volatility.
- Real estate investment can also diversify your portfolio as an investor.
- Real estate investing gives you multiple tax benefits.
Factors you should consider
1) Your risk tolerance – Risk tolerance may vary from person to person. No fixed-parameter will indicate our emotions while managing finances. So, we must focus on our inner voice and clarify – “Am I comfortable to take out on more debt? Or do I need to search for a company that will provide debt help solutions?
If you are comfortable with your current debt burden, you can shift forward to the next level.
2) How much you are paying as down – As a rule of thumb, the higher your down payment will be, the better mortgage loan conditions you will receive from the lender while financing the loan.
3) Do you have enough funds to avoid PMI – You might need a decent amount of funds ready to put down 20% of the total value of the property as down payment while buying your primary residence or investment property. It will help you to avoid PMI (private mortgage insurance) and own 20% equity in your home.
This means you’ll require enough cash to put 20% down on your home. You might have to use your savings, sell assets like cars or other collectibles, take out a personal loan, borrow against your 401(k) plan, etc to arrange that money. You might have to use that money for closing costs and other expenses as a homeowner.
4. Your emergency fund – After buying the property, you may need to bear all of the necessary repairs and maintenance costs from your own pocket. Although you probably set up a small fund to pay for remodeling and most repair works, you may still face any unexpected expenses related to your homes such as a plumbing repair or sewage repair, or change in air conditioning set up.
By creating a good emergency fund you may keep up with these costs and reduce stress caused by such sudden money requirements.
Which debt to ignore and which one to choose?
a. High-interest debt
It’s a fact that with a higher interest rate, you may lose more money in the long run. So, if you carry high-interest debts such as credit cards, payday loans, or any other type of high-interest debt, then you should postpone investing in real estate for the time being.
Paying off your debts should be your number one priority before you think of any kind of big investment. You may choose any debt repayment method as per your convenience, debt snowball or debt avalanche.
b. Low-interest debt
Low-interest debt such as a car loan or a personal loan can be avoided while investing in real estate.
But still, with this kind of loan, real estate investors might experience a bit of difficulty while investing in real estate. However, the issue is much lighter than with high-interest debt.
c. Tax-deductible debt
Normally, investors consider this type of debt as a “good debt”. This type of debt includes mortgages, business loans, investment loans, and all the other loans in which interest paid is tax-deductible and eventually returned to you.
This type of debt belongs to the low-interest category. As a result, real estate investors may easily plan on investing in real estate and pay off their debts without worrying much.
Getting out of debt soon and easily is every person’s dream. But, even if you are in debt, it shouldn’t prevent you from making money through investing.
You must find a way to adjust your priorities and keep saving. Once you are ready to invest in a real estate property, go for it.
Author Bio- Patricia Sanders is a financial content writer. She is a regular contributor to debtconsolidationcare.com . She has been praised for her effective financial tips that can be followed easily. Her passion for helping people who are stuck in financial problems has earned her recognition and honor in the industry. Besides writing, she loves to travel and read various books. To get in touch with her (or if you have any questions regarding this article) email her at [email protected].
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