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6 Tips to Get Out of Debt by Investing in Real Estate

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Have you considered buying real estate to get out of debt? If you have a decent credit score despite being in debt, consider taking out a loan buy a property. Owning a rental property is a good way to generate long-term income that can be used to pay off your debts, especially if the rent you collect exceeds the cost of your mortgage.

Not sure where to start? These tips can help.

  1. Look for an investment partner first

Even though you can take out a loan for the down payment, look for an investment partner first. You might be able to partner with someone who has money for the down payment, but isn’t interested in managing a rental property.

Before moving into a partnership, make sure the property will generate enough rent to cover the mortgage and put some profit in your pocket after you’ve paid the investor. If the math doesn’t work out that way, find a property that works or just take out a loan.

  1. Buy a property in a good neighborhood

The definition of a “good neighborhood” is subjective, however, what makes a neighborhood good for an investor is a low crime rate and the ability to charge a decent amount of rent.

For each property you’re interested in, find out how much rent you can realistically charge. Calculate your monthly mortgage for each property and compare that to the rent you can collect. Pursue properties that will generate more in rent than you’ll need to pay for your mortgage. The idea is to generate cash flow from the rent and use that to pay down your debt.

You’ll find great deals in bad neighborhoods, but they’re not worth your time if they need significant work. Your goal is to find a property that will bring in extra cash as soon as you rent it out – not after you’ve spent thousands of dollars on repairs.

  1. Don’t include utilities in the rent

Once you’ve got a property to rent out, don’t include utilities in the rent. This is easier to do in better neighborhoods where people have higher incomes.

While you can increase the rent when you include utilities, there’s no guarantee the extra will cover all utilities. This is especially true for electricity. Some tenants won’t monitor their electricity use (or make the effort to conserve electricity) simply because they aren’t footing the bill.

  1. Commit to using 100% of your rental income to pay down debt

When you reach that glorious day when all your debts have been paid off, you’ll still have an income-generating asset and more of your paycheck will be freed up. To reach that day faster, pay down as much of your debt as possible from day one.

A real estate investment can generate a few hundred bucks each month to help you pay down your debt faster. Don’t cheat yourself by spending even a dime of that money unless it’s a necessary repair or cost for the property.

Don’t use 80% of your rental income to pay your debts and spend the last 20% on pizza, beer, and entertainment. Commit to throwing the full amount of extra income toward your debt. Pay it off faster, avoid extra interest, and get debt-free faster.

  1. Apply for a home equity loan

If you already own a property with equity, you might qualify for a home equity loan, also called a second mortgage. A home equity loan allows you to use equity as collateral to secure a fixed-rate loan. You can use this money to pay off your debts.

  1. Apply for cash-out refinancing

This option will only work for existing homeowners who have sufficient equity. The way this works is you take out a bigger mortgage that pays off your existing mortgage, and you’re left with extra cash at closing. The extra cash can be used to pay off your debts.

Since this option creates more debt through a new mortgage, it’s best used by people with significantly high debt. It’s not worth doing when you’re only a few thousand dollars in debt.

Don’t let debt stop you from investing in real estate

Some people say you should pay your debt off before investing in real estate while others disagree. The truth is, taking out a mortgage is a form of debt, but real estate assets bring in more money long-term than the debt it takes to buy the property. It takes time, but eventually a rental property should produce truly passive income.

Managing an investment property while in debt isn’t hard, it just takes careful planning and prioritizing.

Photo: Got credit, via Flickr.


Ashley’s October 2016 Debt Update

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I hope you’re all having a good week! Our kids are out of school Wed – Fri this week so my mom flew out to help with childcare (since hubs and I both have to work still), so it’s been a lot of fun to visit together and it’s always great when Mom visits! For instance, my freezer is now full of homemade freezer meals that we can quickly and easily heat up on our busy weeknights!

I’m not even going to lie – this semester has been kicking my butt a little. I’m sure you can tell based off the more sporadic posting schedule as of late. Mid-semester there was a faculty member who, due to persona reasons, had to stop teaching a class. In week 8 of 16. Guess who got to pick up the class? This girl! I’m happy to help out and it will work out in the end (my department head is giving me a course release in exchange) but I’m definitely feeling the burden of the extra work at an already extremely busy time!

BUT –

we’re already on the downhill slope toward the end of the semester. Just a few weeks to go and I’ll be home-free! And it’s going to be such a fun winter break! We’ve made reservations for our family to travel up to the Flagstaff area and do the North Pole Experience. I’ve wanted to do it the past couple years and have kept ourselves form doing it due to budgetary constraints. This year I knew I wanted to make it a priority so I’ve been putting little bits of money aside each month to help offset some of the costs (much like I did when I saved a couple hundred bucks each month for an entire year in order to pay for cruise 2016 entirely with cash). This experience obviously wasn’t as expensive as the cruise, so I’ve just been setting aside $50 for the past couple months. I was able to pay for our tickets out of my pocket of cash and we still have a little leftover (that I’ll continue to add to this month and next) to cover the cost of a hotel and food or souvenirs on the trip. CAN NOT WAIT!!!

But that’s neither here nor there. Feast your eyes on the main reason for this post:  my October debt update!!!

PlaceCurrent BalanceAPRLast Payment MadeLast Payment Date Original debt, March 2014
Navient$70,4266.55%$1975October$82433
Balance Transfer Student Loan #2$46000% (through April 2017)$750October$7650
Medical Bills$56860%$25October$9000
Balance Transfer student loan #1$00% -Paid off in March 2016$5937
PenFed Car Loan$02.49%-Paid off in January 2016$24040
License Fees$02.5%-Paid off in April 2015$5808
BoA CC$07.24%-Paid off in June 2014$2220
Mattress Firm$00%-Paid off in May 2014$1381
Wells Fargo CC$013.65%-Paid off in May 2014$7697
Capital One CC$017.9%-Paid off in March 2014$413
Totals$80,712 (Sept balance = 83,173)$2750Starting Debt = $145,472

I’m not going to lie, I’m pretty bummed that we ended up SO.CLOSE to the 70’000s for our total debt owed. Just another $700 and we would’ve tipped over! But we’ll definitely be there by the end of this month.

The other important thing to note is that ACS is now off the debt spreadsheet table. ACS sold my last remaining loan with them (I used to have 2) to Navient. That means Navient now services 100% of my student loans. Blah! Speaking of, I still haven’t resolved my most recent Navient issue. They DID straighten out the auto-drafting issue and have updated to the correct payment (they had been grossly over-charging me). BUT, they still haven’t re-allocated the extra payments toward the loans I would have selected. So another phone call is warranted, but has not yet happened. It’s on my “TO DO” list for Friday (fingers crossed that resolves it).

Otherwise, things are moving right along. Still on schedule to close on our house very soon. I’m still holding my breath and crossing my fingers that it all goes through (after already being delayed twice). This weekend is also my husband’s and my 6th wedding anniversary! It’s going to be a bit of an anticlimactic one. My Mom leaves town on Friday so we had a VERY low-key date night on Wednesday night. We wore jeans and went to happy hour sushi. Nothing fancy or special, but it’s always nice just to have time out alone together (since typically we’ve got the girls anytime we go anywhere). Last year I mentioned how – when we first got married – I had hoped we would be able to spend our 5-year anniversary in Hawaii. Instead we made a major debt payment and just went out to dinner. Nothing crazy. I don’t regret our choice in prioritizing debt payoff in the least. I think it’s the best thing for our family. And it’s easier to maintain determination and stamina now that we’re adding in a bit more balance to our lives (e.g., like planning this Christmas trip to Flagstaff and going on more regular date nights, etc.). It’s all about trade-offs between debt payment and “life” happenings and I’m happy with our balance right now. At the same time, I look forward to the day when we can travel more freely without worrying about cost or the trade-off between paying off debt and making memories together. I’ve never been to Hawaii before and have always wanted to go. A second-honeymoon seems like the perfect reason. It’s not in the cards this year (though we’re still doing fun, albeit cheaper, family activities). But a second honeymoon WILL happen someday. It’s just one more of our “rewards” we’ll be able to indulge in after cleaning up this debt mess!  Every month – just a little bit closer to our debt-free goal!

How is your debt repayment going? Have you paid off any debts recently?


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