The Personal Finance Podcast - Should You Pay Off Debt or Invest First? The Answer Might Surprise You (Money Q&A)

Starting point is 00:00:00 On this episode of the personal finance podcast, should you pay off debt or invest first, the answer may surprise you on this money Q&A. Welcome to the personal finance podcast. I'm your host, Andrew, founder of mastermoney.com. And today on the personal finance podcast, we're going to be diving into your questions on this money Q&A. If you have any questions, make sure you join the Mastermoney newsletter by going to mastermoney.com slash newsletter. and don't forget to follow us on Spotify, Apple Podcast,

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Starting point is 00:01:08 if you like watching podcasts on YouTube. Now, today we're going to be diving into five of your questions on this episode of Money Q&A. So the first question is, should I build my emergency fund at $20,000 first or start paying down my mortgage and invest at the same time? Number two is, is my bonus payoff plan the best option? Or should I prioritize my 12% personal loan or Roth IRA contributions instead? Three is, should I use my $8,000 tax refund to max up my Roth IRA this year or finish building my three-month emergency fund first? four is what are the best books and resources for someone looking to get started in real estate

Starting point is 00:01:46 investing, especially in rental properties? I have a bunch of books that we're going to be going through on that one. And then five, should I sell my current home and use the equity for a down payment and student loans or keep it as a rental? And how does the FHA assumable loan factor in? So these are going to be five of the questions that we are diving into today on this episode. Really action-packed. Tons of stuff to get into on this once without further ado, let's get into it. All right, so question number one is from John. So, hello, I have been a listener for the past few years and wanted to thank you for the

Starting point is 00:02:20 great work you are doing. Well, thank you so much, John. I am 33 years old and I am rather new in my fire journey. My wife and I have begun down the path of financial independence. However, we are now getting a divorce and I am keeping the house we own and will have to refinance in order to buy her out and give her equity. My question lies in the next steps for my financial plan. After all is setting done, I will have a mortgage.

Starting point is 00:02:41 of around $220,000 and an emergency fund hovering around $5,000. I have no other debt aside for my mortgage. Well, that's fantastic. And I plan to boost my emergency fund closer to $20,000. And then I am unsure which step to make that would make the most sense. I would like to pay my mortgage down rapidly to save on interest, but I also want to open my brokerage account to begin investing for early retirement. I am not sure if it makes sense to do these simultaneously or fixate on one before the other.

Starting point is 00:03:08 The good news is I have a roommate lined up to rent a room, my home, which should cover about 50% of the mortgage and utilities. So my ability to save and invest will go up quite a bit. Any advice you could give on the next steps once my emergency fund is funded would be greatly appreciated. So this is a really, really good question, John. And I think for most people, they are wondering what is next. Now, I'm sorry about the divorce. I'm sorry you have to go through that process. But this is something where you can take some really good steps because your income is going to be increasing overall based on you bring it in a roommate. So a couple of things to talk about first is we talk about this in the 136 method episode. But for those of you who are new who have not

Starting point is 00:03:46 heard about the 136 method, what we want you to do is first pay off that high interest debt. So first we want you to get a one month emergency fund set up, which sounds like John most likely has with that $5,000 in his emergency fund currently. Then we want you to pay off any high interest debt. Well, John doesn't have any high interest debt here. All he has is his mortgage there. And I'm not sure what the interest rate on that is, but we're talking about any high interest debt outside of your mortgage. Okay. So everything else is going to fall into play when it comes to this. Then after that, when we get that high interest debt, anything about that 6% interest rate, that is paid off. Now what we're going to do is work on building towards that three month

Starting point is 00:04:20 emergency fund. And so the three month emergency fund is the next big step. So getting at least three months of expenses in your emergency fund is great. Once that is done, so you get three months in place, let's say you spend $5,000 a month. I'm just going to do this for easy math. So you already have $5,000 in your emergency fund. If you need another $10,000 to get to three months, then you save that $10,000. Then we start to split off. And I tell people, once you get to a three-month emergency fund, our ultimate goal is to get to a six-month emergency fund. That is the minimum here at Master Money and the Personal Finance podcast that we recommend is a six-month emergency fund. Three months is not enough for anybody out there, especially if you go out and lose your job.

Starting point is 00:04:59 So we believe in having a six-month emergency fund, but you can build it up over time. And we don't want you to miss out on those great years of compound interest. So once you get to that three-month emergency fund, now it's time to start investing as well. And so we can prioritize investing by first breaking it off 50-50. I tell most people to start at 50-50, and then you can start to adjust to this based on your progress. So let's say, for example, you have $15,000, which is three months of expenses in your emergency fund, and now you want to split off some of that money in order to be able to invest. Let's say you have $2,000 extra per month, and you're going to split it off $1,000 is going to the emergency fund.

Starting point is 00:05:35 $1,000 is going towards your investments every single month, okay? So you're going to start to do that. And if you say to yourself, I'm making some pretty good progress in my emergency fund. I'm pretty secure in my job right now. I'm actually going to make it 60-40. So 60% investments, 40% going towards your emergency fund. There's nothing wrong with that whatsoever. You can kind of feel out the system.

Starting point is 00:05:54 But we tell most people to start with 50-50 and stick to 50-50 if you don't know what to do next. And so really, overall, once you start investing, then we want you to do a couple of different things. And we talk about this in the wealth builder's journey inside of Master Money Academy as well. So if anybody's interested, we talk about that. in Master Money Academy. But some of the things that we talk about is just the order that you're supposed to be investing in. And so you look at first, getting your match, your employer match is number one.

Starting point is 00:06:18 Why? Because that is free money. And so making sure you take advantage of that free money is going to be really, really important. Number two is then getting closer to figuring out the order of where you should be investing. So I like the HSA and the Roth IRA, then going to the 401K and then going back to your taxable brokerage once you get those things maxed out or your 401K is any other pre-tax at that level. would be your 401k level as well. So it could be anything like a 457, a 403B, those types of things. And then once you cover all of those, if you are still having money left over, then you can do things like

Starting point is 00:06:49 wealth accelerators. So if you're interested in real estate or businesses, you can do that, or you can just add more money to your taxable brokerage account. The taxable brokerage account is the underrated account always when we are talking about these things because it has so much flexibility that I am okay with you, especially on your financial independence journey. If you think you're going to retire really early, I'm okay with you stuffing even more in that taxful brokerage account than you would in some of these retirement accounts if you were not worried about the tax breaks in a specific given year. So that is something to also think through. But the big pros that you have going for you right now is you're going to have that room and in place.

Starting point is 00:07:22 That's going to allow you to increase the amount that you are saving every single month. That for sure, your savings rate is going to have a big impact on how soon you can retire. And then also just building that emergency fund simultaneously while you are working through and starting to get those dollars invested. We want to get those dollars invested as early as we possibly can. And so that is going to be a big, big deal. Now, one thing you noted, and we haven't covered yet, is that you talking about you wanting to pay down your mortgage. Now, it depends on the interest rate on your mortgage, because there are two things that you can do here. Typically, if you do the math, you are much better off investing your dollars than you are paying down your

Starting point is 00:07:57 mortgage because a house typically does not have the greatest return off. You have a seven or eight percent interest rate on your home, here's the way I would look at it personally is I would look at this and say to okay, I am going to see when rates are going to drop. And my goal is to then refinance this mortgage into a lower interest rate mortgage. And so that would be the first goal for me. Then goal number two is if you wanted to pay it off, you could take a portion of what you are investing once you have that emergency fund fully funded at six months. And you could take a portion of those dollars and you can start to put them towards your mortgage and make extra payments. But I would do something like 80% investments, 20% towards those additional mortgage payments. But that needs to be done after you have a

Starting point is 00:08:35 fully funded emergency fund and after you are on pace to really get your investments going because your investments for financial independence need to keep you on track with your retirement number. And if they are not doing that up front, then we need to make sure we are prioritizing our retirement before paying down the mortgage. Now, I know having a paid off mortgage is part of your plan most likely, but typically you are going to be much better off investing those dollars, depending on what that interest rate is, then you would be paying off the mortgage. But again, if you like having a paid off mortgage, if it makes you sleep better at night. I have friends like that like Andy Hill or Brennan Schlagbaum, a budget dog. They wanted to pay off their mortgage just

Starting point is 00:09:12 because they feel better having a paid off mortgage. And if that is you, then there's more power to you. There's nothing wrong with paying it off early. We just need to make sure that we are doing it in the right order. And so taking care of that investment order first and then using those extra dollars to pay off lower interest debt or mortgages is what we are going to do after. So that is going to be kind of the order that we talk about this. And again, in Master Money, Academy, we kind of go through this stuff too in the exact order with our 25-step system called the wealth builder's journey. So that is fantastic, really, really good question. And I know this kind of feels like a setback, but you are making the right moves and you have the right mentality

Starting point is 00:09:46 when it comes to building wealth here. And I think you're going to be in a really, really good situation. And luckily, on that mortgage, you don't have a ton left on it in comparison to, you know, some people we've seen out there, you have over a million dollars on their mortgage. So you are in a really good position with only having $220,000 left on that mortgage. And you're doing a great job looking to build up your emergency fund first before you do all this other stuff. So really, really great stuff here. I can't wait to see what some of your next steps are. And let us know as you get closer to financial independence. And if you have any other questions, because you are doing some really great stuff for your future here. All right. The second question is, I absolutely

Starting point is 00:10:24 love the podcast. And I am 23 years old, single and living in Columbus, Ohio. Later this year, beginning a bonus of about $13,000 pre-tax, which I am estimating to be around $6,500 after tax. I'm not sure where to put this money, given my debts and my desire to also save for retirement. And they give their details here. So annual salary is $77,000 per year, and their take-home pay is $2,100 every two weeks. They talk through their debts. So they have debts to their sister at $2,000, a personal loan at $6,000 with 12% interest, government student loans, all under 6% interest for about $30,000,

Starting point is 00:10:59 private student loans at $6.98 interest at $60,000 and a credit card at $2,000, which is likely going to be a high interest debt as well. And then current spending, they go through their current spending and what they are contributing to certain things. So this is a really, really good question. And I think what we need to do is first look at a few different things that are going to make sense here. Number one is that credit card debt is glaring to me.

Starting point is 00:11:24 most likely that credit card debt has the highest interest rate of all. Now, we don't have the interest rate details on it here, but most likely that is going to have the highest interest rate of everything else that we are looking at here. So we need to first wipe out that credit card debt with the first $2,000 that we have available here based on this bonus, which leaves us with $4,500 left. Because a credit card debt, for those of you listening out there right now, usually they're going to have anywhere from 15 to 30% interest rate. And that is a really high interest rate that is a pants on fire emergency, meaning you need to take advantage of that and get that paid off as fast as you possibly can. You cannot make that in the market. You cannot make that in your

Starting point is 00:12:02 Roth IRA at any given time. I mean, some years you may have some outliers, but on average, the S&P and 500 has returned 10% to investors over the course of the last 30 years. So you're going to get a much higher return by paying off that credit card debt than you would investing in something like the S&P 500 because we cannot guarantee, you know, year over year what those returns are going to be. And so it's typically 7 to 10% is what you can average on a normal investment portfolio. So number one is we want to attack that credit card first. So anybody listening, we always want to make sure high interest debt gets paid off before we start investing in some other areas.

Starting point is 00:12:36 It's really, really important because you're going to be much better off long term. Secondarily, is I am looking at, I don't know if you are owning any interest to your sister. If you're not, then that one can wait unless she's asking for the money. And then that's a different situation. We're going to need to make sure that we pay that off first. But if she's not and she's okay waiting a little longer, we can prioritize that a little bit later on. Now, one thing I would say about the credit card is make sure we never, ever go into credit card debt again. So our number one rule here is the only way we spend money on a credit card is if you already have the cash in your checking account.

Starting point is 00:13:08 And so that's going to be the big key is making sure you already have cash in your checking account before you spend a dime on the credit card. All the credit card is is a pass-through account that just spends money on your bill so you can get points in miles. But if that causes a problem and you feel like you just keep going back into credit card debt, Let's make sure we stop using credit cards and go back to debit cards for a while until we get our cash flow management under control. Now, secondarily, though, is that personal loan is glaring at 12% interest. And so the personal loan is going to be one. We want to definitely attack next at that 12% interest rate. And if your bonus is a little bigger than you thought it would be based on, you know, the tax situation, I know you're estimating 6,500, but let's make sure we get that personal loan paid off next.

Starting point is 00:13:47 So those are the two big things that you need to do up front is personal loan and credit card because those interest rates are going to be so high. Should we put money in the Roth IRA front? No, we should not. We should be taking care of these first before we start to invest those dollars. Now, I know you don't want to miss out on years of compound interest, but we need to make sure that we take care of some of that debt first. Now, the government student loans at under 6% interest, the private student loans that are at 6.9% interest, those that we are a little more okay with. The 6.9% interest rate is obviously above the high interest rate debt, so we need to prioritize that next after we start to get some money. moving here. But once we get that done, we can get the ball rolling and start to build up the rest of it.

Starting point is 00:14:26 So I see you're sending $250 per month to that emergency fund. That is great. And that is something that once that gets up to at least one to three months, then we can start to prioritize some of these other debts as we get this paid off. And then $250 is going towards that Roth IRA, which is also a very good thing. So right now, you are making some great progress. But here's the order of operations. Paying off the credit card one, paying off the personal loan, two, making sure we get the emergency fund up enough, making sure we get the emergency fund up to at least one month of expenses, and then we're focusing on some of these debts and then splitting it off from investment and the other side. So that's the way that I would look at this. Maxing out the Roth IRA could be something

Starting point is 00:15:02 you could do in the future. But right now with this bonus, you're going to be much better served by getting rid of that high interest debt first. You're going to get a much better return long term than you would for something else because that high interest debt is compounding against you instead of for you. So we need to make sure that we take care of that first. So those are the first two highest priorities. And then if you do have extra money left over, then you can go towards emergency fund or your Roth IRA, depending on where you are on the wealth builder's journey. And so those are going to be a couple of different other places that you could put those dollars. So really, whenever it comes to this kind of stuff, it's just making sure that we are always making

Starting point is 00:15:37 progress towards increasing our net worth. And you are doing that. You're thinking about this the right way, which I think is fantastic. And you have a great salary, especially in Columbus, Ohio. I know cost of living in Ohio is a little lower than maybe some areas of the country. And so what we can do is we can prioritize and make sure that we have some extra cash flow available to prioritize, especially the private student loans that are at that right on the line at 6.98% of high interest debt. So that's going to be one that we definitely want to prioritize next. So I hope this helps and a really, really good job and great way of thinking about this. Congratulations on your bonus. That is a fantastic bonus. And if you have any other questions,

Starting point is 00:16:13 please let me know. All right. The third question is love the podcast. I am 14. you won and at the beginning of stages of preparing for retirement, unfortunately. I was bought out out of my marital home last year and was able to pay off all my debt besides my new mortgage, max my Roth contribution for last year, and start my emergency fund. That is fantastic. Congratulations. That's amazing. I am currently about $3,000 shy of having three months emergency fund. And I am due to receive a bit over $8,000 in a tax refund from last year soon. My question is, do I put $7,000 in my Roth to max it out since this year's window will close in a few months and put the remaining 1,000 in my emergency fund? Or is it more important to hit that three month emergency fund,

Starting point is 00:16:53 which will take about $3,000 and put the other $5,000 plus in a Roth? If I do the latter, I will not be able to max my contribution this year as I am only able to save about $300 $300 per month at this point. Really, really good question. And honestly, I love that you are thinking about this. So when it comes to personal finance, typically we have these guidelines set up, but every single situation is personal. And so when we talk about this, I'm going to go through your situation on how I would look at this. And then you can decide based on, you know, what we're talking about and your research, what you think should actually happen here. And then you can decide based on what we're talking about here, what to do. So for most people out

Starting point is 00:17:26 there, if you're listening and you haven't heard our emergency fund, we want you to at least have three months in your emergency fund before you begin investing your dollars. And that's just so that people can kind of be disciplined and get closer to that number and get to that three month number. But if you are this close to your three month emergency fund, in my eyes, you're about $3,000. away from it. And so because of that, since you're getting this refund in and you're looking to max out your Roth every year, and this would help you be able to do that, then I would consider first looking at, okay, I'll take $1,000 and I'll put it towards my emergency fund. So that way, I'm pretty close to my three-month emergency fund. I mean, I'm right there and having the ability to take care of anything that could

Starting point is 00:18:05 happen to me in life. I'm making sure that I have that available. Then I would take the rest of those funds and I would move those funds into the Roth IRA. So this is going to protect your future. and every dollar contributed at 41 has about 25 years to grow before you get to the age of 66, for example, not sure exactly when you want to retire, but that will give you 25 years before then. So that compound interest is going to be absolutely massive over that time frame. It could grow to well over 50 grand just over the next couple of years. Then what I would do is I would take those extra contributions that we're going to put towards your investments, and I would look at adding those to the emergency fund.

Starting point is 00:18:40 Then you'd take that extra $2 to $300 per month and then you'd put that towards your emergency fund so that you can get up to that three month limit. And that's going to be the way where, hey, I'm taking out my Roth. I'm checking that box that I want to check off, meaning I want to max this out. So I'm going to check that box off. Then I'm going to go and finish off my emergency fund, because you're already putting a thousand towards the emergency fund, which is fantastic. And then you also get to max out the Roth IRA. So you get the best of both worlds. And you are so close to the three month mark that in this specific situation, that is how I would look at it and how I would tackle it. So again, let's review the order of operations here.

Starting point is 00:19:13 So one, we're going to take $1,000. We're going to put it in our emergency fund. So now we're only $2,000 away from a three-month emergency fund. Two, we're going to take the $7,000. We're going to put it in our Roth IRA because then we're getting those dollars working for us. Then three, we're going to take our delta for the rest of the year. We're going to start to put that towards our emergency fund so we can build it up to that three months by the end of the year. So that's kind of the order of operations, the way that we're thinking about this.

Starting point is 00:19:34 And the way that I would look at your specific situation. So awesome, awesome job. And you were making tremendous progress. and thank you so much for sending in that question. So lately, I've been noticing how fast things are changing at home. The kids are growing like crazy, clothes don't fit anymore, and routines are changing. And it just hits you. Life is expanding.

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Starting point is 00:22:56 I have one quick question. What resources or books do you recommend for someone looking to get started in real estate investing? I'm curious what barriers to entry exist and what I may be getting. myself into. I'm interested in rental properties in particular as an opportunity for additional cash flow. So for anybody out there who is interested in getting into real estate investing, real estate investing is not something that you can just kind of jump into. So this person who sent in this question is spot on. They need to make sure that they get some sort of education first. Now one thing that we do have, by the way, is a rental property calculator. If anybody is interested in that, we have it over on the website. And typically we have it in the show notes as well.

Starting point is 00:23:32 It's 19 bucks, I think. But it is a spreadsheet that helps you. you run the numbers step by step on a rental property. And that is the number one key for most people is they need to know how to run the numbers when it comes to real estate. You make all of your money when you buy. You can either lose money when you buy or make money when you buy. And so understanding how to run those numbers is very, very important. Now, when I started, one big thing I want you to note is I had analysis paralysis, meaning I kept reading books over and over and over again, thinking I needed a little more education before I got started instead of just starting to jump in after about six months of reading through some of these books.

Starting point is 00:24:05 It took me two and a half, three years before I actually got started real estate investing, and I truly wish I would have started earlier because you do learn a lot through experience. So what I would recommend for most people out there is to take about six months and learn as much as you possibly can. Go to real estate meetups, start networking with people, start building out your team, and start reading books. And I would try to read one book every single week. So over the course of that next six months, you're reading at least 24 books if you're

Starting point is 00:24:30 reading a book a week. And if you can't read that much, you know, you can read that much. You can read 12 books and that'd be plenty. I mean, you'd have enough information for anything out there. So what I would look at first is I would look at some of the core real estate investing books. So Brandon Turner, who's been on this podcast, was a huge influence on me early on when I started to get into real estate investing. So he has a book called The Book on Rental Property Investing, very original name, and the book on managing rental properties. The book on managing rental properties I utilized as basically my handbook for managing my rental properties. It even has contracts in there.

Starting point is 00:25:03 It has things like what to send to tenants. It has things on how to manage tenants if they're not paying and how to set up the right paperwork, all of that different stuff. Really, really useful handbook. I literally used it as a textbook and I would reference it all the time when I would have issues come up with some of my rental property. So those two are very good. Another one, when it comes to financing and understanding how to do refinancing and cash out

Starting point is 00:25:26 refinancing and how great of a strategy that is, is the Burr book, B-R-R-R-R-E. R by David Green. That is a very good one for sure if you are looking to look at some creative financing and some ways to do that. Another great one on creative financing is Pace Morby's book. And he talks about subject to mortgages, those types of things. A great one for motivation is Rich Dad Poor Dad. Now, Robert Kiyosaki has gone off the rocker a little bit, but he is a fantastic author in Rich Dad, Poor Dad, and is a really good book just for motivation. Another one that I really like that I don't hear a lot of people talk about is the millionaire real estate investor by Gary Keller. This is the founder of Keller.

Starting point is 00:26:01 Williams, the realty firm, but he interviews a bunch of millionaire real estate investors and how they did it. That is a good one. One, if you're interested in single family rentals, is Building Wealth One House at a Time by John Schaub. And one of his best friends is actually goes to the real estate group that I used to go to. His name is Pete Fortunato and used to see Pete and John at some real estate meetups, which was kind of cool. And so John Schaub is from my area, from the Tampa, Sarasota area. And he wrote Building Wealth One House at a time. Now, another great one that we had an interview on this show for is my good friend, Chad Carson, and Chad Carson wrote probably one of my favorite real estate books that have come out in the last

Starting point is 00:26:40 five years. It's called The Small and Mighty Real Estate Investor. And I highly, highly recommend looking at that book as well, because I think that could be a very, very helpful book for you to look into deeper. So that's a great one. And it talks about, you know, how a small portfolio can get you financial independence and how he did it at the age of 37. That is a really good book as well. Now, there are some great additions that I will add to this that would be great to have if you don't, have you haven't read them. So one is called the book on tax strategies for savvy real estate investors. That's just going to show you all the different tax strategies that you can have in play. You don't really need that until you start buying properties, but it's just good to have and good to

Starting point is 00:27:13 note. Another one is, and this is a great one for beforehand, is what every real estate investor needs to know about cash flow and 36 other key financial metrics. I read this one, and part of my spreadsheet that we built out came from a lot of the metrics in this book. So I would highly recommend just understanding the math behind how to run the numbers. You really need to know how to run those numbers. Now, if you're interested in commercial real estate, there's one called commercial real estate investing for dummies that I enjoyed. Commercial is something that I'm looking to get into more here in the future. And so I just read that one. Long distance real estate investing by David Green, who used to be the host of Bigger Pockets, is also a good one if you're looking for properties

Starting point is 00:27:48 outside of your specific area. So that is a good one. And then set for life. So Scott Trench has one, basically combining financial independence with real estate investing. he's a CEO of Bigger Pockets and the host of Bigger Pockets Money. And he wrote a fantastic book if you have not read Set for Life. It kind of intertwines real estate and financial independence and personal finance altogether. And so for a lot of people out there who enjoy personal finance, who are thinking about getting into real estate investing, that's a good one to start with, is set for life because it's very motivational and helpful for a lot of folks out there.

Starting point is 00:28:18 And he gets pretty tactical in that book, too. Another one that I liked is called the ABCs of Real Estate Investing. That one is by Ken McElroy. and he has a huge portfolio out in Arizona. And now he's across the country, but I think he started out in Arizona. And he has a lot of multifamily properties. That one was very good. And then your first 100K in real estate by Nick Stageberg is another one to look at if you want

Starting point is 00:28:38 to learn more about some of those specific real estate investing things and some motivation too. So sometimes you get the tactics down first and then you use some additional books as motivation and resources as a motivation. So one thing I will say about real estate is it's not for everyone. If you do not want to deal with getting phone calls on the weekends or tenants, calling you or even the property manager who is managing your properties, you're still going to have to manage them, then it may not be for you. When a tenant leaves and you have to find a new tenant

Starting point is 00:29:04 to come into your property, it can take you a month or two to find somebody. So there is some additional work. It is not passive whatsoever. Don't listen to anybody who says real estate is passive. It's not. But it does create a tremendous amount of wealth. It has a tremendous amount of tax benefits. It has cash flow, which is absolutely amazing. And there are some great things for real estate investing that you just have to know what you're getting into. So I think for most people reading some of these books will tell you some of the things that you're getting into and give you a better understanding. But the best lessons that you will learn is truthfully by doing. And that is something where that's what I'm saying, give yourself a six month timeline and get after it. Get after it

Starting point is 00:29:40 and start to try to make offers on properties and start to make a big difference in your real estate game. So those are some of my favorite books. If you have any questions on those, please let me know. And thank you so much for the question. All right, the next one is another great question. So, Andrew, thank you for everything you've done on the show. My wife and I have learned so much. Over the past year, we've downsized our car payments, and on the way to paying them off,

Starting point is 00:30:02 built an emergency fund and made significant progress on our student loans. Most importantly, your guidance has helped us create a financial plan together that we feel confident about and have implemented. So absolutely amazing. Thank you so much for the kind words, and it is incredible what you're doing in such a short period of time. I love your thoughts on the next big decision, on how to best use equity in our current home to buy our next one.

Starting point is 00:30:22 I bought my first home in 2021 for $230,000 and currently owe about $200,000 on a 2.5% FHA mortgage. We estimate we could sell it for around $340,000. We're expecting our first child soon, and while we love the home, it's too small for our growing family. We're weighing whether we should sell and use the equity, likely around $100,000 for a down payment on a larger home and pay down student loans. We owe about $150,000 combined in a working aggressive. to pay those off. We've also considered renting the home out, but I believe the cash flow would be minimal about $150 to $200 per month, and we'd still need funds for the down payment. I do not believe

Starting point is 00:30:58 that a he lock would make sense for our rental numbers either, but open to all thoughts you may have. I'm especially curious whether the fact that the FHA loan is an assumable loan could help us sell at a higher price using the low 2.5% rate as a selling point. Would the potential buyer need a second mortgage or type of loan to cover the difference between the sale price and the balance of the FHA loan and how does that usually work? Great, great, great questions here. And then finishes off by saying, would love to hear your take on all the options and what we might be missing. So what I'm going to do, actually, is I'm going to go through each of these options on the table and give you the pros and cons of each. And I would tell you what I would do in this situation. So your current

Starting point is 00:31:35 position is you bought a home in 2021 for $230,000. You have about $200,000 on a mortgage left with a 2.5% FHA loan there. The current estimated value of your house is $340,000. And so you have have about $140,000 in equity, and you think you'd net about $100,000 after real estate cost if you sold it. And then other factors is you have a student loan debt at $150,000. You have your income is $175,000 gross, which is great. And you're expecting your first child and you need more space. So for everybody out there listening, a great reason to buy a new house, even if it's not the best financial decision, is because you have family dynamics that are changing. That is a wonderful reason to buy a house as long as you can afford it and it makes sense based on your specific

Starting point is 00:32:18 So one thing I would say up front is that the new home, making sure that the new home is 30% or less of your income is going to be a big deal. But let's go through all of these options and kind of think through this. Option A is to sell an upgrade. So you could sell your current home and net net, and you can use that $70,000 as a down payment on a new home and use the remaining $30,000 to knock out some of your student loans. I like this thought process. It's going to help you accelerate your net worth and it's going to help you accelerate your path to wealth. And I think there is some pros to this. So the pros are you move into a family-sized home because your family dynamics are looking for this. You have a large down payment which reduces your new monthly mortgage and you can also pay off your student loan balance. The cons are you give up that rare 2.5% mortgage and you're starting over with a larger loan at today's highest rates. Now the second option, which I don't love, I'll just be honest and say it up front here, is to keep it as a rental because you can rent the home and have $150 to $200 per month in positive cash flow, but you still need to fund the new down payment, which is the bigger deal I think in this specific scenario. For some of you, if you already had a down payment, you know,

Starting point is 00:33:20 set up, then maybe I would say, yeah, rent that out, get your 200 bucks a month for the next 30 to 40 years. Your rent's going to go up over time. You're going to have some more cash flow. It could be a good situation. But in this scenario, it's a little bit different because the pros are you would keep that two and a half percent loan. And over time, rent could increase and you can build your equity further. That would be a great situation. But the cons are your cash flow currently is minimal. And being a landlord while raising a newborn could be somewhat stressful if you haven't done it before plus you're still going to need cash for the next house, which is one of the bigger options there. So option C is to leverage the assumable FHA loan. So FHA loans are assumable, which is a

Starting point is 00:33:56 big selling point. And how it works is that the buyer assumes your $200,000 loan at 2.5% and they must bring the difference between the loan balance $200,000 and purchase price $340,000 to you in either cash or via a second mortgage. They'd either have to get that second mortgage or they could bring it to you via cash. Or you can find someone like a real estate investor who may be interested in that. Sometimes they would look at something like that. So why this matters is that that 2.5% rate is extremely attractive compared to today's rates. And so having that first mortgage being something that's 2.5% could be really, really interesting to buyers, but only certain buyers can swing the large gap. And or you might have to find someone to get that second mortgage there.

Starting point is 00:34:35 But you might get a premium selling price or a faster sale, but the pool of buyers shrinks to those who can qualify for the second mortgage or bring big cash. So that's the harder thing is it just might be a couple of extra hoops here. And so here's the way I would think about this is most likely one of the better options for you because you need the down payment for the new house is going to be to sell the current house because the rental cash flow is too small to justify keeping it right now. At $200 every single month, you know, it would take you 70 years to recoup that. Now obviously the rent's going to go up over time. So let's just say, for example, for namesake, it would take about 40 years to reap that cash flow that would pay enough for how much your

Starting point is 00:35:10 selling the house for, and that's being conservative. And the stress of managing the rental with a newborn likely outweighs the benefit, in my opinion for you specifically in this scenario. And then number two is if you sell the house, then I would use the equity strategically. So I'd put enough down on the new house to keep your monthly payment comfortable. So below all your expenses to be below that 30% number. And then direct the remaining $30,000 towards student loans like you're talking here. This is going to accelerate your payoff and give you a ton more momentum. And then lastly, I would look at running affordability checks on the next home. So with $175,000 worth of income, lenders might qualify you for a much bigger home, but make sure you just don't over buy and you

Starting point is 00:35:47 fall within that 30% parameters by keeping those housing costs low. And if you can get into not having any PMI or mortgage insurance, that's also going to save you a lot of money would probably save you more money than would the cash flow of the other rental house too. So that's another thing just to factor in is that PMI. And then play up the assumable loan when you sell. So market it with your agent if you want to say there's a 2.5% assumable FHA loan when you're selling because if you state that, that might be something that could be of interest to some buyers and it could help you sell faster or slightly higher and you can talk to an agency. Hey, is this an asset? Is this something that you can really market on this property? Because if there are savvy buyers who are interested in

Starting point is 00:36:25 this, you may be able to command a higher price at that lower rate. But don't build your whole plan around it is the key because sometimes it just doesn't work. So don't build your whole plan around it. But I would see if you could play up that assumable loan when you sell. and see if you can get more money out of your sale just based on that. Because that is something I would be very interested in if I was a home buyer. Some other options to consider is you mentioned the HELOC. I don't think the numbers work for the HELOC. And then the other option is to delay your move one year.

Starting point is 00:36:50 But with the baby on the way, space may matter more now than the math. And sometimes it's much better just to do the lifestyle decision than it is to do what is best mathematically. So really think that you are on the right track here. Selling the house is probably the move in this situation. because you're going to get a lump sum, be able to use that lump sum and roll it into the next house and keep some of your bills and expenses manageable. So that is the order of operations that I would look at this, but let me know if you have any questions on this or if you would like me to expand on this any further. And I'd be happy to do so. This is a fantastic question. So thank you

Starting point is 00:37:23 so much for sending it in. And thank you so much to everybody listening to this episode. I truly appreciate you being here. Again, if you have questions, make sure you join the Mastermoney Newsletter by going to mastermoney.co slash newsletter. And if you want to join MasterMoney Academy, it is going to be early October is when we are launching to everybody else. And we do coaching calls just like this, but live in Master Money Academy. So really, really excited to launch that for everyone else. Our beta group and our founding wealth builders, they are so incredible. It is just a lively, active community. And we just have some amazing people in there. And everybody is helping each other build wealth, which is just so, so cool. So it is just so fun to watch this

Starting point is 00:38:02 unfold and really excited for everything we have planned for Master Money Academy. So thank you again so much for being here. I truly appreciate each and every single one of you and we will see you on the next episode. Rosen lasagna, medium power, 15 minutes. Sounds like Ojo time. Let's play. Feel the fun with Play-Ojo, the online casino with all the latest slot and live casino games. What you win is yours to keep with no wagering requirements, instant payouts and no minimum withdraws. Hey, I just won. Woo-hoo. Feel the fun. Hey, oh Joe.

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The Personal Finance Podcast - Should You Pay Off Debt or Invest First? The Answer Might Surprise You (Money Q&A)

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