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Save for rental property or pay off car?

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koa
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Save for rental property or pay off car?  Reply with quote  

Hello, I'm in a toss up here and was looking for some helpful advice. First I'll give you some of my back ground. Im 23 and just recently graduated college (made it through with no debt at all!) now I've got my first 'real' job. Making ~>1000 biweekly, it's a firm job I don't have to worry about losing unless something goes terribly awry. I'm still living at home for next to no real rent. I made the incredibly dumb decision to buy a brand new car when my old vehicles transmission started to go. While I love the car I hate the interest and depreciation. Really wish I had done some more research now! Gas and insurance included I'm spending about 550-600/month on it and it's really my only expense outside day to day things such as food and other expenditures. So I figure I can survive off of 1000/month. This leaves me with plenty to start putting towards some sort of investment. (I already have an emergency fund and I'm 4 months ahead on my car payments) I would ideally like to buy a rental property (or even two) before I finally buy myself a home. I could find a decent fix up property for around 25k-30k around where I live. And While I don't like living at my moms home, it's seems almost stupid to not take advantage of my situation. I currently have about 6k in a savings and was wondering if it would be the better idea to put it towards a down payment on a fixer-upper house for renting or towards paying my 4% car loan? Thanks for any advice!
Post Sun Dec 21, 2014 4:12 pm
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oldguy
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quote:
Making ~>1000 biweekly, it's a firm job I don't have to worry about losing unless something goes terribly awry. I'm still living at home for next to no real rent. I made the incredibly dumb decision to buy a brand new car when my old vehicles transmission started to go. While I love the car I hate the interest and depreciation. Really wish I had done some more research now! Gas and insurance included I'm spending about 550-600/month


Good job on the college graduating, no debt, and the job. One thing that you might do (a self-learning assignment?) is to list all expenses - that includes fed income tax, state income tax, SS tax, healthcare, the car expenses, your 401k investment, Roth IRA, lunches, nights out - everything. List annual numbers (rather than monthly). That list shall sum to your gross annual income.

Then do a Pareto analysis of the list - on excel, do a 'descending sort' on the expense data. This gives you a good view of the primary cost drivers in your life, it separates the "significant few from the insignificant many". Usually the top 20% of the items makes up 80% of your costs - and the bottom 80% is 20% of your costs.

Commonly, tax,shelter, and transportation are at/near the top. In your case, the $10,000 transportation will be near the top (I added in the annual cost of 'wear' items - tires, brakes, battery, plus washes, oil, etc). Your SS cost is about $3000, fed tax maybe $5000, and so on. And near the bottom you'll see your $1000 Starbucks bill. So if you consider lowering expenses, you see that cutting fed taxes - or transportation - by 10% has a way bigger effect than cutting Starbucks by 10% or 20%. Ie, it's not the "latte factor" that causes people to overspend - that's a key concept, most people start cutting by cutting Starbucks, re-washing baggies, etc - when in fact the other end of the list is the place to look.

As for buying fixer-upper houses - I've learned to do the opposite. I look in 2 to 8 year old neighborhoods, approx 1000 to 1200 feet, 3bd2ba. That size seems to appeal to my renters. The 2 to 8 yr-old houses have a near-new roof, new AC, new water heater, new appliances, modern 3-wire electric service w/ GFI, modern code plumbing, new bathrooms, etc. The first owner will have planted the lawn and hung the draperies. So all I need is the key and a renter - and I usually have a renter waiting to move in before I get the keys. That means that I collect the security deposit and the first month's rent almost immediately. Conversely, if you are in there on w/e's putting in new flooring, all new appliances, granite counter-tops, interior paint, exterior paint, landscaping, sprinklers - you may lose 3 months rent at the outset. Plus you'll find a lot of things to fix/replace in older 'fixers' - wiring, plumbing, sprinklers, garage door opener. You'll run into lots of 'improvements' (surprises?) that 50 years of owners did, that can get pretty expensive. And the cheap fixer-upper becomes the expensive money-pit.

quote:
While I love the car I hate the interest and depreciation.


Good job on the car @ 4%, that loan is a 'keeper', don't prepay it. We always finance our cars completely, 0 down payment, and get a 5 yr loan.
We have an SP500 Index Fund that's been building for about 40 yrs, the average return is 11%/yr. We could sell $33,000, use $3000 to pay the capital gains tax, and use $30k to pay cash for a car. Instead, we finance the car and leave that $33k invested at 11%. Plus we sell the old car for maybe $4000 and add that to the SP500. The goal is to double that $37,000 to $74,000 in about 7 years (the Rule of 72).

As for depreciation, modern cars provide about 200,000 miles of trouble-free service, for us that's about 10 yrs - so our dep cost is about $2600/yr.
Post Sun Dec 21, 2014 9:02 pm
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fortenmerd
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Post Tue Dec 30, 2014 12:57 pm
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oldguy
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quote:
Save for rental property or pay off car?


Neither. Invest in the generic US Market (SP500 Index), it has returned about 11%/yr for decades. If your job offers a 401k plan use it. And invest some 'outside' of a 401k/IRA so that it is immediately available to you, that way you can keep a smaller EF (dead money).

Your $6000 @ 11%/yr for 30 yrs would grow to about $132,000.

http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html

Pick several 30-yr-blocks and check their returns, usually it will be close to 11%/yr.
The most recent 30 years, 11/1984 to 11/2014, averaged 11.28%/yr.
Post Tue Dec 30, 2014 2:11 pm
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Offshore-Wealth.com
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BUYING RENTAL PROPERTIES WITHOUT EXPERIENCE is DANGEROUS  Reply with quote  

Lesson learned, you bought a depreciating asset, but hey, we all have to get a new car bug out of our systems, and the sooner the better. I am a car crazy kind, so it took me years to get the new car bug out of system, now I keep a car I love for as long as I can keep it looking like new, and with the new engine additives, you can easily get 500K out of a good German vehicle which I prefer given the past experience I have had with Mercedes, Audi and BMW, so buy the best two or three year old model and keep it forever.

As to depreciating assets, buying homes should wait, we are in for another round of foreclosures this new year as hundreds of thousands who remain unemployed continue to struggle holding onto their homes. We are not out of the woods yet with this economic house of cards. The stock market has been the best investment over the long haul, but you have to know the markets, so get some solid education under your belt first, and in my opinion, you could make a killing going short for when the news hits mainstream after fed reserve gets first audit since formation, watch the markets collapse when there is no gold in their vaults. The house passed the bill to audit the fed, and with republicans now in control of senate, it should pass with flying colors, finally.

Simply put, you have to know what your are doing before investing in stock market or FOREX. Dollar is at record highs due to massive manipulation of fed reserve keeping interest rates insanely low, but that is all about to change as I see it once fed is audtited and the truth of the fed reserve being a massive ponzi is known by all, this house of cards will tumble fast and furious, so hang onto your short positions for markets will fall fast just as every bubble bursts, so too will markets, so you have to be smart when markets are at their highest. Dollar will drop too, so don't hold much in cash is my advice. These are interesting times for sure. You are young, no expensed other than car payments, so keep it that way and invest what you can afford comfortably.

Success to all,

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Post Fri Jan 02, 2015 11:06 pm
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Paultayloor
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I currently have about 6k in a savings and was wondering if it would be the better idea to put it towards a down payment on a fixer-upper house for renting or towards paying my 7% car loan? Thanks for any advice!

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Last edited by Paultayloor on Sat Apr 18, 2015 11:51 am; edited 1 time in total
Post Fri Apr 17, 2015 6:19 am
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Offshore-Wealth.com
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Unless you are into construction industry, buying a fixer upper can be a nightmare, so my advice is to pay off car loan, interest rate is way higher than going rate for those with decent credit FICO scores, so by paying off loan, you FICO will go higher, then you will be better off in long haul. Housing market is still on life support in most areas, and a second wave of foreclosures are on horizon, so there will be good deals for those with good credit in the future and you should be able to pcik up a better than fixer upper at same price if you are patient.

Success to all,

FREE BILLION DOLLAR RECESSION PROOF BUSINESS OPPORTUNITY SAVING THOUSANDS WHEN YOU CUT THE CABLE & DUMP THE DISH FOR TV MOVIES PPV
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Post Fri Apr 17, 2015 8:31 pm
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