Monthly Archives: May 2008

It’s amazing how much consumer debt people will carry on credit cards.  And then the decisions revolving around that debt can be puzzling.  So let’s think about this for a moment.

Here in Kansas City if you work with me to purchase an investment property I’m gonna direct you towards a rental property that will have a Return on Investment (with appreciation) somewhere in the 22%-32% range.  Without appreciation your return will likely be in the 13%-21% range.  That’s on a yearly basis for the first couple years. 

But what if you are carrying debt on a credit card costing you 15%?  18%?  My sister has a card at 25.9%?  Did the Sopranos earn that kind of interest?  I wonder. 

Anyway, if you are carrying significant consumer debt while pondering whether or not you should become a real estate investor I would like to encourage you to give paying off the consumer debt some serious thought.  Let’s say it’s gonna take you $15,000 grand to buy your first investment property so you are saving fervently and leaving the money in a money-market account earning you 3%.  But in the mean time you have $10,000 in consumer debt, spread over a couple plastic cards, that is costing you 18% a year.  Well, then you have a -13% growth rate.   That’s not good.

Let’s look at it another way.  Let’s say that you concentrate first on paying off the credit card.  At $10.000 you are probably paying around $425/mo in payments to the credit card companies.  Instead of paying those minimums and putting the additional $400/mo in a money-market account earning 3% why don’t you take that $400 and slap it down on a credit card.  Should you do this you’ll make 16 fewer payments (14 vs. 30) and you’ll have earned an average annual return of 19% on your debt investment. 

After retiring those credit card debts you can take $825/mo, put it in a money-market account until you get to your down payment for a rental property and you can do it with a clear conscious knowing you are on your way to a Retirement Worth Having.

I have been accused of being too conservative with my investments.  But I don’t see the sense of paying interest on consumer debt when paying it down means the returns are likely to be similar to what I can help you get with a rental property.  And without the hassle of tenants.  Therefore no time expenditure.

Of course, $10,000 is a huge chunk of money to some people and not so much to others.  If having $10,000 on your credit cards still amounts to only 1 month’s take home pay, then it’s not a big deal.  But if you make $30,000 a year and you owe 1/3 of that towards consumer debt, you might want to get your priorities in order.