Should You Pay Off Debt or Invest in Real Estate?

Dave:
You all have real estate questions. Henry and I are here to answer that. Hey everyone, it’s Dave here with Henry Washington and we’ve once again dug into the BiggerPockets forums for a few burning questions that you’re all trying to answer in your own investing careers. We’re going to give you our best advice to avoid headaches and maximize your returns on the road to financial freedom through real estate. Henry, what’s happening man?

Henry:
What’s going on buddy? This is my kind of show I get to tell other people how to spend their money.

Dave:
I know people like listening to you, you’ve got a very reassuring presence about you, so I’m glad you’re here to give people advice because they’re probably more likely to listen to you than to me. Fair enough. Alright, first question. The title of this form post is Locking Up a Property Site Unseen Needed Advice. Daniel says, I’m looking at a property that checks all the boxes. It’s got good numbers, fits my buy box, but I haven’t seen it in person. I visited every other property I’ve considered in the past, so this is uncharted territory for me and it feels a little out of my comfort zone. I’m considering putting it under contract site unseen to lock it up, but I don’t want to make a rookie mistake here. Do you rely on inspections, local contractors, the agent or property managers to get eyes on it? I feel like there’s a balance between being decisive and being reckless and I’d love to hear how you guys approach this. Any tips, warnings or real life lessons are welcome. I’ve got all three of those tips, warnings and real life lessons. Have you done this before?

Henry:
Oh yes, yes. I bought property sight unseen, but there’s a caveat mostly all but in my local market and someone saw them, it just wasn’t me.

Dave:
I feel like this one is a big, it depends kind of what you were saying. If this is a market that you’ve never been to and you don’t have a reliable team in it, I think that’s just a hard no. For me, I would not buy a property site unseen to a city I’ve never been to without people I trust. I personally in the last year have bought two properties, site unseen, still haven’t seen them. I’m actually going next week to go see them for the first time and I’m eager to see what I got.

Dave:
They’ve been performing fine, but I’m hoping I don’t get there and I’m like, oh God, what have I done? What? I had gone to that market and researched it, spent several days there learning the neighborhoods and it’s not a huge market, so it was kind of easier to understand. Plus my agent in that market is someone I’ve known for a really long time. I had property managers go and check them out and these are properties that were in solid condition, so I think under those circumstances I was comfortable buying a property site unseen and I’ve also am an experienced investor and feel comfortable in my ways to figure out a way to make deals work. If I were brand new, I don’t know if I would do this honestly and if I didn’t feel like I could trust the people on the ground, I don’t think I’d do it either, but that’s sort of where I come out on this. I don’t know about you, Henry.

Henry:
I’d probably take on a little more risks than you in this situation, but I do agree with you. If you are experienced, I think this is a safe thing to do if you do it right and there’s a lot of technology that can help people do things like this. Now, if you don’t have a team built, obviously you want to build a team for long-term success where if you’re going to be investing out of state or someplace where you can’t drive to, conveniently, you want to be able to have a team and in this question he even says, do you have inspectors do it? Contractors? I think there’s investors that have multiple different people on their team. I know some people who have a realtor that does all their looking at their out of market properties. I know some people that their property manager does all the looking for them. I know some people that their contractor does all the looking for them.

Dave:
I

Henry:
Know some people where they kind of mix and match those things. It really just depends on you and your team. There’s no right or wrong way to do this and have somebody get eyes on a property for you, but if you haven’t built that team yet and you are comfortable enough with the market, there’s apps like we go Look, which is where you can hire people, they call ’em lookers. You can send lookers to go and inspect and take photos of properties for you. Proxy picks is another app where you can do something similar. Photo notes is another app. TaskRabbit is another app. All these are apps where you can hire people like freelance to go and take pictures and video of a property fairly inexpensively and then that way you can at least have current videos and photos to help you make your decision.

Henry:
Nothing is going to compare to you actually being there, but there are things that you could tell them to look out for. You can make sure that they’re taking pictures of the mechanicals, make sure that they’re taking pictures underneath the house up in the attic, all of the things where there might be problems that could scare you. You can get photos and videos of, so there’s technology that can help you, but I think the real thing I want people to understand is you got to have a comfortability with that market and someone should see it. It doesn’t have to be you, but someone should see it and then you either can trust what that person says or they can give you photos and videos and you can make an adjustment, but if I was brand new, I had no experience. This is not something I would do. You don’t know what to look for even if they send you pictures.

Dave:
I guess the only caveat I would say to that is if you were buying something as a long-term rental, that’s in really good condition. I know people who have a lot of money work in tech or something, they want to buy new construction in Dallas. It’s like, yeah, okay, you’re probably going to be fine. You can probably figure out what the rent’s going to be. There’s no hidden things in a new property or something that’s relatively new, but doing what you do where you’re doing heavy construction, that’s a totally different thing. So I think it really depends on the individual strategy.

Henry:
The only way I would do this if I was brand new is if I had an equity partner who was boots on the ground in that area who had experience that I trusted. Other than that I’m not doing it brand new.

Dave:
All right, well maybe I should do a live an unboxing of my properties when I’m going

Henry:
Next week. I want to see your reaction as it happens.

Dave:
What the hell did I find?

Dave:
Alright. That actually brings us a good transition to our second question, which is sort of in a similar vein. Basically, this person, Alyssa from the BiggerPockets forums asks, what has been your experience with out-of-state investing? She says, hi everyone. I live in California. I’ve been meeting a lot of investors who prefer to invest out of state due to California being so expensive as well as the aggressive tenant protection laws we have here. I’ve heard both the good and the bad sides of investing out of state, and so I’m curious to know what other people’s experience have been. I’ve mostly heard about long-term rentals, specifically in Indiana, Alabama, Texas, Michigan and Ohio, but I’m open to hearing anyone’s experiences anywhere would really like to hear your thoughts. I’ll say that overall, my experience with outstate investing so far has been positive. I’ve said this before the show, but basically I started investing in Denver.

Dave:
I’ve done a lot of passive investing. Now I’ve started investing in the Midwest because I want a compliment to the other types of investing I do, which are sort of more for equity and building big cash positions and I want places that are going to just offer solid low risk, reliable cash flow and I can’t find that in the market I live or in Denver where I used to invest, and so to me, I have to go out of state for that and I want that in my portfolio. So that is a positive experience. There’s definitely a learning curve. I think it’s just in any market as an investor, it takes some reps and it takes some practice to really understand where to buy, how to forecast rents, how to forecast growth to comp things properly, and there’s going to be a little bit of inefficiency in my opinion at the beginning of this because any market you live in, you’re going to inherently just understand.

Dave:
When I started investing in Denver, I knew the cool neighborhoods to live in. I knew where my friends wanted to live. I knew the seasonality patterns of when to rent. You just get those things and it’s taking me longer to learn that, but I think it’s necessary for me and it’s just kind of a learning curve that you have to understand and not expect to be an expert as quickly as you might in a local market, but appreciate that you’re going to get something that you might not be able to get in your portfolio if you just stayed only in your local market.

Henry:
I think it’s more of a question of what do you want your life to look like and then you design your business to fit that, and so if you figured out that you can’t afford to hit your financial goals in California, but you’ve researched some markets and figure you can hit your financial goals with property in another market, well then you can absolutely go buy property in another market and create the experience that you want. There’s enough people, technology processes and systems out there pretty inexpensively now that you can create the business you want to, depending on how S off you want to be, you’re going to have to do a little more work. You might have to spend a little more money, but that’s the trade off. I have a friend here locally where he just decided one day that he was like, you know what? I just don’t like managing my properties. I don’t like going to them. I don’t like managing my flips, but I don’t want to give that process to anybody else. No one’s going to care like me. And so he just decided I’m not going to go to my properties anymore, so what do I have to do in my business so that I don’t ever have to go to a property ever again,

Henry:
And he hired a couple of VAs and now they handle everything and he never has to go to a property and he’s here locally, so you can do this anywhere.

Dave:
Yeah, yeah, I think that’s a really good point. It’s really just about the business you want to create. I will just say I think a lot of people focus on the downsides of outstate investing, which is yeah, it takes longer to learn the market. You’re going to have to pay people to do a lot of things, but there are upsides to it, and Henry just hit on one that I think is kind of great. It’s that it just forces you to automate your business in a way. I spend so little time on my out-of-state investments. It’s crazy. Once a quarter I really sit down, analyze the deals. I obviously respond and talk to my property manager pretty regularly, but it’s like an hour every other week maybe it’s not a lot of time, and that’s great. The first 10 years of my investment career, I was in it all the time and it’s so tempting to even when you work full time to just go do everything yourself and honestly, I just feel like my portfolio is so much more sustainable because I’ve sort of forced myself to take my hands off. Actually, just a couple of weeks ago I was in Denver and I realized when I left that I never went to go see my properties, which I would never do every time for the last five years since I moved out of Denver. I would always go look at all of them, check them out, and I was like, I didn’t even feel like I needed to and that

Dave:
Was great. It was a pretty good feeling. Those properties are performing. My property manager’s good and I had other stuff to do like go eat sandwiches and eat sushi.

Henry:
That’s the goal. Right,

Dave:
Exactly. All right. Moving on, Henry, we are obviously answering questions from the BiggerPockets forums today, but I think we should tell everyone about an opportunity that you’ll have to ask Henry and I questions directly at BiggerPockets Momentum 2025. It’s our new virtual summit. It starts February 11th and every Tuesday you’re going to get access to some of the sharpest minds in real estate, including Henry. If you can call my mind Sharp, maybe me, but also James, Kathy, all the people you hear on this show all the time are going to be there. And on top of that, we’re also going to be putting anyone who participates into small mastermind groups so they can get accountability feedback on deals and direct input on some of the decisions that are facing your investing portfolio. So if you are interested in this, make sure to check it out. You can go to.com/summit 25, and again, this starts on February 11th. Great opportunity to get some personalized advice on your portfolio. Henry, I know you’re a speaker at this event. What are you speaking about?

Henry:
I am speaking on creating an action plan for 2025, so the title is Action Plan, how to Go from Learning to Earning, but we’re going to talk all about how you can go from this spot where you are in self-education to actually making some money.

Dave:
I like the sound of that. All right, well, if you want to hear from Henry asking questions directly, hear from me and all these other experts, make sure to check that out. We are going to take a break, but we’ll be back with more forum questions in just a minute. All right, Henry, we are back answering questions. This one I think is perfect for you. It comes from Sean Gammons who says how to buy two rentals in one year. I was going to buy an owner occupant duplex with 3.5% down, then buy an investment property using 25% down, but my DTI ratio would not qualify for both mortgages in the same year unless I used A-D-S-C-R loan and then the interest rate would be very high and it’d be hard to make a deal work using that kind of loan. So I am just curious how other investors have managed to buy two rental properties in the same year in the building phase of their portfolio. Thanks, Henry. Answer.

Henry:
So first and foremost, I would question how you know your DTI wouldn’t be able to handle you buying both properties because I think a lot of people just make this assumption. They look at their debt to income and they look at their credit score and they go, I’m not going to be able to get a loan on both of these, but they don’t really know, and if you’re asking a lender right now to tell you if you’ll be able to qualify for both, I don’t know that they can actually tell you right now. You’re not trying to buy both at the same time, right? It’s more a question of do the first one first, and I think buying a duplex on a 3.5% down is a great move. Whether you’re going to buy one property or 20 properties, it doesn’t matter. That should still be your first step, so go do that step first.

Dave:
I totally agree. Yeah, the inability to figure out how to buy two should not prevent you from buying one. Absolutely. That just seems like you’re getting ahead of

Henry:
Yourself. Absolutely. We’re trying to solve problems that we don’t know are problems yet.

Dave:
Exactly.

Henry:
The first problem we have is you don’t have any, so buy one and buying a duplex on a three and a half percent down FHA mortgage is a great first

Dave:
Step. Great idea.

Henry:
Go do that. And then after you do that and you get moved in, start talking to lenders about what your next purchase is going to be. Your credit will be in a different place. Maybe you’ve paid down some debt by then, you don’t know what that looks like at that point. Then start having those conversations with lenders and seeing can you qualify and if you can’t qualify, what things would you need to do to your credit in order to help you get there? And if you can’t get there using a conventional, there are way more loan types than just your DSCR or your traditional first time home buyer loans. There’s tons of different loan products. There’s small local banks, there’s non QM loans. There’s all these ways that you could look into financing that next property, but at the end of the day, buying the first one should be the first step and then we’ll figure out what you need to do from a finance perspective to buy the second one. But trying to set your finances up now to be prepared to buy two at some random point in the future, I don’t know that you’re fighting a winning battle doing that. I think you’re wasting a lot of time.

Dave:
Yeah, it just seems like putting the cart before the horse here. I hear this question. I don’t know about you. I hear this question all the time. This is a very common one. It’s like, how do I scale? It’s like well scale when you can

Dave:
Buy one and when you’re able to buy the second one, buy the second one. I know that sounds so reductive and very silly, but it’s true. I don’t know. When I bought my first deal, I wasn’t like, how do I get my second one? I was like, I got a deal. That’s awesome. I’m pretty stoked about it. And then when I had saved up enough money and my DTI was in a place where I could buy a second one, I bought a second one. Alright, hopefully that’s helpful. Sean, sounds like you got the right idea for the first deal. Go pull that one off. You’re going to be thrilled about it and then go look for that second one as soon as you can.

Dave:
Moving on to our fourth question today, purchasing first home with debt comes from Alex Messner. Alex says, my wife and I are looking to buy our first home with hopes to eventually accrue multiple properties for renting. I’ve been reading the online resources about getting started searching the market and even doing tours, but I’m hesitant to jump in and buy a house as I have quite a large amount of student debt. I make roughly $150,000 annually but have 200 grand in total student debt from grad school. My biggest question is this, do you think I should continue to rent for now and prioritize tackling loans or should I invest regardless of student loans? If my hope is to use FHA loan for smaller down payment and then eventually rent the house out in a few years once I move, is it common to purchase a home with other debt? Would it be a poor decision? Thanks ahead of time. I have a lot to say about this one, but you go first.

Henry:
In general, my thoughts on paying off debt and investing are if you have high interest debt, we’re talking 15% plus, 12% plus, you may want to look into trying to get that paid down first before you’re going to invest in real estate.

Dave:
That can get ugly quick

Henry:
Because if you’re brand new, the likelihood of you buying deals that are going to net you 10, 15% cash on cash return out of the gate is pretty low. But if your student loan debt is like 3, 4, 5, 6%, 7%, I would consider looking at what your return is going to be on the type of investing you’re looking at doing. What are the average returns there? Because if you can go get eight, nine, 10% cash on cash return rental, but you have five or 6% student loan debt, well then the smart money says to go buy the real estate, then you’re getting a return, you’re making a higher return than the interest that you’re saving and then you can essentially take the money from the rentals and pay off the student loan debt

Dave:
Just using an example, right? If you had a hundred grand to invest and let’s just say your interest rate on your student debt is 6%, right? That’s costing you six grand a year. If you can buy a rental that nets you 8% a year, that’s $8,000 a year by buying the rental property, you’re improving your financial position by $2,000, overpaying down the debt. So to me, that just makes more sense, but it really depends. Like Henry was saying about the actual interest rate,

Henry:
High interest debt absolutely has to get paid off, but when we start talking about this low interest debt, you really need to think about what is it that you’re going to get in return for the money you’re looking to invest, and that will help you determine if it’s going to make more sense to just invest. Because at the end of the day, if you take that money and you pay off your debt before you buy a house or you buy an asset, well then congratulations. You’re in a shoebox. You still don’t have a house, you still don’t have an asset. So using the money to buy an asset that then helps you pay off the debt, well then once that debt is paid off, you still have this asset, which is also paid down some since then as well, which will continue to pay you after the debt is gone. So it’s more about paying attention to what kind of debt are you paying off and what kind of return are you going to get.

Dave:
I think that’s a perfect way of thinking about it. I also just want to address sort of a philosophical thing here because at the end Alex says, is it common to purchase a home with other debt? Yes, is the answer

Dave:
In one of my books start with strategy. I sort of go into this about positions to start real estate. In my opinion, the best place to start is if you have a positive net worth so you don’t have any debt or at least your assets are higher than your liabilities, but I actually think the more important thing is that you live a sustainable lifestyle and that you are earning more income than you are spending. That to me is what’s going to make you able to get a loan and it’s going to allow you to take on the risk of buying real estate. And we talk about this a lot. Risks of buying a primary home is house hack very low, but there’s always risk and having your income higher than your expenses outside of real estate is going to put you in a really good position. So I kind of think about it that way. I don’t know about you, it sounds like it, but when I started investing, my net worth was negative.

Henry:
Same.

Dave:
My assets were like two or $3,000 maybe, and I had student loan debt the same as everyone else, and I had card debt. I was starting from a position of negative net worth, but I made more money than I spent every month, and so that allowed me to sort of get a loan. It allowed me to take the risk of real estate and eventually pay off that debt in a large part due to real estate.

Henry:
I mean, let’s put this in perspective, it’s 2025 now. I just paid off my student loan debt like two weeks ago,

Dave:
Dude. I know. That’s so awesome. Congratulations, by the way. It feels great. It

Henry:
Does feel great. It does feel great, but didn’t, obviously I graduated in 2006, so I didn’t accelerate my student loan debt payoff because my interest rate was so low. I bought all my real estate with debt and student loan debt. So yeah, you absolutely can do this and invest again, it’s just a matter of what’s the interest rate. My interest rate was like 5% or less, so I was just going to let that thing ride

Dave:
Out. Alright, let’s take our second break, but when we come back, we will have more questions about potentially investing in negative cash flow properties. We’ll be right back. All right, welcome back to the BiggerPockets podcast. Today we are answering questions from the forums. This next question comes from Ryan Cousins who asked about holding onto a negative cashflow property. So Ryan says, hail, I have a scenario to run by everyone. My wife recently received a job offer in which she would make a lot more money, but we would have to relocate. We currently own our home, which we bought about a year and a half ago. It’s a three bed, three bath, new construction home. We love the area. We think there’s going to be a lot of appreciation as the area matures. The tricky part is if we hold onto it, we’ll surely be in the red when we rent it out. The basics are our mortgage is 59 65. Wow, expensive, and I believe we can get anywhere from 52 50 to 5,500 on monthly rent. I would be self-managing the property because I know the area well have local connections to help out in a pickle and could get there in a day drive if need be. Wow. Alright. Henry, where do you start on this one?

Henry:
It’s a question for me of what’s the equity position now and then what’s the projected equity position in the future? Cashflow isn’t the only important part about a real estate deal. The other thing that could be beneficial to this couple is could they depreciate that asset or accelerate the depreciation on that asset and how much does that save them in taxes as W2 earners, right? So yeah, it might cost them a few hundred bucks a month, but it might save them 20 to $30,000 in taxes. That’s something you would want to speak to a tax accountant about, to get a full picture of what it is that you would be giving up if you sold it or what it is that you would be getting if you sold it. Don’t just look at the cashflow, but look at the cashflow, look at the equity, look at the appreciation, and then look at how the taxes could or couldn’t benefit you and then make a decision.

Dave:
That’s good advice. I think that you should consider it. It is all, and it depends. I’ll just say I don’t like it. I don’t like this deal. Personally, I wouldn’t do it just for a couple of reasons. First of all, I think the key to being able to hold onto properties for a long time if you’re going to appreciate is cashflow. I don’t like the idea of using my money to float real estate very much. I would now because I have a bigger portfolio where my total portfolio is cash flowing, and so if I say, Hey, if one of my many properties is a little bit under cashflow, but the whole portfolio can sustain itself, that’s a different story. I’m not getting the sense that that’s the situation for Ryan. The other thing I’d say is I don’t love this one because it’s new construction.

Dave:
That does mean that you can hold onto it for a long time. But with new construction, I think there’s just not a lot of upside. If I’m going to land bank something, essentially I want to know that there’s good zoning upside or that I could eventually do a renovation and sort of fix it up or it’s a neighborhood that used to be a little rundown and now it’s getting better. Usually new construction, it’s slow and steady and it’s stable, and that could provide decent appreciation. I’m assuming that just based off their mortgage, I’m going to reverse engineer and say, this is a million dollar house. They probably have 200, $250,000 in equity. I just think you can invest it somewhere better. That would be my instinct. The other thing I’m going to say here is, Ryan, you might be much more ambitious than I am, but I’m going to say that you’re probably not going to keep self-managing this place if it is a day’s drive away from you. That is a long way to drive when things go badly for a negative cashflow property. To me, this just spells like you’re going to get frustrated either with driving somewhere all the time to lose money on it, at least on a monthly basis, or you’re going to hire a property manager, which is going to further eat into your cashflow. So to me, something about this just doesn’t seem like it’s going to be a great thing and it could be a headache.

Henry:
Let me add a little bit of detail to my stance here. My stance would be that this property needs to get sold. It’s just a matter of when.

Dave:
True,

Henry:
Right? So if you’ve got $250,000 of equity, that’s great. Is it the best time to sell right now? Probably not.

Henry:
So I would probably hold onto this at least until the spring and then put it on the market where you can maximize that cash that you’re going to get for selling it. Or does it make more sense because you know something that we don’t know about the area, something’s coming, something’s being built that’s going to help with appreciation in the future. Then does it make sense to float it for a year or two until that comes to fruition and then sell it? That’s a very local thing that you’ll have to answer, but if none of those things are true and it’s just your average appreciation over time, then it’s just a matter of when is the best time to sell this thing. I think it would take a while for this property and just increase rents to get to where it is going to cashflow.

Dave:
I agree with Henry within reason. I wouldn’t sell something in January. If I could sell it in May, I would definitely wait on that, but that’s a lot of money that could go into a lot of different investments, and you just need to think about is this the best use of your capital or is there somewhere else you could be doing? Could you invest in your new market, invest out of state, whatever it is. This to me, seems a little bit more speculative with that amount of capital you could be making some significant deals happen.

Henry:
Yeah, absolutely.

Dave:
All right. Those are our questions today. Those were a lot of fun. I enjoyed those. I feel like these are ones that I’ve been thinking about a lot recently.

Henry:
Yeah, no, those are good questions. They’re ones that I think a lot of people are interested in, so I’m glad we were able to hopefully shed some light on some things, help some people out.

Dave:
If you all want to ask Henry or I any questions, we pull these from the BiggerPockets forums. You can have those questions answered by the BiggerPockets community anytime, or we might pick yours if you go and ask them, or as I said earlier, if you want to come to Momentum 2025, our virtual summit, a mastermind group, make sure to check that out. You can go to biggerpockets.com/summit 25. Henry, thank you for being here. Thank you all for listening. We’ll see you again soon.