Start Free and Clear?
Paul used credit cards to do repairs and has racked up $135,000 in debt. He has a stock portfolio worth $145,000 he can use to clear the debt. Should he do that or pay off the debt using the snowball method?
QUESTION: Paul in Michigan has been buying foreclosures in the area as rental properties. He used credit cards to do the repairs and has racked up $135,000 in debt. He has a stock portfolio worth about $145,000 he can use to clear the debt. Should he do that or pay off the debt using the snowball method?
ANSWER: If you go through the pain of cleaning out your stock portfolio and paying off your debt, which is what I would do, the danger is whether you’ve learned your lesson or not. Next time your rental property needs a repair, how will it be taken care of? I would pay off the debt, but I don’t want to pour water into a bucket that’s got holes in it.
I really want you to figure out how to stop up these holes, meaning we have to have some kind of a cash game plan. You’ve got 27 rentals and to predict that something is going to break next month is fairly easy. You really have to know how you will cover that. You can’t just say you’ll pay cash; you have to know where the cash is coming from.
You are running this on a really tight shoestring. Your cash flow is leveraged to the nth degree. I would pay off the debts and cut up the credit cards. But the only way that will work and you’ll stay out of debt is to develop very rapidly and continually increase your reserves for repairs so that the rental properties don’t drag you back into this kind of a mess.
I would hate to talk to you a year from now and you’ve got $135,000 in other debt and no stock portfolio to take from. We have to correct the problem and the symptom. The symptom is the debt. The problem was a crummy plan for cash management with this many rentals. And yes, I would pay off this debt immediately.