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Ask Dave

Properly Prioritizing Properties

Amy and her husband own a home, a rental property that is being rented, and some land on which they are upside down. They'd like to keep the land. Where do these properties come in the Baby Steps?

QUESTION: Amy in Phoenix and her husband owe $175,000 on their home, $96,000 on a rental property that is being rented (and she wants to sell), and $65,000 on some land on which they are upside down. They’d like to keep the land because it may be a good investment. They earn between $120,000 and $150,000 a year. Where do these properties come in the Baby Steps?

ANSWER: I would get the rental property sold when the renters move out. Out of that money, and/or out of your income, I’d get the land paid down to where you can sell it, unless you’d like to keep it.

One of the rules of thumb that we use is that if you have a home equity loan or a second mortgage, which you don’t, but if you did and it was less than half your annual income, we say to pay that off in Baby Step 2. If it’s more than half your income, it goes in Baby Step 6 while you’re paying off your home.

The reason is that I want you to get on from Baby Step 2, but if it’s a small enough debt, you can knock it out. The land is almost right in there. You say that you’re nervous about retirement, but you are trying to do seven things at one time, and nothing is going to get done.

Decide what your priorities are, lay them out and do them in that order, whatever it is. The rental is gone as soon as the renters leave. There is $20,000 or so there that can be applied to the land, and then you can go ahead and attack the land and knock it out.

As soon as it’s knocked out, have a beefy emergency fund of three to six months of expenses, then start 15% of your income going into retirement. You are going to be there anyway. You’ve paid off $100,000 really fast.

Treat this like it’s a debt. Just put it on your debt snowball list and attack it because it’s small enough, since you want to keep the land. Attack it in that order. Knock out the debt snowball. That includes throwing the money from the rental at it when it sells. What’s funny is that you may get it paid down by the time that rental sells to where that rental knocks it the rest of the way out.

Get as much as you can get in a reasonable period of time. Don’t give it away because you’re not desperate. Don’t get so task-oriented that you’ll have to throw the thing out. Get what you can get out of it in a reasonable period of time. Get it listed appropriately with a good real estate agent. I’ll bet you by Christmas, all of that is gone. Then you finish your emergency fund and tear into your long-term investing at that point, with 15% of your income into retirement, then the kids’ college fund, then throw the balance of anything you have left on the home mortgage on Baby Step 6.