Should We Include Rental Property Debt in Our Debt Snowball?
Matthew asks if rental property debt should be included in the debt snowball. Dave says no.
QUESTION: Matthew on Twitter asks if rental property debt should be included in the debt snowball. Dave says no.
ANSWER: No. The debt snowball is in what we call Baby Step 2. Baby Step 2 is where you only have $1,000 saved as a starter emergency fund—beginner emergency fund. Your next step is you stop saving money, and you attack your debts with a vengeance, working them off smallest to largest. List them smallest to largest, pay minimum payments on everything but the little one, and attack the little one until every debt is gone. Every time you pay off one, you move to the next one down. Every time you pay off another, you move to the next one down. That’s the process you use. That does not include your home. It does not include rental properties, which would be at Baby Step 6.
Baby Step 6 is you’re going to pay off your home there, and between your rental property and your home, I normally would pay off your home before I pay off your rental property. That’s simply from a risk management perspective, meaning that if I was going to lose something, what would I rather lose? I’d rather lose the rental property than the home in a worst-case scenario. If your rental property is $30,000 and your home is $3 million, then we might go ahead and knock off the rental property before we do the home, but if they’re somewhat in the same general range of debt, then I would pay off the rental property last.