Dear Dave,
I’m going to sell a rental cabin I own, and the sale should bring me about $388,000. Should I take the proceeds from the sale and use it to pay off my home and other debt or use the money to buy another, similar rental property where I could collect about $1,500 per month in rent? Right now, I owe $200,000 on my home, and I have just under $50,000 in miscellaneous debt.
Valerie
Dear Valerie,
Let me start by asking you a question. If your home were paid for and you didn’t have a mortgage at all, would you take out a loan against your home to buy a rental property? Let me give you a hint. The answer should be a big, fat no.
The shortest distance between where you are right now and a high-quality financial life—including wealth building—is getting your home and other debt paid off. Then, use the cash flow that’s freed up, and the increased peace of mind, to rapidly pile up a bunch of money and buy another rental property.
There’s nothing wrong with owning rental properties and other kinds of real estate, Valerie. I love real estate, and today, I have several rental properties of my own. The difference is I bought all of mine with cash. I didn’t go into debt for them. I learned my lesson about debt the hard way over 30 years ago, and I don’t want you to take a chance on suffering through all that crap too.
Use the money from the sale of the cabin to pay off your home and other debt, and to make sure you’ve got a solid emergency fund of 3–6 months of expenses set aside. After that, if you want to start saving aggressively for another rental, go for it. Just make sure it’s a smart buy when the time comes and that you pay for it in cash!
— Dave