Posted: 2/8/2007 2:05:14 PM EDT
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OK, I $7,500 in credit card debt. I also have a house in another state that is currently rented out. The renters have the option to buy the house and at the time of the rental they stated that they may want to buy after living there for 6 months. Now, if I save my money (and barring any financial emergencies) then I will have enough cash to pay off my credit card in full on 3/31. At that time I will be left with a little over $1,000 in my savings account. By 5/31 I will have that back up to $5,700 (Lord will and the creek don't rise). The house is going to need a new AC (and they kind of have me over the barrel on that one...as the landlord I'm obiligated to fix shit that is broken), and I'm thinking that I could get the unit replaced or repaired for around $2,500. this will leave me with around $3,200 going into June. By the end of June I'll be back at $5,000 in savings (again, Lord willing and the creek don't rise). IF my tenants buy the house THEN I would probably have to cought up about $2,500 to close on the house (based on the payoff, the commision for the agents that rented the house, the transfer tax and title fees). So, IF everything goes according to plan  THEN I could have my credit card paid off and be out from under my house...and damn near flat broke. However, my cost of living would be down by about $350/month (minimum payment on CC + delta between rent income and mortgage payment). Aside from my car, that would account for all of my debt. My question is this: Is it better to be temporarily broke (and potentially exposed for a short period of time if I hit a financial emergency), or to have a lot of cash on hand, just in case? I'm leaning towards paying off teh credit card, re-building towards being able to sell the house if the time comes and taking my chances. I have two cars, so if one breaks down then I can let it sit until I get into a better financial position. I THINK my employment situation is pretty secure, but you never can tell for sure with these things. |
Seriously I took a similar tactic to get out of more CC debt than that. I did spend some time hoping and praying that nothing broke but it did work out for me. |
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I'd pay off the credit card. Some free advise though......down the road when you get ready to retire and need a loan, if you haven't been using credit cards for small amounts all through your consumer lifespan, the lender will probably not approve your request. Steady use of credit without maxing out your card makes one a "good" candidate for a home loan etc. If you were just a cash for everything guy, they don't trust you?! Makes no sense to me but I'm serious. If one isn't playing the game, you don't qualify at some point crazy as that sounds. |
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I agree you should pay off the debt. I do not understand however that you talk about paying off the credit card debt and then you mention minimum credit card payments. You should not have a payment after you pay it off. You are also counting your chickens before they are hatched. You are saying "In this month I will have this much $ then on this date I should have this much $" Shit happens and you can not count on it. I know you are just asking a question on the internet, but what if the people move out next month and you can't rent it for 3 or 4 months? Can you make the monthly payment on both houses? I wish you the best and my advice would be ... Do NOT sell the rental. Someone (your renters) is buying that house for you. Let them! Do not use your credit card unless you can pay it off to a zero balance each month. In 14 years I have never paid one cent in interest on a credit card or a vehicle and I do not even pay the 20 or 30 dollar fee per year for the credit card. They give it to me for nothing. Simply spend less money than you bring in and save as much of it as you can. The rental will continue to appreciate and I am guessing you can not save money that fast. |
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If they are gonna buy your house...just discount it for the price of a new AC and keep your tangible cash in reserve. I wouldn't offer it until the deal is actually working and not a pipe-dream on their part. They aren't gonna need AC for a few months anyway. May? The more you pay down the CC, the less you will be paying in interest and the smaller the minimum payment will be. Pay it of in 2 or three large payments. If you have to make a minimum payment for a month or two...no sweat. Keep a reserve...and keep it drawing interest for you. Why do you have to pay all the closing costs on the house? Negotiate. Will they pay half? Title fees? Your goals sound do-able. For each thing that you want to do, like paying you CC off, consider all the options and their ramifications. You might find an alternative method that is a better option. Good luck with it, Steve!! |
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Pay off the credit card. It can only have a positive effect on your liquidity, because whatever cash you put it will increase your available balance. In the mean time, you will save the interest. Of course, don't use it if you don't have to. The bigger question is whether to have a mortgage. Paying off your house may or may not be the best investment and could put you in a short term liquidity problem. If it were me, I would pay it off as soon as I had a few months reserve. |
There are an awful lot of people who are going to be selling and taking losses. That's what happens when you buy at the top of the market after the most insane runup in housing prices in history, and you finance with some kooky ARM because you can't afford the payments otherwise. Breaking even isn't all that bad these days. |
Yes. You'll save all that accrued interest, and if a true emergency pops up you have the CC to fall back on. What's your situation on this house? Are you cash-flow negative on it each month? Do the tenants have an option they can (and intend to) exercise soon? What financing do you currently have in place on the house? How much are you making on the sale of the house? You can IM me if you want. |
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Interesting. Every piece of advice here is based on emotion. I think you should look at the numbers a bit more closely. if you FEEL like paying of the card, and it makes you feel better, then do it. I did not see a single piece of logical analysis here. SO. How to evaluate this? I'd look at the cost of carrying the debt on the credit card over the time frame you established. Remember to take into account any interest you might receive on your cash savings ( this would offset the carrying cost of the interest). This will give you the net carrying cost (interest ) of having the credit card debt. Now, you have to evaluate the opportunity cost of not having any cash on hand. This is a subjective measure, and depends on your tolerance for risk (like if an unexpected emergency comes up). Don't forget that cash advances on Credit Cards usually have pretty steep fees. I prefer to have some cash on hand. Money talks. The rules are: The people with the cash make the rules. Maybe you pay half of the credit card down, and keep half your cash. This middle ground may reduce your carrying cost, and give you a bit of a cushion to rely on. Ultimately, you have to do whatever it is that allows you to sleep at night. |
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My advice would be that it's okay to be temporarily broke provided you have health insurance through your employment. Health care would be the only reason, IMO, that being temporarily without emergency funds would be risky. I personally have run my emergency account low several times (although never "empty"). In my case, my "emergency account" is my money market savings account. Right now it's low again and I'll be meeting with my broker next week to arrange for more funds to be moved into it from investments. |
Which is why I asked the questions I did. As for the CC debt, it's a no brainer - I'll bet my next paycheck he doesn't earn on his savings more than what he accrues in CC interest each month.
Good advice on its face. However, don't forget that the biggest factor in successful personal financial management remains the investor. Whether it's debt, risk, or return. A very large part of this is understanding emotions and how they keep people from doing the logical thing. In many case the mathematically correct answer isn't the right solution.
Yep. On 5 grand, it's too much. We don't have to do the math to know that.
Yep, as I said above he would still have the CC for a true emergency. Those steep fees will help dissuade him from using it. After all, how did he manage to build up an amount of CC debt that is concerning to him in the first place? If he could answer the questions I posted I think he would wind up better off, hopefully he'll do that today.
Sounds like he has access to cash if needed for emergencies. Now, like you I prefer to keep a few bucks on hand for any deals that might pop up, etc but it doesn't sound like that's the mode he's in - he's in a "sheesh I need to get out of debt now" mode.
That's an emotional, not a logical suggestion.  (just messin with ya)
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It sat vacant for 18 months while I had it for sale. I received ridiculously low offers in droves. I had two different "buyers" make serious offers but were unable to pull the trigger. The house is in an area where the local economy has been beaten mercilessly witha blunt instrument and left to die alone in the woods. Unemployment is the worst in the country and I'm told it's about 5X the national rate.
Yes. $200. However, prior to them moving in I was negative $1,300/month.
Yes, and hopefully. I don't want them to try and buy the place before I am ready financially.
Traditional FHA @ 6% first mortgage, no additional mortgages. How much are you making on the sale of the house? Making? MAKING? As in how much money will I have left after commisions, payoff on the mortgage, closing costs, transfer taxes and title fees? I'll be LUCKY if I make -$2,500. |
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My mother owns a condo in Florida... an empty one. Nobody is renting right now because it's a "buyer's market" and why rent when you can rake a seller over the coals with a buy. Unless you know it'll always have someone in it renting you may want to consider getting rid of it. I don't know what the market is like where your house is. Renting is a doube edged sword. |
First, this is the internet - the advice I'm giving is worth every cent you paid for it.  I understand that you're concerned that if you pay off your cc debt, you won't have enough money if an emergency happens. Two things could happen: (1) an emergency doesn't happen; or (2) one could happen that requires quick cash. Scenario (1) - everything's fine - you save a lot of interest on the cc debt. Scenario (2) - Assume you pay of your cc debt and an emergency happens. What will you do? Answer - use your cc to pay for the emergency. Net result - you still saved some interest payments on the cc debt. I'm all in favor of having some cash on hand for emergencies but essentially you are asking whether you should finance your cash stockpile on your cc. My answer is no. That said, if it were me, I'd eat only Ramen Noodles and cut out every possible expense until I had some emergency cash. |
Ok. So you need to figure out how to add value to this house in order to make it attractive to buyers. If the local economy is in the toilet, we may presume that putting some big addition onto the house or dropping 30 grand on a kitchen is not the right answer. Obvioulsy you want to spend little or no money on the place, but how is its curb appeal? A few nice shrubs, some trim paint, etc - just stuff to freshen the place up can do wonders.
At least you are building equity in the house, and you hope the house appreciates at least $200 per month. Markets cycle though - that's what they do. If you decide to hold for the long term then that strategy might work for you. Negative cash flow sucks though - even if the place was climbing in value, would you take 25 of them today?
Does this option state who pays for what in closing? It might pay to discuss thier intentions and see if they have even inquired on financing. There's a reason they took the option to begin with, and they probably have debt-to-income issues or credit issues. You want to have a realistic idea of what they are going to do. In any case, you are locked into an option so they control the property. If they buy it then you know what you need to do. Let's go forward and assume they DON'T exercise that option.
Good, there's your value add if they option out. You have decent financing in place.
Assuming they don't exercise the option, you need to remarket the place and add value via the financing. You could carry a land contract with a nice markup on the property and also make a markup per month (and no landlord expenses) since what you charge will be higher than your 6%. After all, you are "lending" to sub-prime candidates. You are doing exactly what the bank does - buying money wholesale (your 6%) and selling retail. Get a big enough downpayment so if they go to hell on you, you pocket enough money to get you to the point you can resell. You could do another L/O, this time stipulating that all maintenance is to be done by the tenant-buyers. On this L/O, you could entice them to pay a higher price for the property by agreeing to take a large seller second back upon sale. If you wanted, you could sell the note and get cash fast. There are many variations on this theme, and many details to iron out. See a title insurance company who can tell you what paperwork you'd need to do, and probably an attorney for a decent contract. It sounds like this scenario is unlikely and that the buyers will buy, but it's good to know. |
By buying shit that I didn't need and then not paying it off when the bill came. Once I get this card paid off, I am going to drop the limit down to about $1,500 (currently the credit limit is over $12,000). That way, no matter what I charge I will always have enough to pay it off in one month. As for potential emergencies, at my lowest point I would still have $1,000 on hand and that would almost tripple the next month. I can't think of many things that can't wait 30 days to be paid off. |