Dave Says: Focus on quckly paying off debt on commercial rental property

Dear Dave,

My husband and I own three commercial buildings in Boise, Idaho, that are leased out long-term. We owe about $500,000 on one and $400,000 on each of the others, and they earn $190,000. The only other debt we have is a small amount left on our mortgage. I know you don’t like debt, but is it OK to owe on commercial properties that are making good money?

Dawn

Dear Dawn,

I own several commercial buildings, and I don’t owe a dime on any of them. So, I can’t tell you that I think it’s OK to have debt on commercial buildings. I believe the best plan for building wealth is to become debt-free.

Now, from the situation you’ve described, that doesn’t necessarily mean you guys should be in panic mode and start selling everything in sight. But I do think that you should systematically work your way out from under these debts over the next few years.

If I were in your shoes, I’d go ahead and get the house paid off first. Then, I’d take a look at these commercial properties, and begin working the debt snowball on them. Start throwing as much money as you can at the smallest debt, while making minimum payments on the other two. When you get it paid off, roll that amount over — along with every dime you can dig up —and attack the second largest one. Follow these steps until you pay off all of your commercial properties.

It might take up to 10 years in your case, because we’re talking about at least $1.3 million in debt. If you have a bunch of equity in one you don’t particularly like, you might consider selling it and throwing the cash at the remaining two. But whatever the timeline, I’d develop a hardcore game plan to get rid of this debt.

Wouldn’t it be cool to have all that paid for? Talk about cash flow!

— Dave

Split it with you

Dear Dave,

My wife and I are debt-free except for a car and our house. The car is financed through her mom, and her dad agreed to send us half of the payment each month. We owe $7,700 on the car, and we have enough cash right now to pay off the car in full with plenty left over. Should we do this, even though her dad is making $100 of the payment each month?

Dustin

Dear Dustin,

If her father had agreed to send you guys $100 each month, ask him to continue doing that for the duration of the agreement. Then, you guys pay off the car now with your cash. There’s nothing dishonest about this, as long as you explain the plan to her parents and they’re agreeable.

The reason for this approach is two-fold: it gets the debt paid off, and then you can get the car put in your name. Plus, a situation like this represents drama just looking for a place to happen, if it hasn’t already. Family relationships take on a weird vibe when money has been loaned and borrowed.

If they’re not agreeable to the idea, that’s okay. All you can do is ask. But one way or another, I’d be out of this situation before the sun goes down!

—Dave

Don’t touch the 401(k)

Dear Dave,

My wife and I make $100,000 a year combined, and we have about $12,000 in credit card debt. We also owe another $80,000 in student loans, and our kids’ private school education costs $1,000 a month. Is it okay for me to take a loan against my 401(k), which is invested in mutual funds, to clean up the credit card bills?

Stephen

Dear Stephen,

I wouldn’t do that. If your 401(k) is invested in good mutual funds, it’s likely you’ll miss out on some pretty good rates of return. But that’s not the biggest reason this is a bad idea.

The biggest reason is that when you leave your company — and you will leave, whether it’s because you get a better job, you get fired, or you die — that loan is considered an early withdrawal. If you don’t repay it within 60 days, you’ll get hammered with a 10 percent penalty plus your tax rate. You could easily lose almost half of what’s in the account.

If you want to start paying off debt, my advice is to start doing things to generate extra income and begin living on a tight budget. Grab an extra, part-time job for a while, too, and have a big garage sale. Sell so much stuff the kids think they’re next! You need to work a serious debt-busting plan.

The good news is it’s only $12,000. Knocking out the credit card debt won’t be so bad, and with your income, the kids’ school isn’t unreasonable. It’s the $80,000 in student loans that’s killing you. Scrape together and save every penny you can find each month, and put that toward paying off the credit card debt. Then, roll that amount over, add anything else you can come up with, and attack those student loans.

You can do it, Stephen!

—Dave

Kicked out, starting out

Dear Dave,

I’m 19 years old, and I just got kicked out of the house after wrecking my dad’s truck. I’ve got a job making $12 an hour working about 40 hours a week, and I’m currently living with a friend at his apartment. I have a goal of going to college, and I’d like to get out of my friend’s place as soon as possible. Do you have any advice some someone just starting out?

Brandon

Dear Brandon,

That’s a tough situation, buddy. I’m sorry things worked out that way with your dad. You’re going to need more money than what’s coming in, so let’s prioritize things.

Your first goal is food, and your second goal is to help your friend a little bit with the rent. After that, you need to save up and get a car as quickly as possible. I’m talking about a total beater — a $500 to $1,000, mechanically sound, basic, ugly car. They’re hard to find, but they are out there.

After you’ve done this and gotten some stability in your life, start thinking about saving for a little bit better car. This may mean picking up an extra part-time job for a while. Then comes piling up some cash so you can get your own place. Let’s get all this out of the way before you start thinking about school. Right now you barely have a place to live, and you’ve got nothing to drive.

Listen, I love your motivation and the fact that you have dreams and a goal to better yourself. You’ve been through a lot, but let’s get the basics taken care of first, introduce a little stability into your life, and then we can start coming up with a plan for school and a long-term future. Good luck, Brandon!

—Dave

Dave Ramsey is America’s trusted voice on money and business, and CEO of Ramsey Solutions. He has authored seven best-selling books. The Dave Ramsey Show is heard by more than 12 million listeners each week on 575 radio stations and multiple digital platforms. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.

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