sell rental property to pay down credit cards?

[pentup]

Due to my inability to control our finances in my early 20's I've now got some significant credit card debt to deal with at 34 years of age.

Income: $77k gross.

We've got $25k @13% on one card, $1400 @5% on another, a department store card with $5000 @ 29%, an old line of credit turned loan of $6400 @ 7.65%. We originally had another card with $28k on it but I used a 401k loan over 5 years for some debt relief. It's now down to just under $21k. I know the 401k loan was not the smartest move but I think it was necessary at the time.

So we're talking about almost $60k in bad debt. I'm able to make the minimum payments but not a lot more. I feel like we're pretty frugal now so merely cutting spending won't get us much. We've never had a late payment and we're not behind on anything.

I do have one rental property that we own. It's worth approximately $85k in this terrible market. It's got 23 years left on a 30 year note, approx. $60k. The PITI is $602. We get $800/m, which is the going rate in rent and have steady tenants although I expect them to move when their lease is up because they are having trouble with the school nearby.

If I could clear anywhere near $20k from the proceeds of the house I could free up about $400/m to put toward bad debt. I just can't decide if paying off good debt to pay bad debt is a good idea or not.

I'm also considering refinancing the rental property for 15 years @ ~4%. I would still clear over $100/m in this scenario and the house would be paid for sooner.

What do you think?

[bjl584]

Selling the property would be a good way to get some cash to help with your debt, but there is no guarantee that the place will sell quickly, or at all, unless you are willing to give it away. (It took me over a year and a half to sell my last home.) Is there anything that you can do that is more immediate to help your debt load? You should post your COMPLETE budget so others can critique it. I'm sure that your expenses can be trimmed someplace. Perhaps you can sell some unneeded/unwanted items around the house. Perhaps you can pick up extra work. What is the status of the rental property? Is it occupied? Can you raise rents? Refinancing may help if you are able to do it.

[JoshuaHeckathorn]

It's a horrible time to sell rental properties IMO. It sounds like the property is still cash flow positive, so I would try to hold onto it until the market rebounds somewhat. Who knows how long that will be, but I still have faith it'll happen.

You do have a sizable amount of credit card debt which you need to be paying down. I know you say you're frugal, but I would take an even closer look at your finances to trim the fat, sell things around the house you don't need, and try to allocate as much cash as possible on a monthly basis to paying off your highest-interest debt first. If you have great credit, you may want to think about transferring some of the debt to a 0% interest credit card to save on finance charges.

[disneysteve]

I think answering your question really requires knowing the big picture. We need to see your budget.

One thing I'd urge you to do is to forget about this whole concept of "good" debt and "bad" debt. I think all debt is bad if you can't afford it and don't have a solid plan for repaying it.

I would agree with the advice to sell whatever you can sell. Dave Ramsey is fond of saying to sell everything you can until the kids think they're next.

Has the 401k loan been repaid?

[jpg7n16]

We've got $25k @13% on one card, $1400 @5% on another, a department store card with $5000 @ 29%, an old line of credit turned loan of $6400 @ 7.65%. We originally had another card with $28k on it but I used a 401k loan over 5 years for some debt relief. It's now down to just under $21k. I know the 401k loan was not the smartest move but I think it was necessary at the time.

...

I do have one rental property that we own. It's worth approximately $85k in this terrible market. It's got 23 years left on a 30 year note, approx. $60k. The PITI is $602. We get $800/m, which is the going rate in rent and have steady tenants although I expect them to move when their lease is up because they are having trouble with the school nearby.

Okay, before considering the home insurance, taxes, repairs and maintenance you pay on the property - You make approx $200/month = $2400/year on your equity of $25k, or $20k upon sale.

2,400/20,000 = 12% return (taxable)

And that completely ignores all the other costs associated with the rental, so the TRUE rate of return is much less.

Compare that to your debts, and you would still be better off selling the property, paying off the 29% card and the other 15k putting towards the 13% card.

5,000 * 29% = $1,450
15,000 * 13% = 1,950
Net savings = $3,400 (not taxable)


So even in the fantasy world of faulty math, it'd still be a better idea to sell the place.

My recommendation: sell.

[naomibatac]

Sell rental property to pay down credit cards?

What I can suggest is to negotiate with the different credit cards issuer. You can ask for a sort of restructuring whereby you both agree on a monthly amortization in the amount that you can afford to pay over a longer period. The effect is just like paying a little more than the minimum for each credit card. In order for you to sustain your monthly budget, refrain from using your credit cards and continue your frugal spending.