Trading Liabilities for Assets: A plan to pay off the truck and tractor

We hate consumer debt.

 

Besides the mortgage on our personal residence, we try to pay cash for anything that isn’t going to make money for us. So imagine our surprise when we found ourselves owing a combined total of 30K on a Toyota Tundra and a brand new Kubota tractor (she said, tongue planted firmly in cheek)

 

But unfortunately, dear space pals, there’s no such thing as public transportation in the country and acreage requires a bushhog. So for the last couple of years, we’ve forked out a combined payment of $750/month for these two lovely liabilities. I don’t like it and Mr. Brz keeps forgetting they aren’t paid for, which is rather annoying as he panics anew every time he finds out. Picture someone learning they have cancer on the first and fifteenth of every month and you’ll get the general idea.

 

So for my own sanity, I’ve undertaken a mission to rid us of this scourge and with some fancy finagling involving bonus checks, income tax refunds and rainy day savings, we should have the cash to pay off the balance by March of ’08.

Sometimes old programming dies hard 

I’ve been licking my proverbial chops at this delightful eventuality for weeks now. My trusty business calculator comes out and I figure and re-figure how lovely the checkbook balance will look sans nasty vehicular payments. I’ve added up the number of payments between now and then (that would be 10 bi-weekly payments on the truck of $175 and 5 tractor payments of $400, the number of years left on each (3 for the truck, 4 for the tractor), added, subtracted, and compounded ad nauseam.

 

It’s been too much fun.

 

Then it hits me—We are big-shot real estate investors now. What on earth am I doing using 30K *cash* to pay off liabilities?

 

Slowly, painfully, my pitiful little brain cells creak through the possibilities of this new way of thinking.

 

• Old Way:
  • Pay off debts.
  •  Increase monthly cashflow by $750.
  • Pat self on back and exude smugness throughout the next 3-4 years whenever remembering scrimping, saving and eventual triumphant debt-free-ness.

• New Way:
  • Find asset for 30K that generates positive cashflow of $750/month.
  • Pay tractor and truck note using new stream of income.
  • Continue receiving $750/month long after liabilities are paid off (Can anyone say, “College Tuition?”)
  • Feel very silly for almost falling back into old financial management rut.

Will it work? 

Of course the sticking point is finding a $30K asset that will generate $750/month positive cashflow. But just for grins, let’s pretend we can. Here’s how this imaginary scenario could play out.

 

(By the way—in my Happy Place everything is possible. By starting with this positive outlook, my rational mind is not allowed to edit out any brilliant baby ideas before they have time to grow up into realistic plans that will make us money. Does every idea work? Not on your life… but in my Happy Place, negativity is suspended and everything’s given an equal chance to germinate)

Let’s pretend we find a house for $25K.  (Don’t laugh too hard… we bought our last place for $25.5K)

Let’s say the house needs $5K in repairs for a total of $30K. (What an amazing coincidence! That’s just how much we have to invest~!)

 

Now, after careful research, we find that said house will rent for $950/month.

 

Expenses on this place will run $250/month leaving positive cashflow of $750/month.

 

Okay fine… but here’s where this gets interesting. After 4 years, the truck and tractor are paid for—but the silly little investment house doesn’t know that. It just keeps on generating that same $750/month… year after year after year. The value of the house increases (hopefully), but even if it doesn’t, we can still sell and get our original 30K back.

 

However, let’s pretend that by the time the truck/tractor notes are history, we have such an overstuffed portfolio of rentals that we decide to sell and carry back owner financing.

 

Here’s how this could work out:

• Purchase price: $30K

• Selling Price: $60K

• $3000 down payment

• Principle balance of: $57K

• 8% interest, 15 years

• Note: $545/month

• If the buyer pays the entire 15 years, the total received would be:

• $98, 100

• Or, we can just keep the house and keep pulling in the positive cashflow from rents month after month after month… not bad for a 30k initial investment.

So again… will it work? I guess we’ll have to step out of our Happy Place to find out J

If you’d like to see how we’re doing, check back occasionally and click on Tractor/Truck Challenge.

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Tags: assets, investing, investment, liabilities, owner finance, real estate