Line of Credit vs. Investment: Smart Strategies for Debt and ROI

When you’re dealing with debt and looking at new opportunities, it can be overwhelming to figure out the best move. Should you use a line of credit with a 7% interest rate to pay off a loan at 15%? Or would it be smarter to invest in a rental property that brings in a 20% return on investment (ROI)? Let’s break it down in a way that makes sense and helps you make a confident decision.

Step 1: Understand Your Costs and Returns

First, we need to look at the numbers. When you take a loan or line of credit, you’re paying the bank a percentage in interest. On the other hand, when you invest in something like a rental property, you’re earning money in returns.

• High-Interest Loan (15%): If you’re holding onto a loan at 15%, that’s a significant cost eating into your finances. Paying this off as soon as possible can save you a lot of money.

• Line of Credit (7%): A line of credit at 7% is a much cheaper way to borrow money. The question becomes whether you should use it to pay off the 15% loan or invest in something more lucrative.

• Rental Property ROI (20%): A rental property that brings a 20% ROI sounds amazing, but it’s crucial to dig deeper. This return depends on factors like location, rental demand, and your management skills.

Step 2: Benefits of Paying Off Debt First

Let’s say you decide to use the 7% line of credit to pay off the 15% loan. Here’s what happens:

• Immediate Savings: You instantly save 8% in interest annually. For example, if your loan balance is $50,000, you’d save $4,000 a year by replacing it with a line of credit.

• Simpler Finances: By reducing your high-interest debt, you lower your financial stress and free up cash flow.

• Guaranteed Returns: Paying off a 15% loan is like earning a guaranteed 15% return because you’re eliminating that expense. That’s a solid financial win with no risk.

Step 3: The Case for Investing in a Rental Property

Now let’s explore the other option: using the 7% line of credit to buy a rental property with a 20% ROI.

• Higher Potential Returns: If the property truly generates 20% ROI, you’re making 13% more than the 7% borrowing cost. For instance, investing $50,000 could bring in $10,000 annually after paying the loan interest.

• Building Equity: As the property value grows and the mortgage gets paid down, you build equity over time. This is wealth you can leverage for future investments.

• Cash Flow: A well-managed rental can provide steady monthly income, boosting your financial stability.

However, keep in mind that investments carry risks. What if rents drop, expenses go up, or the property doesn’t perform as expected? Always stress-test the numbers to ensure you can handle potential setbacks.

Step 4: Combining the Two Strategies

Why choose one when you can do both? Here’s an example of combining these strategies for maximum impact:

1. Refinance the 15% Loan: Use the 7% line of credit to pay off the high-interest debt. This immediately reduces your costs and improves cash flow.

2. Invest in the Rental: With the money you’ve freed up, analyze rental opportunities. If the property’s ROI comfortably exceeds the 7% borrowing cost, move forward.

3. Leverage Rental Income: Use the income from the rental property to pay down the line of credit faster. This keeps your financial momentum going and reduces overall debt.

How to Stress-Test Your Decision

Before committing to any plan, it’s essential to run a stress test. This means looking at worst-case scenarios to see if your finances can handle the pressure.

For the Line of Credit and Debt Payoff:

• Calculate how long it will take to pay off the 7% line of credit.

• Ensure you have enough monthly cash flow to cover payments comfortably.

For the Rental Property:

• Assume the property’s income drops by 30% (e.g., if you have to convert a short-term rental to a long-term lease).

• Add unexpected costs, like repairs or vacancies.

• Check if the numbers still work under these conditions. If they do, you’re in a solid position to proceed.

Key Tips for Success

1. Do the Math: Don’t rely on gut feelings. Use clear numbers to guide your decisions.

2. Avoid Overleveraging: Borrowing can be helpful, but taking on too much debt can backfire. Stay within your financial limits.

3. Focus on Cash Flow: Make sure your investments generate enough income to cover their costs.

4. Work with Experts: Consult with financial advisors, mortgage brokers, or property managers to make informed choices.

Real-Life Example

Imagine you’re holding onto a $50,000 loan at 15%, which costs you $7,500 annually in interest. You also have the opportunity to buy a rental property for $200,000 that promises a 20% ROI. Here’s how it could play out:

• Option 1: Pay Off the Loan: You use a $50,000 line of credit at 7% to replace the loan. Your annual interest drops to $3,500, saving you $4,000 every year. This frees up money for future investments.

• Option 2: Invest in the Rental: You take the $50,000 line of credit as a down payment on the property. If the rental generates $40,000 annually (20% ROI), you’ll have $36,500 left after paying the $3,500 interest. That’s a big win, but only if the property performs as expected.

• Option 3: Combine Both: Use the line of credit to pay off half the loan and invest the rest in the rental. This reduces your debt costs and gets you started with a high-ROI property. By balancing the two strategies, you’re spreading out your risk while maximizing returns.

The Bottom Line

After 20 years in real estate, I’ve learned that the best decision depends on your numbers and goals. If you’re focused on reducing financial stress, paying off high-interest debt with a cheaper line of credit is a no-brainer. But if you’re ready to take calculated risks, investing in a rental property with a strong ROI can help you build wealth faster.

Always run the math, stress-test your plans, and stay flexible. Whether you choose to pay down debt, invest, or do both, make sure your money is working as hard as possible for you. Real estate is about building long-term wealth, so think strategically and act confidently.

Keep it consistent, stay patient, stay true—if I did it, so can you! Ready to learn? Let me guide you at propertyprofitacademy.com – Jorge Vazquez, CEO of Graystone Investment Group & its subsidiary companies and Coach at Property Profit Academy.

FREE first month at Property Profit Academy:
✔ Learn to buy properties with little to no money down.
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My team and I have over 20 years of experience in real estate. We have strong relationships with wholesalers, probate lawyers, sellers, and others in Florida. I aim to align your investments with your vision and deliver exceptional results. Contact Vanessa to schedule a meeting: https://graystoneig.com/cody