Dave Says: Rental properties? Baby Step 6
Dave Ramsey | October 25, 2017

Dear Dave,

I have a rental property that I still owe some money on, and I’ve just begun Baby Step 2 of your plan. Should rental property debt be included in the debt snowball?

Matt

Dear Matt,

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No, it shouldn’t. Baby Step 2 of my plan is where you use the debt snowball to pay off all debt — from smallest to largest — except for your home. This, of course, comes after Baby Step 1, in which you save up $1,000 for a beginner emergency fund. I would include rental properties in the “home” category, and I urge people to get serious about paying off their homes a little further down the road in Baby Step 6.

To fill in the gaps, Baby Step 3 is going back and fully funding your emergency fund with three to six months of expenses. Baby Step 4 is investing 15 percent of your household income inRoth IRAs and other pre-tax retirement plans, and Baby Step 5 means setting aside college money for the kids. Baby Step 6 is where you pay off your home, including any rental properties that weren’t already paid for in cash, and Baby Step 7 is when you relax, build wealth, and give.

If it were me, I would pay off my primary home before taking care of the rental properties. That’s simply a risk management perspective. However, if you owe just $20,000 on your rental property but still have a $3 million mortgage on your residence, you might go ahead and quickly knock out the rental property first.

Hope this helps!

—Dave

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