I previously wrote about a strategy that a friend of mine used when going to college that helped him graduate with little to no student loan debt because his parents bought a house for him to live in throughout college and rented rooms to his classmates/friends etc.
They were able to use the rental income to pay for the mortgage and gain equity over the four years he attended school. They were also fortunate to have seen the real estate market rise substantially over the course of those four years and made a handsome profit off the sale of the house.
What Did I Learn?
After seeing this strategy in action, I learned that using the leverage of a mortgage, rental income, along with the possibility of rising real estate prices was a great way to exponentially build one’s wealth.
When my wife and I both landed jobs after college in the same city, we began renting. I did not want to rent, but getting a mortgage without any job history with my company would prove to be difficult (not to mention $40,000 in student loan debt).
We ended up renting a nice 3BR 1.5 Bath townhouse style duplex that was only 4 blocks from my work. I could walk to work, which saved money on gas and allowed us to have just one vehicle. I could also be home within five minutes each night to relax and complete errands – a short commute is awesome and I highly suggest it.
It was a nice place and we enjoyed living there.
The Big Purchase
Using the knowledge that I had gleaned from my previous experience watching my friend (technically his parents) profit from real estate, I decided to approach our landlord about buying the duplex.
The duplex was in excellent condition and was possibly the nicest of its kind in the city. I had done my homework and decided that I would make an offer to our absentee landlord that would essentially allow the other tenant to pay for the entire mortgage payment and my wife and I would simply have to come up with our bill payments each month.
I will concede that it was a bit of a low-ball offer and I expected him to reject it – which he did. However, he counter-offered at a very reasonable price that was just a couple of thousand more than I was really hoping to pay. At this price we would have to come up with about $100/month in addition to our bills. This was great because we were paying $550/month plus bills in rent each month. A no brainer!
After 9 months of owning the property, we were able to tackle the majority of our student debt using our earned income, plus the “rent” we paid to ourselves. I was a little more aggressive than my wife and was able to completely eliminate my student loans in a year after leaving college.
After owning the property for 9 months, my wife received news that she had landed a job in a larger city closer to our home towns. I badly wanted to maintain this property as a rental, but prices had risen so drastically that we could not.
That being said, when we sold the duplex after 9 months we realized a capital gain of 60%. This allowed us to put a large down payment down on our new home and have some money to immediately complete some renovations that would drasticlaly increase the value of the house.
This story was a very fortunate one for me in terms of the capital gains. It was partly being in the right place at the right time. However, I would have never taken the chance on buying such a property had it not been for my past experience and understanding of the potential benefits.