Let’s pretend for a moment that you have $40,000 in student debt after Grad school.This is a scary start. What if you could erase that? What if you could erase that and live for free? What if you could erase that, live for free and maybe pay off your car? While we are on the subject let’s buy a brand new car!
Warning! The extreme plan of this article may be difficult to understand without some prior knowledge! Refer to PART I and PART II of my previous articles to better grasp the following concepts put into action.
This poor situation really took a turn for the better. Smart investment in real estate can help us achieve this and more. It is important to understand from the start that no matter the house, investing can be risky and should be clearly evaluated. Money is made when you buy Real Estate, not sell.
Ready to jump in? Let’s use our example from above to walk through the scenario. Although this scenario is made up, it is inspired based on a real life situation.
Let’s step back a few years to your first year of Grad school. You are only $20,000 in debt after undergrad. Wow, what a relief… Of course all these numbers can be tweaked to fit your unique situation. So you have all this debt and you decide to buy a home! I know, a bank would never lend to a college student. Let alone a student with that much debt. Well, you have an alternative. Get a co-signer. A parent, uncle, older sibling or anyone who could be pre-qualified themselves could co-sign on your loan.
So you are walking into the bank’s office with your co-signer and you have no idea what to expect. Do not fear, a great local loan provider will be able to walk you through the process. They are on your team! The bank wants you to be able to make payments as this makes you a safe investment. The best thing you can do is be upfront and honest. Come into this meeting with as much information as you can find. Research is your best clout. If you have a specific investment plan for a property be ready to present it in clear terms. This will greatly help your bank with arranging the proper financing.
Okay, so you are pre-approved for a loan! Let’s say you came up with a $15,000 down payment and an 95% LTV (Loan to Value ratio. Which is essentially the amount the bank will give you). This is going to be an FHA loan which can go as low as a 3.5 percent down. This type of loan is normally for first time home buyers and property which shall be owner occupied, meaning you will live here. So you now have $300,000 in total buying power.
A couple key points to remember, Real Estate investing is as creative as laws and basic finance principles allow. This is a conservative way to see this deal. Pieces of this puzzle will be explained greater in later articles when we talk details of down payments, good credit, loans and much more.
So you go out with your Realtor and find a $300,000 three-bed two-bath house. It needs a little work, but your agent negotiates a successful contract and gets it to closing a month later. You get a new home buyers tax benefit also. You now own a home! Well, to be precise, you and your co-signer do. Great so we now have no job and have to pay a mortgage.
I thought I get to live for free? We do. Let’s say your mortgage payment $1529.39 a month at a 5 percent fixed interest rate. Do you have any friends? Maybe college roommates you are leaving behind? How about this, you take the small room and charge your two roommates $800 a month each in rent. I don’t know if you are good at math, I know I’m not. However, I do believe that means you have $70.61 in your pocket each month after your mortgage is paid. (this is called cash flow).
It is very important to know that this left over money should be kept! We must account for capital expenses (i.e. roof, HVAC, water heater, or any other expense). Again, more on this later.
So, we now live for free. But I want a car and no more debt! Okay, so let’s live in this house for the remainder of Grad school. We sell it. With an average annual appreciation rate at three to five percent, let’s use 3 percent. Three years after the initial purchase, your home may be valued in the $327,000 range. This is especially true if you are in a hot seller’s market like Nashville.
So you sell the home for $330,000! Over list price! What do you walk away with? Well based on the original price you bought for of $300,000 and after 36 months of your roommates paying your mortgage, you have about 10% equity in the home and still owe $271,729.77 in principle mortgage payment. So on the sale of your home you have a margin of $58,270.23! Take away $15,000 of your original investment and consider you pay a conservative $23,000 in broker fees and closing costs, you net $20,270.23! Remember on top of that you have that initial down payment back in your pocket if you did not owe it to another party.
This example has been dependent on a hot market and everything going smoothly. Many things could have happened along the way to put a dent in the process. But imagine if you bought a $150,000 home in poor shape and put $30,000 into it and sold it for $230,000. You don’t even have to live in that house and you have made just about the same profit as the previous example, but in 1/36th of the time!
So by living for free for three years, hopefully saving money, and maybe even getting a small job, you can easily pay off half of your loans! Let’s not stop there. I promised a new car, remember? Let’s take that extra money and our original down payment then do it all over again! Three years later, your loans are gone and you have gotten so good at Real Estate, that you refinanced the second home you bought and got a new car. Or maybe you just somehow bought two smaller homes and flipped one quick. Or maybe you have gotten so quick and creative that you are building a Real Estate empire!
The point is that this is only one way of doing things. Take a moderate risk. Do your research. Consult experts. Invest in Real Estate.
This article has been brought to you by inspiration from my interview with Nashville Realtor, Jessica Harris. Jessi is a Real Estate Agent with Village Real Estate. She erased her student loans and payed off her car through investing in two fixer uppers. Even being a student in Grad school did not hold her back. She is now living out her passion for Real Estate in Music City, USA!
