Digging the hole of debt
It seems that every day I’m reading another article about how many student loans people are taking on. I went to college for a total of 7 years and obtained a bachelor’s and a master’s in science. By working up to 3 jobs at one time during college, I minimized the number of loans that I took out. I also was paid to go to graduate school and received scholarships. But even so, I ended up with ~33k in student loans by attending these public schools. I graduated in 2016 and actually came out slightly better than average. The average bachelor’s graduate in 2016 had $37,172 in student loan debt.
So in that context, I suppose I did okay, especially given the master’s degree. My feeling as I left school was excited but fairly nervous about paying back these loans. Assuming that I had taxes, insurance, etc., I would’ve needed to make a salary of $50,000 ($33,000/0.66%) and put every single penny towards loan payments just to get to being worth nothing! Strangely enough, I felt that it was important to, you know, eat some food and not live in my car for a year. I know that most people do not pay off their loans in one year, and that debt is the American way of life, but I still felt the pressure of that student debt weighing on me.
Stop digging and build the ladder
I was fortunate to land a decent paying job making just under 60k right out of graduate school. Additionally, given that I had spent the last 8 years living like a broke college student and driving a beat-up old rust bucket, it was easy to maintain a frugal lifestyle. I was just happy to not have to choose between groceries and cheap beer (the essentials of course). So I set a goal to save up an emergency fund of $10,000. I was initially trying to save up 6 months of expenses in cash, but just liked the sound of 10k better. I threw my extra paychecks and small bonuses towards the debt, and after 12 months met my savings goal of 10k! The student loans had barely budged, however, and were sitting at around 28k.
Hacking the Housing Market
Around this time, some interesting changes accelerated my financial position. First, many of my friends were homeowners and real estate investors with at least one rental property. They had also been working for a little longer, had no student loans and had higher incomes than me. I had been interested in becoming a real estate investor myself and was spending a lot of time reading real estate books and listening to real estate investing podcasts. However, I felt like I was just starting to get my own financial feet underneath me. I did notice though that many low-income people were also homeowners. I decided to do some research on how those people could afford to buy a house in such an expensive market.
This research led me to the world of first time home-buyer programs. There were quite a few and many of them had different terms. But it still seemed too good to be true. I eventually learned of a program from the Colorado Housing and Finance Authority (CHFA). Their mission is to develop and stabilize communities in Colorado through financial education and assistance. I got very excited and started to believe that homeownership was a realistic goal for me sooner rather than later. So I reached out and got more information from the program representatives.
No money down loans
I ended up using a program which granted the full 4% down-payment on a house to qualified buyers. You couldn’t make too much money, needed decent credit, and had to have some money in the bank. Additionally, you were required to take a 6-hour class on home-ownership which could be done online.
So that was a bit of work, but getting given 14k for 6 hours seems like a great trade! I then went on a hunt for a lender that would work with the program, as well as a realtor to start looking for a suitable home. So what’s the catch you’re thinking? Well, the program specified that I had to use their lender, which put a very high-interest rate on the loan. It was about 1.5% above market mortgage rates at the time. That doesn’t sound like much, but on a multiple 6-figure loan can mean hundreds of dollars per month.
Buying my first property
After about a month of looking at properties that I could actually afford, I finally found a townhouse with an unfinished basement. This was very desirable to me as my plan was to house hack this property. The basic idea behind house hacking is to live in a property that you own and rent out a portion of it to cover the cost of ownership. I was very fortunate to have my offer accepted in a competitive market. We actually beat out 9 other competing offers, and only through a chance meeting with the seller were we able to win the bid.
This decision was not all positive, however. At the time I was really afraid. I could technically afford it but knew that I would be stretching myself thin financially if I couldn’t get a renter in, or had some unforeseen expenses. In the end, I listened to the advice of my investor friends and pulled the trigger on the property. Within the first 3 weeks, I was able to find a great renter. I listed a room for rent on craigslist, and after interviewing the place to several people found a great roommate and tenant. Buying the property had wiped out all of my savings though. I was down to about 3k in the bank, which is a fairly low amount for owning an expensive piece of property. So I went back to my frugal habits and spent the next several months building my reserves back up.
Going from good to great financing
In addition to building my cash reserves back up, I worked on getting my cash flow up as well. Earlier I mentioned how the interest rate on my “no money down” loan was quite high. By checking with the lender, I learned that there were no restrictions on refinancing the loan. I called around to several lenders and learned that not only was it possible to refinance into a very low-interest rate but that I could pull out a bit of equity too. In the end, I ended up dropping the property into a 3.75% interest rate, paying nothing out of pocket, and getting $2,000 cash to help fund some construction.
Building the basement
The next step in the process was to actually build out the basement. As I am a food scientist during my day job, I knew little about construction. So, I spent lots of nights and weekends learning about finishing a basement, getting permits, learning and performing construction, and managing contractors. I didn’t know all of the steps, but simply learned the next step in front of me and took action immediately. Construction generates a lot of noise, but luckily my roommate was a great sport about it. Rather than being annoyed with me, he was just generally fascinated in the process. Additionally, I tried to keep the noisiest parts to times when he wasn’t home.
In the end, I was able to add a full bedroom, 3/4 bath, and an additional living room to the house. This totaled 700 additional square feet of living space. Towards the end of the construction, which took about 3 months for the most majority, I moved down into my newly created space. I passed my city inspections on the first try which was very exciting as a newbie to construction, which gave me the confidence to move into and enjoy the space. I then rented out my old room in the home with a 2nd roommate.
How the debt was eliminated.
So, my title was a little misleading. I still owe around 22k on the loan 3 years after starting working. This means that I have done just a little better than the minimum payments on the loans. However, in that time I managed to create 40k of additional value through my home. I spend around 10k on building the basement, and an additional 10k on real estate costs (mortgage, taxes, utilities, etc.) during the time that I lived there. After 1.3 years of ownership, I had 60k in equity in the home and was able to drop PMI, further increasing cash flow.
I didn’t end up paying off my loans with that cash but feel even better because now I own an appreciating piece of cash flowing real estate. I take comfort in the fact that if I wanted to, I could sell my home and wipe out all of my debt. And to me, that is nearly as good as being debt free. As Biggie said, “I went from negative to positive. And it’s all good. Baby BayBay.” Additionally, through house hacking/landlord, I was able to live in the house for next to nothing while I owned it. My net housing costs were around $125/month while I lived there with 2 roommates.
Next steps
I am now back to renting a room in a friends house and have fully rented out the property. In the end, managing rent by the room as a landlord is quite tricky. I also want the freedom to move to another city again, and not be tied down to one location. Before I moved out of the home, I was able to pull a 25k line of credit which can be used to fund more home projects in the near future. This project was a lot of work, but in the end, I learned a ton and substantially advanced my financial future. It’s not easy but is definitely repeatable for others.
The main lessons are that debt is hard to get out from under, especially by saving your way there. By utilizing other peoples money, and relationships as well as a dash of luck, you can rapidly advance your financial position. I plan to repeat this process a couple more time to kick-start my journey towards financial independence. I hope you’ll follow along, and drop me a line to let me know what you thought of my project. Until next time, have a great day!
