I Went into Debt to Invest in Real Estate

When I was brainstorming ideas for the name of this website, I ultimately chose “Debt Free Geek” because it described me perfectly:

a technology geek without debt

Just a few years prior, I had paid off over $150,000 in debt by age 28. And by starting this site, I hoped to share how I did it and help readers, maybe like yourself, achieve a similar feat.

5 Benefits of Being Debt Free

80% of Americans in Chains!

After dropping all my debts in 2014, I’m BACK to being a one of the “80% of Americans caught in the chains of debt” according to Dave Ramsey.

How Could I Let This Happen?!

We’ve wanted to get into real estate for many years. No matter how I ran the numbers, I couldn’t get solid rates of return OR the amount of cash flow I wanted with cash-only purchases.

I figured out that I could probably buy a house every two to three years, so we’re talking a measly three houses per decade.

This just wasn’t fast enough for us. So we began to consider financing, and that’s where we landed. A smaller amount of cash required, and we get cash flow sooner rather than later, as well as someone helping us pay down the debt. Let me show you.

Our Current Loans by Date Acquired:

Here’s a list of the loans we’ve taken on over the past six months in our real estate investment journey. One of them is our new-to-us, fixer-upper home.

  • December 2017 – $51,000 – Rental Property / duplex 1
  • December 2017 – $51,000 – Rental property / duplex 2
  • February 2018 – $63,000 – My primary home

Rental Property / Duplex 1

This cute little two-unit house brings in a productive $450 per month in positive cash flow.

I follow general advice provided by Brandon Turner at Bigger Pockets, which is to set aside a portion of gross rents for vacancies (8%), cap-ex (5%), and repairs (5%). When I refer to “positive cash flow”, I mean the amount of cash leftover each month AFTER saving for these items.

It’s not all that different than the idea of paying yourself first, as I recommend for personal budgeting.

Rental Property / Duplex 2

This is a carbon copy of Duplex 1, and it’s right next door. Each of them is located about 35 minutes from where I live. Another $450 per month in wondrous, positive cash flow.

So far, I’m extremely pleased with both of these properties and the additional $5000 of income they’ve generated. I do plan to share more about the good/bad/ugly in future posts.

Not bad for just $34,000 down, right? These two properties bring us a return of over 26% on our cash paid out-of-pocket. This return is calculated after some necessary repairs and fees for closing.

Primary Home

We listed our home in February of this year and had it under contract in just four days at $135,000, with a cash buyer. Two weeks later, we closed and walked away with just over $127,000 in cash!

Here are the details of that deal:

Sale Price: $135,000
Closing Costs: Paid by buyer
Agent Fees: $6,750 (listing agent 2%, buyer agent 3%)

Just before putting our home on the market, we found an older house which needed about $20-$30,000 in repairs. We negotiated to purchase that house for $70,000. We also decided to finance this purchase and only put 10% down ($7,000).

Here are the details of the deal on our new fixer-upper home:

Purchase Price: $70,000
Loan: $63,000, 30 year fixed, payment = $422/month
Down Payment: $ 7,000 (10%)
Closing Costs: $0 (paid by seller)
Repair Budget: $25,000
Total Out-of-Pocket Cash: $32,000 *

* We’ve only spent about $5,000 of our budgeted repair money, so currently we’re sitting at around $12,000 out-of-pocket.

Why a Primary Mortgage?

Our home’s value was appreciating at about 2-3% per year. Since we had it paid off, it felt a lot like having $130K in bonds.

Real estate investments can generate annual returns of well over 25%, as you can see from our two duplexes.

So our goal is to take the cash we’ve freed up from selling our house and use it as down payment on more income producing real estate.

The less cash we have tied up in our primary home, the more property we can purchase with financing.

A Word on Returns: Stock Market vs Real Estate Market

I’ve seen a lot of people compare stock market investment returns to mortgage interest rates. The argument is, “Hey, I can invest my cash in stocks and make more money than I’d save if I used the money to pay off my mortgage.” Yea… I’m just not feeling it.

Sure, you could probably beat your mortgage’s interest rate by 3-5%, but it’s just not enough for me, and you have no control over the market.

Now with real estate investing, you can absolutely experience (and have great influence on) returns of 20% to 30%.

So, I still invest in the stock market, but I don’t park all of my cash there.

What Should You Do With Your Mortgage?

So many options, and it all depends on your apetite for risk, your age, salary, marital status, and more.

Are you unsure if you’ll have a solid income in years to come? Then maybe paying off your home now or down-sizing makes sense.

Are you desperate to invest, and afraid of missing out on the compounding growth of the stock market? Then maybe you should strike a balance between investing and mortgage pay-down. Remember, down-sizing is still worth considering.

Are you in a great job field, already investing, and just splitting hairs? Consider paying your mortgage down to the last third of its amortization schedule. In this part of the loan’s maturity, most of your payment is paying off the principle balance of the loan. So each monthly payment is mostly going to build your equity. I used to dislike this argument, but I’ve come around. Everyone’s situation is different.

Make your own choices!

What About Debt Free Geek?

Here to stay. Here to help and inspire by sharing my failures and successes.

For me, gaining total freedom from debt was one of the best things that ever happened to me, so keeping the site’s name the same is a token to remember how it all started.

In a way, it created a gigantic savings account that allowed me to save over $130,000. In addition, I had over 3 ½ years of living without a housing expense.

The amount of courage this gave me was unbelievable. I performed more confidently at work. We traveled and enjoyed many “guilty” pleasures without the guilt.

Most of all, it caused me to peer into the next evolution of financial freedom (aka “financial independence”), and what I found has catapulted me to an amazing new level.

Rental Property Performance So Far

The properties have performed nicely so far! I’ve had one tenant move out, and had the opportunity to make some improvements and increase the rent for that unit by 15.8%, which will cover the cost of the improvements in just six months.

Here’s a look at 2018 performance (four months):

  • Gross Rents: $10,439
  • Expenses: $4,554
  • Net Profit: $5,884

I budget for holding $260 per duplex in reserves for vacancies, repairs and capital expenditures (roof, hvac, etc). For four months, that’s $2,080 in reserves.

I budget for $450 per duplex in profit. For four months, that’s $3,600 in profit. If you’re doing math and have noticed that I have extra profit…it’s due to some late fees paid by tenants.

We’re in Rome this Week!

I’m finally taking some time to write this post for you guys while on this 8 hour flight to Rome. The whole trip will cost us around $3,000 to $3,500, depending on what we spend on food and activities.

Having the ability to take family trips like this is a direct result of our decision to become debt free. I’ll always be thankful that I made the decision to chase debt freedom years ago.

And some day, when we’re living abroad for the summer while the kids are out of school, I’ll be thankful that, anxious yet hopeful, we sacrificed our debt free status to blaze a new trail to financial freedom.

3 Replies to “I Went into Debt to Invest in Real Estate”

    1. Hey PM! I do manage the rentals myself, and as you’ve said, it’s not a passive investment. I probably make at least one or two trips out to my duplexes each month.

      Still want to get with you some time for coffee. Let me know if you’re ever in Columbia. 🙂

  1. Chris, it’s time for another real estate update! I’m feeling the itch to get into property and am especially curious to hear more about your good/bad/ugly. From a budgeting perspective, have you had any issues? And are you still on track to leave your job by the beginning of 2019, or has that changed with this real estate investing initiative?

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