Now that we have moved into our new space, I have a moment to write down a few words on home ownership as a tool to facilitate student loan repayment. If you haven’t been following along on my journey thus far, first, welcome to my little pocket on the internet!
My name is Sam and I graduated dental school at 26 years old with $575,000 of student debt. You can listen to my story in this interview. It was a crippling number and instead of waiting 25 years for loan forgiveness (which would put me at slightly over 50 years old), I decided to pay it back as fast as I can. I experimented with non-traditional ways of living, which included small space living, finding a roommate to live with my married husband and I, scrounging for hand-me-downs, living a minimalist life, and delving into side-hustles. However, one of the more traditional decisions we made was to buy a home. And it paid us back tremendously!
Why We Decided to Buy a Home
We live in Southern California, which is a fairly expensive place to call home. When we first rented a space, it was costing us $2,800 a month to live in a 1500 square foot live/work loft. Even after we negotiated with the landlord to lower the lease to $2,600 a month, we still felt like it was a big chunk to throw into someone else’s pocket. We decided it would be better to funnel that money into equity of our own. That way, we would be paying the same amount of money to put a roof over our head, but still be growing our wealth.
After a year of renting, we knew the next move would be to buy a home. I advise any young person to get their foot into real estate as soon as they can. Even if it is the tiniest home. If you can afford to pay the mortgage, put that renter’s money back into your own pocket.
How We Bought Our First Home with $575,000 of Student Debt
The first thing we did was negotiate with our current landlord a lower monthly fee. The second thing we did was get a roommate, to further reduce the monthly rent. The extra money we saved went directly into a savings account. I recommend a Marcus High Yield Savings Account to hold short-term savings. Meanwhile, we implemented the strategies of frugality (here is a list of Frugal life hacks) to save even more. We shopped for a good deal on a mortgage loan and within six months, we were signing documents for a live/work loft of our own. This was early on in my loan repayment journey, before I delved into side hustles. I probably could have sped up the process by earning more income with side hustles (here is my list of side-hustles).
How to Find a Deal on a Home
We chose a live/work loft that was similar to the one we were currently living in. It had 2 bedrooms, 2 baths, 2 stories, a 2 car garage and 1500 square feet of space. It was built in 2004. As a live/work loft, the property was commercially zoned, and the downstairs faced the heart of downtown. The exact same loft in the community we were renting from was going for $650,000. We found one that was in a more central location, listed at $499,000. In California, that is a steal.
My first tip is to be patient. Look for a long time and don’t jump on the very first opportunity. To be honest, I scoured the listing for 6 months while we were saving money. 6 months is a very long time if you already have the funds, but the best deals come to those who wait.
My second tip is to keep the search well-focused. I limited my search to live/work lofts because of the lifestyle we wanted. I knew I wanted two bedrooms because we wanted to keep our roommate (which we ended up having for 3 years). Having a roommate was great because it helped us pay for our mortgage. At the same time, we knew we wanted a minimalist space. A small space meant we could spend less to own a home. If I wasn’t this focused on what I wanted, I could have easily gotten carried away with buying a bigger, more expensive home. I made sure that the home fit our needs, and nothing more.
My third tip is to not let emotions get the better of you. Buy with your head, not your heart. Society sells us the idea of a dream home. But a dream home won’t make you free from student loans. A dream home will end up being a money pit. And dreams change. I mean, we sold our live/work loft and moved to a ranch community, and it has only been three years. I just remind myself, having a dream house is not my goal. It is a means to reach an end. You can read more about my thoughts on why property ownership is not about finding your dream home here.
How Much It Cost to Buy Our Home
You may be wondering how much it cost to get one’s foot in the real-estate-door. That depends on a whole bunch of factors, such as where you live, or what you are willing to live in. Our first home cost us $499,000. We put down 5%, which was $25,000. Added to that would be closing costs which was an additional $10,000. Total, we needed $36,000 to close the deal on our home.
We chose an online lending company that gave us better deals than a well-known bank could. I would definitely do some shopping around! At first, we thought the Doctor Loan would be the best move. But after doing the math (which you should always do!), we found that the Doctor Loan had a higher interest rate than a conventional loan, which made the monthly payments pretty high. It ended up being cheaper to do a conventional loan with 5% down (which is available for first-time home buyers) plus the added PMI. Moral of the story: do price comparisons.
How Much It Cost to Own a Home
Our monthly mortgage was about $3,000 a month. We had HOA fees that cost $222 per month. Utilities cost about $175 per month. We had a roommate that we charged $700 a month to have her own bedroom and full bathroom. Our total portion per month without utilities was $2,522, which is cheaper than when we were renting under a negotiated price. After two years, we refinanced and brought the monthly mortgage down to $2,500. After another five months, I refinanced a second time and got the monthly mortgage payment down to $1,900! I did the back-to-back refinancing because we were losing our roommate. It was all about bringing that monthly number down as much as possible. However, we ended up pivoting when the market took a turn for the better.
How Much Value The Home Accrued
To our lovely surprise, 2020 and 2021 ended up being pivotal years for us home owners. 2021 alone saw a 20% increase in home value in Southern California. To put it into perspective, in March of 2020, the value of our home was around $510,000. By October 2021, we were able to sell our home at $660,000. We had bought our loft in September of 2018. In three years, the value of our home increased by $160,000!
Why We Sold Our Home and Bought A Second One
We decided to sell our live/work loft and realize the earnings while the market was hot. So as not to miss out on the possibility of continual market increase, we purchased a townhome with half of the revenue from the first loft, and are funneling the other half of the revenue into student loans come February. Our townhome is newer (2018) and is five minutes from my job which nixes my commute. It is also in a much nicer community, down the street from my parent’s house, and within 5 miles of where I grew up. Since we lost our roommate, we bought a townhome that is smaller, but still has 2 bedroom, 2 and a half baths, 2 stories and a 2 car garage. We are using the second bedroom as Mike’s office now that he is WFH.
With the revenue we received, we were able to put 10% down into a $670,000 home. That’s right! We traded our first home for one with the same value. Both homes increased the same amount over the last two years. We gave up 200 square feet of space for a nicer neighborhood and no commute. And with 10% down, we placed more initial equity in this home ($67,000) than our initial home ($25,000). This is without us having to save money or anything. This is just half of what we earned from our daily living expense of putting a roof over our head. For this reason alone, I would definitely recommend buying a home.
How Home Ownership Sped Up My $575,000 Student Loan Repayment
Back to the original title of this post: How did home ownership help with my loans? It gave us an extra $75,000 to funnel into my student loans come February. (The discrepancy between the $160k earned and the amount used for the home and loans is attributed to the closing costs of the sale and the purchase of a home.) This additional $75k towards student loans reduces my student loan repayment timeline by one whole year! And to think, this money would have just gone into some other person’s pocket if we continued to rent.
The Moral of the Story
My advice for young people who are broke but want to own a home is to do what it takes to save the money. Buy the smallest home possible for yourself to start. Consider the possibility of having a roommate for the first few years. Stay determined to live frugally, and reap the benefits a few years down the road. Good things come to those who are patient and wait.
Photo by MinuteKEY on Unsplash