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Why We Bought Rental Property With A $40,000 Windfall

Deciding how to spend or invest a windfall is never easy, but for us, the choice was clear: Rather than play the stock market or pay off student loans, we got into real estate.

After inheriting $40k, the author bought a rental property rather than pay down student loans.Two years ago, my fiancée, Laura, had finally completed her bachelor’s degree and was ready to start working full time. Like many of today’s graduates, however, she graduated with student loan debt.

$30,000 of it.

How did we tackle this problem head on and manage to make 30K along the way? Here’s our story…

After graduation, Laura got a job at a small advertising agency. The starting salary was far from six figures, but enough to cover the bills.

Six months later, the student loans came due and we calculated the monthly payments were going to be roughly $480 a month. Ouch.

Fortunately for us, Laura isn’t very “spendy” and never amassed even a single dollar of high interest consumer debt; she owned her vehicle outright and had no credit card balances.

A few months into repaying her student loans, we learned that Laura’s grandmother passed away following a long illness. Unexpectedly, Laura inherited $40,000 from her grandmother.


Obviously, it was decision time. How should we best use that windfall?

It was interesting talking to different family members regarding how they would allocate the inheritance they received. Some were going to buy a new car, others were going to fix up their primary residence, and a few talked about locking the money away in CD accounts.

Ultimately, we decided to use the money to purchase an investment property.

Everyone we talked to approved of our decision to use the money to buy a house, but their jaws dropped when we told them that we weren’t going to live in it! Few could understand why we would buy an investment property before paying off Laura’s student loans—or at least buy a home for ourselves!


Before I go into too much detail, I want to preface the following by saying that we did not decide to implement this strategy “blindly”. We have other rental properties and did our due diligence before making this decision.

With that said, here’s are the three big reasons we made this decision.

  1. Student loan debt is tax-deductible. Laura’s loans have an 8% APR, which after tax deductions and the standard rate of inflation (3% if you believe government statistics—another discussion altogether) the actual APR she’s paying is closer to 4%.
  2. Liquidity. If we used the windfall to pay off her student loans in full, Laura would have had no additional cash reserves. This would have made her incredibly vulnerable in an emergency (for example, if she needed major medical care or became unemployed.
  3. Lazy money. We knew that if we paid off all of her debt, then those dollars would no longer be able to produce additional income for us. Based on our prior experience in real estate, we were convinced that a rental property could produce an annual 25-30% return on our initial investment of $40K or less.

Still scratching your head? Here’s how it worked.

The Details

After researching our target market for about three months, we finally got the perfect place under contract:

Here is what the investment looks like:

  • Purchase price: $110k.
  • Market Value: Between $135 and 145k (based upon traditional sales, i.e. non-REO or short-sales. Note that the property had $25-35K of built-in equity).
  • Down payment: $27K.
  • Closing costs: $4K.

Total out of pocket investment: $31.5K.

  • Estimated Rent: Two units, a 2bed/1bath: $750 and 3bed/2bath: $1,000 for a total rent of $1,750. (We based on multiple conversations with various property managers).
  • Estimated mortgage with tax/insurance: $700.
  • Estimated repairs: $1,000.
  • Estimated monthly expenses (water, trash, gardener, etc): $165.

Estimated cash flow: $1,750 – ($700 + $165) = $885.

  • Cash reserves needed: $3,500 (five months of mortgage payments).

Yearly cash flow: $885 x 12 = $10,620 subtracted by a presumed vacancy rate of 7% ($743) = $9,877.

ROI: $9,877 (actual cash flow) divided by $31,500 (initial down payment plus closing costs) = 31% cash-on-cash return.

When factoring in the mortgage tax deduction, depreciation and possible appreciation, the actually ROI might be closer to 35-38%


After acquiring this property, Laura will generate enough in rental payments to cover her monthly student loan payments each month and have excess cash flow.

This, in my opinion, is the ultimate example of OPM (other people’s money). Both the student loan interest and the mortgage interest are tax deductible, and she will be paying back the loans with her tenants’ cheaper dollars (due to inflation). And after the student loans are paid off, she’ll still have an income-producing asset.

I’m not advocating this strategy for everyone, but I thought this was an out-of-the-box approach to paying off debt that’s worth sharing. Let me know your thoughts…

Published or updated on April 29, 2011

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About Arthur Garcia

Arthur Garcia is a successful part-time real estate investor in Southern California. His latest venture is The Buy and Hold Guys, a real estate investing blog.


We invite readers to respond with questions or comments. Comments may be held for moderation and will be published according to our comment policy. Comments are the opinions of their authors; they do not represent the views or opinions of Money Under 30.

  1. TM says:

    I’m not sure if you’re still maintaining this post but I had a question.

    How is the rental income treated in the eyes of Uncle Sam? I have read that anything above your expenses (mortgage, taxes, insurance, maintenance, etc…) is taxable. Is this taxed at your normal income bracket? Can you reduce your ‘profit’ by applying the full rental amount towards your expenses? Once your mortgage is paid off, sell the house and move on the next one(s). Lather, Rinse, Repeat!

    • Hi TM,

      I wrote this a while ago, but yes, I still try to update it when I can.

      Rental property is the most tax favored asset in the tax code. I don’t want to go to lengthy detail, but I’ll point out a few key items. You’ll want to look up the work depreciation. In short, it is a forced tax shelter you receive on your rental income. Typically, this shelters most the immediate taxable income. On top of that you get to right off your taxes, insurance, maintenance, and everything else related to the property. Unlike a primary residence, your tenants are actually paying for these expenses (if you buy correctly) but you still get the benefit of writing it off. I’m not saying you should invest just to get the write off, but if you have to spend the money anyway it is nice to get the tax break.

      Also, rental income, as you know, does not work like W-2 income. You pay your taxes after you receive your profit.

      Another great tax break is the 1031 exchange. This allows you to defer capital gains through the purchase of another rental property. For example, if you purchased a house for 100K and in 10 years you sold it for 175K, rather than pay capital gains on the 75K you could purchase another rental and use the 75K toward the next purchase and defer the taxes indefinitely.

      Anyway, there are many more tax benefits, but those are a few to get yourself started. I’ve changed my blog from when I first wrote this post for David. I now blog at: TheBuyandHoldGuys.com if you want to read more about this topic.



  2. Shane says:

    Can I just say that this post is awesome! And the comments are great too! If there are any two topics that should be pit against each other they are conservative personal finance and conservative real estate investing. Smart money either way and if people read and understand both sides they are pretty certain to be financially successful no matter what route they choose!

    My personal plan involves both and it’s that process that brought me to this post which reaffirms all of the risks and rewards of both!

  3. I like the valuable information you provide in your articles.
    I will bookmark your weblog and check again here frequently. …

  4. Bill says:

    Be very careful if you are considering doing this strategy within a retirement vehicle. Self directed IRAs are allowed to invest just about anywhere but there are strict rules in place for how they can do so. If you purchase an income property in a self directed IRA all of the costs for the property must be paid from within the IRA. You can’t so much as buy a bottle of Windex to wipe down the windows unless you use funds from within the IRA to do so.

    • Bill,

      This is a great point. Self Directed IRAs are a whole different strategy than a 401K. I would reccomend buying notes, hard money lending or buying silver with an sefl directed IRA. Rentals are probably not the best strategy for self directed IRA unless you can ensure a great return and even then the IRA fees might eat up more profit than the return allows for.

      Thanks for the 2 cents Bill!!


  5. Zach says:


    Good article and I likd all the info. I think someday if I can get the cash I may do something similar. However, I am already a home owner. Why did you chose to not buy your own home first, before this? Essentially, aren’t you lowering your networth each month in the form of a rent payment? Even tho you are bringing in $885 more in the tenant cash flow, you are also giving it right back in the form of your own rent payments.

    On side note, would it be a good idea to raise cash for a down payment on a non-owner occupied property from my 401k?

    • Hey Zach,

      Thanks for your email. I am going to try my best to answer your questions.

      I think you step back and at the whole picture to understand how RE investing increases your net worth. You have to understand a rental brings all the benefits of a primary residence and MORE.

      You are right that I am giving up some money to rent, but you have to understand the opportunity costs involved by giving up extra capital to pay for a primary residence.

      Because I am choosing to rent I can invest the difference in acquiring more assets that bring in positive cash flow. By doing this my initial investment (down payment) grows via mortgagee pay down, appreciation, hedge against inflation and forced equity via capital improvements.

      Here is a small example of opportunity costs, take the example above, I am paying $1300 a month in rent, subtract that from $885 (tenants rent) which gives me a total of $415 for living shelter. To own a condo in the same neighborhood it would cost roughly 300-350K. This would require a down payment of at least 50K (20% down). That money would sit in the property without any interest. My best hope would be to hope for appreciation. But let’s say I did purchase in my neighborhood, my mortgage would be $1600-$1900. Although I could write off the interest and bring down the payment to $1400 (after taxes), I will still have to tie up 50K.

      The beautiful thing is that the duplex is yielding roughly 28-25% cash on cash each year!! By choosing to rent and reinvest the extra $1000 a month (as well as the 50K down payment), I can repeat this process many more times until eventually my entire income is replaced by my investments. Also note rental properties carry all the benefits of a primary and more because you can write off ALL expenses not just mortgage interest.

      I apologize for the long-winded response, but the point here is that when you buy a primary, in my opinion, it is not an investment. And although you can argue renting is throwing money away, I would argue that if you can get a better return (which I can) investing elsewhere, you are better off acquiring multiple assets that will eventually be able to replace your income and even pay for your primary residence in the future.

      I always have to emphasis that education in Real Estate is very important. Although you can make a lot of money, you can also loose a lot of money if you don’t understand what you are trying to accomplish. I am happy to discuss this further if you would like, just email me – artieag81(a) gmail.com

      Regarding 401K borrowing, only borrow if you can out perform the interest you pay to repay the loan. For example, if you have to pay 5% interest and you can secure a 25% return on a rental property, your total ROI is 20% so – DO IT! If you don’t know how to make the numbers work, then I would say education yourself first and partner with someone who is already doing it successfully.



  6. Joseph says:


    You say that paying off the student loans would leave you with no cash reserves to protect against an emergency, but $40,000 – $30,000 = $10,000. Your total cash dropped by $1,500 more by investing it in this rental property than it would have had you paid off the student loan balance. By paying off the loan you would have eliminated a liability altogether – something I see as being very beneficial. Yes based on interest rates and the returns you get from your investment you made the correct choice based on logic (I’m a huge fan of logic by the way), but a huge part of personal finance is being illogical and doing what feels more right (such as removing the burden of an entire loan). By investing in the rental property you’re taking on more debt (though gaining an asset and income).

    If I were in your situation I would have paid off the debt. Not because it’s the more logical decision, but because I would feel safer and more accomplished by getting rid of a relatively large monthly cash sink.

    • Joseph,

      Like I mentioned in my above post, I am not advocating this strategy for everyone. When it comes to personal finance, it is personal. I personally see the benifit of a 5% fixed interest rate for 30 years. In my opinion, it is a great way to shelter my wealth (money in the deal/downpayment) against inflation and lower my tax burden (as I pay virtually no taxes on rental income due to Depreciation).

      Another point I would make here is that even though I have debt, the asset is worth more than the debt burden. I just wrote a post on moneyunder30.com regarding this. I buy 10-20% below market value and put 20% down. If something happend and I needed to get out of a property, the assest has equity built in to help in case of an unforseen event.

      Another thing I should mention is that all my properties have debt services under $530 per month and rent for 1000-1100. I’m comfortable with the debt management aspect of the investment. However, another way to use the above strategy would be to use the excess cash flow to pay down the mortgage quicker or pay out high interest debt (which we don’t have). Other investors I know have a plan to hold on to as many cash flowing properties as they can for ten years. They use one half of the properties to pay down the mortgages on the others and then they sell the ones with debt to be free and clear.

      I totally see your point of view and I think you have some great points. The Bottom line is it comes down to education and doing what you feel comfortable with. If you’re not 100% sold on the benifits of real estate, then you’re definately not going to be able to stick with it when things go wrong. The goal of the post was to get people to think outside of the traditional advice of being frugal and saving. Those are fine practices, but I don’t think one can really get rich just by saving. Creating multiple streams of income is really the only viable option, otherwise inflation and taxes win in the end.

      thanks again Joseph!



  7. Bill says:

    The economics of this trade are absolutely fantastic right now, you should be commended for taking advantage of the opportunity. Real estate investing is rarely this lucrative. If any readers are interested in purchasing investment properties there really is no time like the present. If you live in California, Arizona, Nevada, Florida, or the Rust Belt and have a reasonable amount of cash to invest you should at least look into the idea. The opportunity does exist elsewhere but those places are probably going to provide the widest margins.

    One question. Because you seem to have such a strong view on future interest rates and mention that you own several properties, are you remortgaging the properties to keep yourself leveraged? If you haven’t had the opportunity yet do you plan to when it becomes possible?

    • Hey Bill,

      Thanks for your comment. You hit the nail right on the head. The markets you mention above are all very strong cash flow markets. I stick to California because I like to vist my properties ever couple of months, but I know quite a few successful investors who are out-of-state owners and well with it.

      To answer your question, all my properties are leveraged. I just secured a 5.3% interest rate on a 55K rental. The mortgage is $224 a month and it rents for $930. The crazy thing is that this is not an unique deal, there are plenty more like this. If you are comfortable with debt management and believe inflation is a very real threat to your wealth, then there is no better strategy than real estate.

      My ultimate goal is to get as many 30 year fix rate mortgages as possible over the next 2 years. Then I’m gonna consider partnering with investors who have no cash and use their credit score to secure additional mortgages. Bill, I am not saying the prices are going to recover overnight, but I will tell you that in the housing market I buy in the prices have already gone up. Investors and home buyers in the 50K-130K range are bidding up prices which is helping the market correct itself. Obviously the houses at the top of the market are still dropping in price, but the bottom end is starting to get upward pressure.

      THanks again for the comment.

      • Dave says:

        “Then I’m gonna consider partnering with investors who have no cash and use their credit score to secure additional mortgages”

        Can you explain this a little more AG? Sounds good I’m just trying to come up with the full picture. Also, somewhere else you mentioned hitting the 10 mortgage max – I’m not familiar with this…

        And you said you switched over to LLC after having a “few” properties. Planning on purchasing my first investment property this fall. How do I know it is time to make the LLC jump?

        Thanks a lot – I’m really enjoying your stuff…

        • Dave,

          here are my comments…

          Dave: “Then I’m gonna consider partnering with investors who have no cash and use their credit score to secure additional mortgages”

          Can you explain this a little more AG?

          Arthur: Sure the idea here is to leverage other peoples credit. I know plenty of folks who want to get into RE investing, but don’t have the cash. THey do, however have decent credit and a nice W2. I’ll partner with them to create a syndication. They take out the loan, I front the cash and split some profit and upside. This is way more involved, FYI, but I’ve simplified for space sake.

          Dave: Also, somewhere else you mentioned hitting the 10 mortgage max – I’m not familiar with this…

          Arthur: Fannie mae will only back 10 loans per investor. After that, I’ll have to either find private money or consider hard money – I’m not excited about either. I would suggest speaking with a mortgage lender to get more info.

          Dave: And you said you switched over to LLC after having a “few” properties. Planning on purchasing my first investment property this fall. How do I know it is time to make the LLC jump?

          Arthur: I would consider speaking to a lawyer who specializes in RE investing. With that said, I think you can probably take on a few properties before you need to form an LLC. The reality is that even though you have the properties in your name, the debt (mortgage) will be substantially larger than the equity. After real estate fees and taxes, they stand to gain very little. I would say your best bet is just buy an umbrella policy. Either way, talk to the professionals before you decide a few hundred dollars can save you hundreds of thousands down the road.

          I hope that helps…

  8. Mark says:

    With rentals, picking good tenants can be one of the most important decisions. Do you have advice on screening applicants?

    • Hey Mark,

      Thanks for the comment.

      Yes, you are correct screening tenants is very important. First off, make sure you buy the property in the “right” area. I will have a post her on moneyunder30 shorlty about where/how to buy, I also have some info on my blog (thebusinessofu.com), so stay tuned.

      As far as screening tenants go…here are couple of things I do to help me in the process.

      one – job stability. I need to know the family can make enough to pay the rent each month. I also take great effort to call their current employer to get a sense of the work ethic and if there is anything I should know. Technically companys can’t say anything bad or good about their employees, but I usually can get a feel for what their reputation is during the call.

      two – references. I ask potential tenants to provide 2 references. I usually call their references and ask them for another reference – ha ha. This kind of throws people off, but you end up getting honest feedback from someone not expecting to talk to you.

      three – credit score. I run their credit and look for anything that stands out to me. The good news is that over the past two years i’ve turn most of my rentals over to previous home owners. These tenants usually have bad credit due to forecolsure, but are pretty much solid otherwise.

      four – background. I know you are not supposed to technically discriminate, but I do (not on paper of course). I hold all my showings during the same 2 hour period so I get to see everyone at the same time. If the tenant drives up in a beatup car, wrinkled clothes, and don’t look well kept, I don’t rent to them. I’ve always believed a vacant house is better than renting to a bad tenant. It will be more headache and more expensive. Take a look at how they carry themselves, what the couples say to each other, the way they say it, etc.

      Five – Ownership. I am a little unique in that I believe in allowing the tenant a little ownership over the property management. What I mean is that I am pretty up front with my expectations regarding repairs and overall up keep. I explain that by renting from me they agree to help me maintain the property. For example, if there is a problem with a leak, they contact my local handyman and schedule a time for him to check it out. If the repair is less than $100, I have my handyman invoice me (this didn’t happen overnight, but with time we built a nice relationship). This eleminates most late night calls and basic problems that happen over the weekend.

      five – education. Obviously, I can’t write everything on this response, but I can say that buying books, taking seminars and reading about landlording has made me better at it. Just think a $20 book can probably save you hours of headaches if it helps you aviod mistakes.

      Please stay tuned here at Moneyunder30.com and also check out my blog for content on similar topics – thebusinessofu.com.


      • Dave says:


        I’m surprised you manage your properties on your own. That’s great – I’m sure you save some good cash, but isn’t it especially challenging being that the properties aren’t too close by? Have you considered using a property manager, or have you before?

        If I go with Las Vegas this fall for my first rental, I’m going to have to use a property manager as it is a $125 dollar plane ticket away…

        • Dave,

          I used to manage all of them. I recently turned them over about 3 months ago. I now only manage one of my properties. Overall, people paint PM in an ugly light. If you place the right tenants and don’t get overly eager, it isn’t the nightmare everyone things. The main reason I stopped managing them was to focus on my main passion – acquiring properties. I plan on taking them back eventually when I leave my day job, but for now it is easier, especially when it comes to showing the property and fielding phone calls.

          I would suggest against Las Vegas as a market to buy in, I’ve done a lot of research and I have determined the market is over-saturated with investors. You want to stay in areas where there is mostly 65-75% homeowner. I would say markets like Atlanta and phoenix may make more sense, just my two cents. Good luck.

  9. Kenny Miles says:

    Hello Laura an d Arthur

    I see a lot of common sense in the way you actually executed that scenario.
    I think it is a big lesson to all of us to look at both sides short term and long term bussiness wise and see whats best for us. We are living in a too secular economy and that is the best way to tackle issues. I like it “Don’t break rules just use the system to your advantage” that is a self sustainable impact to the system.


  10. linda says:

    Strategy sounds good. Can you clarify one part? How did yoy find a property with $700 in mortgage costs & worth $1,750 in rent with a minor $1,000 in repairs?

    • Arthur says:

      Hello Linda,

      The name of the game is targeting a “farm area.” This is an area that an investor has targeted in a market that makes a lot of sense. My target area is about 2 hours outside of Los Angeles, but there are TON of markets with similar figures around the US. The key to finding these areas and deals is education. You need to know what you are looking for and what area you are most likely going to find it. The post above makes it sound like we just stumbled on this property, but the reality is that we spent many months and hours looking at property to find this deal. I hope this helps. Feel free to email me if you have any more questions – artieag81 (a) gmail.com

  11. Justin says:

    Seems to me like a great move!

    The people buying homes right now are going to make some sick money when the market comes back.

    • Justin,

      You have a good point. Just think, in many markets around the country you can pickup property significantly below the cost to rebuild. This means that once the excess inventory is off the market, the prices will have to revert back to the cost of building. I’ll give you an example I just bought a 3 bed/2 bath house for 85K. The cost to rebuild that structure is 125K. The reason is that labor cost and building materials go up over time due to inflation and global demand. At the very worse case senario, the prices will have to reflect true building costs, all the while you can collect a nice steady stream of cash flow- just food for thought.


      • Yvette says:


        Great example. While you are waiting for the market value of the home to increase, are you living in / renting the house? If renting, what’s the different between the income (rent) and costs (mortgate, insurance, repars, etc.)


        • Yvette,

          Thanks for the note. I would like to clarify, I am not waiting for the property values to go up on any of my properties. I have been fortunate in that I just started purchasing withing the last 2.5 years (none of my properties negative cash flow). All of the rentals are yeilding a 25-30% ROI cash on cash. I hope to sit on these as long as I can or until something better comes up – appartments, etc.

          Regarding my living situation, I actually rent – ha ha. The area in LA that I live in doesn’t make sense to buy. So I rent where I want to live and own where the numbers make sense – I rent out all the properties I own, fyi.

          Also, take a look at the post on this page, I listed all the specs – mortgage, rental income, ect. If you have more questions – shoot me an email at artieag81(a)gmail.com. I’ll be posting more stuff here at moneyunder30.com as well as my blog – thebusinessofu.com so stay tuned.

  12. David says:

    Hi, I don’t understand what it means for mortgage interest and student loan interest to be tax deductible. Doesn’t this reduce your income and therefore your taxes? But in the end, don’t you still pay more dollars in the form of interest than dollars you save on tax write offs?

    • David,

      Thanks for the note.

      let’s take for example the interest on a mortgage of 6% (non-owner occupied, cash-flowing rental). With mortgage deductions, you are actually paying closer 4% interest (cash on cash), when you factor in inflation (roughly 3-5%) it actually make sense to borrow as you are now protecting yourself against inflation. Also keep in mind the 4% you pay in interest is being paid down by the tenant, not you.

      Let’s say you are seeing an annual return of 25% cash on cash and you use the excess cash flow to pay down the debt faster (because you don’t want debt), your return on the paying down of the debt would be 4% (true interest rate of the loan). However, one thing you need to consider is opportunity cost. If you rush to pay down the debt to make a 4% return on the money, you could be yeilding a higher return buy purchasing another rental (yeilding 20-25%), paying down other debt (credit cards) or investing in yourself.

      I hope this helps clarify. If you have more questions, feel free to email me or check out myblog – thebusinessofu.com

  13. B Kelly says:

    Even though I do not have student loans, I had a car & personal loan when i was just 23 .. but when my parents gave me some money to pay those off a couple of years later (yes! i’m lucky), i also decided against it and used that money to invest in a property. I paid off both loans ahead of schedule and have replicated this method (of property investment) on 2 other properties. The tenants can be an issue at times, but i know at the end of 12 mths, i have the ‘power’ to start over.

    I’ve also learnt my lesson on excessive spending by painstakingly paying off the 2 loans with my fixed income. By putting the money down into an investment vehicle, I did not give myself any chance to slack off being responsible for my past financial decisions.

    • B Kelly,

      Thanks for the post. I would have done the same in your case. The interest rate on Credit cards is very high and can really work against you.

      In our case, we were purposely keeping the student loan debt and mortgages as a way to fight inflation and lower our tax burden. All of my mortgages are under $500 a month, I can only imagine what making those payments will be like in 15 years – gas will probably be at $8-10 a gallon.

      Again, I am not saying this is what everyone should do, but it if one is comfortable with debt mangement on investments that are purdent (cashflowing real estate) then this is not a bad way to pay for liabilities or supplement their lifestyle.

      Thanks again for your feedback!

      • B Kelly says:

        Yes! At de rate inflation is creeping up in my country de present value of installment I’m making will mean peanuts 10 yrs down de road..

  14. MD Sam says:

    Arthur –
    Perhaps a bit off topic, but did you guys end up being the direct owners of the property, set up a trust/LLC, or a different structure? I know little about this area but would be curious if you could shed some light on what point owning rental properties directly ceases to be a good idea.

    • MD,

      We took title in our LLC. Once you own a few properties it is better to get everything out of your name for asset protection purposes, as you probably know. I think the point when rentals stop making sense is when you are either not interested in growing you portfolio or don’t want to acquire more units. I know a good amount of investors that get as many rentals as they can 30 + houses, hold on to them for 8 years then sell all but 10-12. They use the excess cash to pay down the mortgages on the balance and manage their properties full time. I, however, love the whole process of finding a property fixing it up and growing my business. As these properties accumilate more equity my plan is to 1031 exchange a few of the smaller ones to purchase larger properties – appartments, etc. It all comes down to your investing objectives and life goals. Some people love real estate others just want to own a few rentals, nothing is wrong with either.

  15. I will say that the reasons for not paying down your student loan debt, are exactly the same reasons I provide for not paying down my mortgage more quickly. Due to income limitations, I can no longer write off my student loans. More importantly, student loans are a form of debt that can never be wiped away, no matter what hardships you may face. You may be underwater on your mortgage(s) and you can walk away, but you can never walk away from student loan debt. Paying down those loans is like cash in the bank, except the kind that charges you interest!

    • Justin,

      Great point about the Student Loans. It is interesting that the government will let you walk away from an underwater mortgage, but not from a loan on your education. Kind of makes you wonder which is a safer investment in the government’s eyes.

      Thanks for the comment!


  16. Sounds like a wonderful investment, especially since the rental income can cover the student loan payments!

    Just make sure to account for that new “income” when you do your taxes… you may need to adjust your withholding so you don’t owe a lot of money come tax time from your rental income.

    • Hello South County Girl,

      Thankfully the depreciation should shelter most of the capital gains. However, your note is a good reminder that I should review my current withholdings to see if I need to adjust it.

      thanks for the comment!

  17. This is the key “After acquiring this property, Laura will generate enough in rental payments to cover her monthly student loan payments each month and have excess cash flow.” Great job you two!

  18. Laura says:

    I think is a wonderful strategy given the right set of situations.

    Way to use the system to your advantage!

  19. It sounds like it is working out for you, but I would just question two of your three big reasons:

    1) Student loan debt is tax-deductible – You would still be saving on those interest payments.

    2) Liquidity -If you weren’t planning on having this $40,000, then you probably should of already had some cash reserves for emergencies.

    • Hey Dave,

      Thanks again for your note.

      1. The point here is that we want to pay back the debt with cheaper dollars. In my opinion the value of 10K today is not the same as 10K tomorrow. Thus by using inflation and tax deductions, we are letting the tenants pay our debts with cheaper dollars while maintaining a strong cash position. In addition, the cash flow we make on the property is sheltered by the depreciation, so we don’t have to pay taxes on it. We can use this money to either pay down other debt, finance our lifestyle or pay off the mortgage early, if we want. The point is we have options vs just paying off the student loans. Again, this may not be a strategy many people are comfortable with and I can definately appreciate that.

      2. Good point. I should have mentioned that we already had 6 months of cash reserves in place, apart from the from the inheritance. Since we didn’t need to use the entire 40K we able to place the balance into that account and further our cash position. Also, we have 6 months of reserves specifically set aside for this property in case of vacancy or repairs ( I should have mentioned that too).

      Thanks again Dave, I appreciate you taking the time to reply!

      All the best,

  20. The only thing I’d want to point out is that you say that paying off your loans didn’t bring in an extra income for you… but:

    1) If you don’t pay the interest on a loan (tax deductible or not), you’re saving more of your money. It isn’t an earned income, but it stops the bleeding out of your pocket

    2) You bought a property that was a good price that had a very good ROI (that justifies not paying off the loan, for me), but many people are not in areas that have properties for such good prices that have such a high ROI (did you include maintenance in that? Tenants can be rough. I know, I’m one.)

    This is one of those specific-to-you situations that won’t necessarily work for everyone, and I’m of the mindset that paying off your loans before buying anything (including an income-producing asset) is always good general advice.

    • FB,

      Thanks for the comment.

      1. I guess the point was that, we are letting the tenants pay off debt and the interest while maintaining a strong cash position. A huge part of my strategy is protecting my wealth from inflation by leveraging low interest debt. Again, I am not advocating this is for everyone. It comes down to debt mgmt. which I am comfortable with. As far as repairs go, we haven’t had to deal with anything more than $500 toliet repair. The nice thing is that with such a strong cash flow, we are able to comfortably pay for any unexpected vacancies or

      2. I agree not every place in the country has deals like this, but I do want to point out that I own all my properties in southern california. I think this is probably the best time to find deals like this. There are many markets that are cash flowing that would have never been able to years ago, just food for thought.

      Regarding repairs, we maintain 6 months of reserves per property at all times. This covers any unforseen vacancy or repairs. I just didn’t want to write too long of a post :)

      Thanks again FB. I knew I would get a little heat posting this strategy, but it is always good to hear different points of view.

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