How I Accidentally Made a 120% Return By Renting Out My Home

And what that accident taught me about opportune investing.

Picture of me house hunting.

Back Story

Still living at home in 2012, I had just barely managed to crawl out of debt with a low-paying government job. Ma’s home-cooked Mexican cuisine was the bomb, and I cherished my dad’s casual words of wisdom over the roar of televised sports, but I was way overdue to fly the coop and build a nest of my own.

The sole motivating factor behind my migration-anxiety? Pride: I'll be honest, my sense of self-worth just couldn’t stomach one more day as a 24-year-old in my parents’ house. Meanwhile, I was oblivious to what was going on in the economic world around me.

Home Search Criteria

• Move-in-ready: Due to my extremely low budget, finding a move-in-ready home was of utmost importance. There was no chance that I would be able to fund a renovation.
• Attached properties: I also looked for attached properties with a low Home Owner's Association (HOA) fee. This allowed me to defer maintenance on the exterior of the property.
• Rentability: I knew renting was profitable and I knew I wasn’t planning to stay in this place for very long. It was important for me to find an HOA that let me rent. Also, a lot of mortgages have restrictions for renting out your home. I made sure to check with my broker before signing a contract.
• Affordability: The number of bedrooms and bathrooms didn't matter so much to me. Living by myself, I just wanted something affordable. I decided to stick with townhouses that were within 80% of what the bank approved me for. That way I had a little extra buffer with my finances.

Market Conditions for Home Buying

Coming up, I didn't have much in the realm of capital but I wasn’t about to be dissuaded from moving out. I’d heard horror stories about loan- and house-hunting, but both fell into my hands so easily I worried I’d missed the fine print somewhere. Little did I know interest rates for borrowing money were at an all-time low (cheap loans) and the housing bubble had burst (cheap properties). A rare bird had just been blown clean out of the air, and I found myself with the gun in my hand. It was a right place-right time scenario, and I was only beginning to understand it.

Chart of Historic Interest Rates:

Chart of mortgage rates.

In 1983, interest rates were nearly 15%

In 2012 I was able to obtain a mortgage at 3.75%.

At the time, banks allowed borrowers to put a three percent minimum down payment on a house. Most experts will tell you to put down 20-25%, but this is most effective when you’re vying in a seller’s market. And this was a buyer’s market, which meant there was no need to impress realtors with a big down payment because I had no competition. I could get away with that 3% down payment (nevermind that that 3% was all I could spare). Even with my middling salary of $28k/year I turned this into an affordable venture. Low interest rates, low housing costs and the esteem of the buyer’s market had all coincided to make this possible.

Chart of Nominal and Inflation Adjusted Home Prices from 1970 to 2015.

Note: In 2012 prices of homes were discounted at 30% from those of 2006.

Because of all the foreclosures in my area, the housing supply was in excess, creating the opportune buyer’s market I had before me. Options were plentiful and prices were low. Banks were tossing roofs over peoples’ heads just to get the houses off of their books. The housing bubble hadn’t burst. It had burnt down, and what followed was a fire sale. There were so many houses in foreclosure that banks actually had to refrain from putting up “for sale” signs on every house. The fear of cannibalizing the market was too great.

I’d like to stress how important the virtues of patience, awareness and preparedness are to a good investor. In retrospect, it's painful to think of the massive investment I could have made if only a) I was aware of the favorable circumstances surrounding the real estate market, and b) I was prepared with the capital to take advantage of it. I was lucky enough that everything just happened to harmonize around me. But I know there were a patient few who carefully orchestrated their every investment up to this moment and wound up turning over enormous profits.

The Property

After my first attempt at buying a short sale went up in flames (lesson learned), I was able to obtain a Home Path renovated foreclosure. Home Path puts up some of the dullest houses on the block, but they’re built like tanks, perfect for renting. Even something like durability can work to your advantage because the amount you have to spend on maintenance will add up at the end of every year.

When the sellers took my first offer, I gave them everything I owned, including my soul.

*Side note: Did you know that the literal meaning of a mortgage is "death pledge" or a "loan until death?"

It was the first house I’d ever owned and I could hardly believe I was stepping upon my carpet, under my roof, into my living room. It felt good, though I still hadn’t fully grasped just how good I had it.

The contract required that I live in the property for one year before I was able to rent it out. So exactly one year and one day later I—yea right! It wasn’t until two half and years later that I got that “For Rent” sign staked out front. I took a couple passes at it myself just to make sure it was real.

Now take a look at this:

Market Conditions for Home Renting

(Ever heard of Rent is Too Damn High? That's because it is!)

U.S. House Prices vs. Owner- Equivalent Rent chart from 1983 to 2015.

To top it all off, rent too had adjusted in my favor—unbeknownst to me. My townhouse was renting out at 40% higher than when I moved in three years earlier. Then, because rentals were in high demand, I managed to lease it within 24 hours. Perhaps the townhouse rested upon a burial site, and the spirits were paying me miracles. Perhaps our dumb luck is just bound to stumble upon something other than fool’s gold every once in a while. Whatever it was, here are the facts:

Results

After calculating my mortgage, taxes, insurance, HOA dues, and LLC costs I had effectively made a 120% return on my property.

*Note that taxes and depreciation are not calculated.

The four factors that enabled this explosive return on my investment were:

1. Low interest rates
2. Low house prices
3. Low down payment
4. High rental rates

Afterwards I moved into my girlfriend's condo, the balcony of which overlooks Lake Michigan and the ricochet of lights in Chicago. In no time, I kick-started my career as an investor in real estate. I’ve since owned, flipped, and rented out several other properties. It wasn't until recently that I found out how profitable my very first investment was.

I’ll be the first to say that I got lucky with this one and want to make it clear that I wouldn’t encourage just anyone to take the risks I took, especially if the circumstances were not agreeable. I myself only took those risks out of desperation, and the results could have been as disastrous as they were profitable.

However, I do think that by exercising the three virtues I mentioned earlier—patience, awareness and preparedness—any informed investor could have done what I did, but with larger investments and still larger returns.

As we move into 2016, interest rates and housing prices are rising; it’s now a seller’s market. However, rent rates, too, are on the rise, and there’s still plenty of money to be made in real estate. My only advice for beginners is to be cautious but know that there still are deals to be had.

Thanks for taking the time to read my story. Did you learn something from this? Have you had a similar experience? I look forward to your feedback in the comments section below.