How To Live Rent Free - Attn. Bootstrappers and Those Struggling Financially

[Magik]

This is a thread on how to turn your residence into an asset. If you follow what I am about to tell you, you could be making money as many as four different ways: loan amortization (paying down your mortgage), property appreciation (value of your property going up), tax breaks, and profit (making more than your actual mortgage payment). The idea is that this could help free up funds to fund a fastlane business.

This thread is ideal for those who have been living with roommates and probably will be for quite some time. This is especially ideal for those of you who aren't married and have no kids (though not required) and for those who are planning to start a business and need to cut expenses. If your credit sucks, you have no savings, or are funneling money toward a fastlane enterprise, I wouldn't do this. Getting in a house takes a lot of time, it takes money for a downpayment and other costs, it takes good credit.

My current situation is that I own a 3 bedroom, 2 bath house that carries a mortgage with a 3.125% interest rate and a $943 payment (will be $915 starting in May. I t was $796 my first year, but went up due to escrow issues). I rent out my two bedrooms for $500 each (including utilities), totaling $1000 a month. I could easily raise the rent to $550 each, but my tenants have been here for almost 18 months. Below is how I got here.

2011: I had been renting and having roommates since 2001. I had also had a few landlords that were either assholes or morons (or both), and was quite tired of it. My younger sister, who is a classic case of a sidewalker, was able to close on a house and get a great interest rate. It dawned on me that if she could do it, I could too. I started to think about how I could not only buy a house, but make it cash flow by renting out the bedrooms. I started thinking about what I should look for. I wrote down on paper the ideal house I wanted, being very specific about what I would want, keeping in mind that I would have roommates. I also made sure I was saving money every month to cover costs.

2012: I began the process of looking for a home. I had no idea how much the home buying process sucks. I began to work with a mortgage broker, who I wound up bitterly firing last minute (more in a moment). I started to work with a realtor, but he acted like I wasn't a priority, so I fired him and hired another realtor. We began the house hunting process. I was honed in on three zip codes, all around the same area. I chose these areas because demand for rentals was high and property values were appreciating, plus there were many homes I could buy under 150K.

I looked at a ton of homes. I had a binding offer in on one home, but pulled out because the inspection turned up a polished turd. I found another home and was set to put in an offer. The day before I put forth a offer, they lowered the asking price by 5K, and out came the wolves. My offer ended up being the second best, and I lost that one. Put in two offers on two other homes and they were rejected. I was getting frustrated at this point, and was thinking of throwing in the towel. Then, on a Monday morning, my realtor emailed a listing to me for a house that had just been reduced by 5K, down to 130K. It was a 3 bed, 2 bath house, small but nice. It had a fenced in back yard for the dog I wanted to get, and it was located in the most desirable zip code out of the three. My first thought was that it was too good to be true. I checked it out, and it seemed worthy, so I moved forward. Ran an inspection, and some things turned up that needed repairing. Asked the seller to fix them, and he agreed. It turns out that the seller had another binding offer, but the buyer backed out due to foundation worries. The seller was very motivated by the time I got to him, and he caved. He did 6K in repairs, paid all of my closing costs, and I scooped the place up for 130K with 3.5% down and a 3.125% interest rate, in one of the most prime rental markets in the entire city.

Before I closed though, I had to fire my mortgage guy and hire a new one. This guy couldn't qualify me, even with a co-signer, after he said he could. I hired another guy, who is in the top 5% in the state, and this guy pulled it off last minute without a co-signer. Turns out there is a reason he is in the top 5%.

I was in there November 5, and by mid-December, I had leases and 1000K in rent rolling in, plus had paid my car off. I went from paying $450 a month in rent, to taking in 1000K in rent and no car note. This all gave me momentum.

2013: I started off the year with that momentum. I saved money and was able to easily. I set a goal to quit my job by the end of the year. I ended up going down to 2 days a week in 2014, but am about to quit soon.

2014: I have decided to move out west, where I've wanted to live for quite some time. How will I do this? That is the next challenge, but it's not that complicated. I already have two bedrooms rented. I will rent mine out and then hire a property manager to handle everything. Hiring a property manager is a scary process. My plan is to not let whoever I hire know that I will be 2000 miles away. I've got to do some math and see if I can make this work, but I think that I can.

Another thing worth noting is that when I bought the house, it was the second or third nicest house on the street. Now, there are development companies that have come in and bought up the crappy houses, bulldozed them, and built houses that range from 300K-385K. There are two across the street from me that are 385K each. When I sell, I ought to make a decent profit.

Regarding tenants, I found mine through Craigslist. I screened them first via email. Important: I set what I felt were high barriers to entry, $500 rent plus a $500 deposit, all due upon move in. I'm sure this pushed away a lot of shitheads, which was my intention. I also embedded a sense of urgency into my ad. Most of the people that inquired I felt were worthy of living here. Don't be afraid to set a high price, just be sure to include value added incentives. My leases are month-to-month and utilities are included. I treat my residence like a business. I'm always trying to help my roommates/tenants out and generally provide good customer service, and they are the only two I've had to get.

If you already have a house, and need the extra money, the solution is very simple, if you are willing to do it. You place an add on Craigslist, like above. You set your price for a room to include utilities. This makes it easier on you and the tenant. Then you scree, find the right person, and get it all in writing. Be sure to only do a month-to-month lease. Long term contracts make it harder to get someone out should you need to and also keep that contract end date fresh in your renter's mind, raising the odds of them moving out when that 6 months or year is up. The goal is to not have to re-list the room.

The Point: The point of what I posted above is that you will need to be creative in order to make things happen. You need to look at what the herd does and do the opposite. Many people were amazed that I am able to do this, which I found funny. The hard part was all the hurdles and barriers to entry I faced on the front end. Once I got past those and closed, everything else has been so easy. Doing this gave me so much momentum, and restructured my financial life. Without buying this house, I don't think I would be willing to take the kind of risks I am now taking. Look at your life and see what you can do differently. See if you can turn a liability into an asset. I knew back in 2011 that I wanted to be an entrepreneur. I saw the future, and took steps toward making it happen.

Have questions? Fire away.

 

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[Magik]

You didn't ask, but hopefully you won't mind some unsolicited advice. Given the information you provided, my guess is that if you were to choose to rent the third bedroom, you'd find yourself losing money every month. And potentially a decent loss at that.

Being aggressive and assuming total rent of about $1700/month, your costs (expenses, vacancy and capex) will likely come out to around $850/month. With a mortgage payment of about $950, that puts you about $100 in the hole each month.

Given that you have some equity, my recommendation is to sell this one and take you tax-free gains...

I'm not sure where you are getting $850 a month in costs, it wouldn't be anywhere near that, and I'm factoring in utilities, property management, repairs, etc. Sure, if the water heater blew up, that would be a negative month, but the odds of that happening within the next 5 years are very slim since it's relatively new. I had the seller do $6000 in repairs on this place before I bought it (after a house inspection). The other factor is this place is small, so there is less to repair. The place does need some cosmetic upgrades and some landscaping though.

The other factor, vacancy, does not apply to the neighborhood my house is in. Stuff does not sit vacant here. 50% of the listed houses are under contract. Renters are lining up to live in this neighborhood, and the demand far outweighs the supply.

I have had two developers send me mail wanting to buy the place, because of all the 300K and 400K houses being built on this street, so my property is appreciating as well. Every month I hold onto it is more money in my pocket down the line. I am going to see what the developers are offering, but it won't be what I could get for this place two years later.

What I do worry about is if someone can't pay, then I miss a months worth of rent, which could happen, though if I practice due diligence, it probably won't. Then I have to deal with having a losing month plus getting another tenant. However, I collect deposits from each person, so if they don't pay, they don't get their deposit back. There are many things that COULD happen: natural disasters, fire, renters damaging the home, renters not paying (they lose their deposits though), unexpected repairs (very likely at some point like HVAC, water heater, locks, windows, etc.), vacancy of a room (would never be more than a month).

However, this is how I look at it. Every month I have had this place and rented it (since Dec 2012), I have made money on 1.loan amortization, 2.property appreciation, 3.tax breaks, and 4.profit (extra money that's left over after mortgage is paid). If I move to L.A. like I plan, I do give up #4 (when you factor the rent I pay out there), but 1-3 are still working in my favor.

I'm trying to see it from your perspective, but the odds of me losing on this are slim, and I'm looking at it from every possible angle. Maybe I am missing something.

 

[jon.a]

I'm not sure where you are getting $850 a month in costs, it wouldn't be anywhere near that, and I'm factoring in utilities, property management, repairs, etc. Sure, if the water heater blew up, that would be a negative month, but the odds of that happening within the next 5 years are very slim since it's relatively new. I had the seller do $6000 in repairs on this place before I bought it (after a house inspection). The other factor is this place is small, so there is less to repair. The place does need some cosmetic upgrades and some landscaping though.

The other factor, vacancy, does not apply to the neighborhood my house is in. Stuff does not sit vacant here. 50% of the listed houses are under contract. Renters are lining up to live in this neighborhood, and the demand far outweighs the supply.

I have had two developers send me mail wanting to buy the place, because of all the 300K and 400K houses being built on this street, so my property is appreciating as well. Every month I hold onto it is more money in my pocket down the line. I am going to see what the developers are offering, but it won't be what I could get for this place two years later.

What I do worry about is if someone can't pay, then I miss a months worth of rent, which could happen, though if I practice due diligence, it probably won't. Then I have to deal with having a losing month plus getting another tenant. However, I collect deposits from each person, so if they don't pay, they don't get their deposit back. There are many things that COULD happen: natural disasters, fire, renters damaging the home, renters not paying (they lose their deposits though), unexpected repairs (very likely at some point like HVAC, water heater, locks, windows, etc.), vacancy of a room (would never be more than a month).

However, this is how I look at it. Every month I have had this place and rented it (since Dec 2012), I have made money on 1.loan amortization, 2.property appreciation, 3.tax breaks, and 4.profit (extra money that's left over after mortgage is paid). If I move to L.A. like I plan, I do give up #4 (when you factor the rent I pay out there), but 1-3 are still working in my favor.

I'm trying to see it from your perspective, but the odds of me losing on this are slim, and I'm looking at it from every possible angle. Maybe I am missing something.

J is using the 50% rule. It is regularly applied to traditional rental deals as a rule of thumb.
Over the long haul 50% of your rent will be absorbed by expenses. Your risk is spread out over several tenant so vacancy might be less of an issue. But management and wear and tear might be more of a problem.

 

[Magik]

J is using the 50% rule. It is regularly applied to traditional rental deals as a rule of thumb.
Over the long haul 50% of your rent will be absorbed by expenses. Your risk is spread out over several tenant so vacancy might be less of an issue. But management and wear and tear might be more of a problem.

I Googled it. It makes sense in principle. I think I've been a little too loose in my assessments. However, all taxes and insurance are rolled into my mortgage, so when I say my payment is $915 a month, that is all inclusive. I forgot about pest control though, which is roughly $40-$50 per month, so I need to factor that in.

So far, I have collected $16,000 in rent, and repairs (including pest control) have been about $700. However, $6,000 in repairs were performed before I moved in back in 2012, though the majority of that was to fix some foundational issues.

The big thing I am thinking of is appreciation and loan amortization. Every month renters are paying down the loan, and every quarter the property is appreciating, especially with all the development going on in the neighborhood.

I see how it could be a bit of a gamble, but I also see the upside if I can hold on a few more years.

 

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