Tag: real estate

Building the Thing I Wish I’d Had Before I Bought My First Rental

5 minute read

It’s 11:40pm. Do you know where your polygons are?

It’s 11:40pm on a Friday and I’m staring at a ZIP code boundary that won’t render correctly on a map for the 20th time. The polygon is trying to wrap itself around the entire Eastern seaboard because somewhere in a coordinate system I don’t fully understand, a projection did something a projection should not do. My wife went to bed an hour ago. I am debugging a map.

This is, apparently, how I relax now.

I own two rental properties. I underwrote both of them the old-fashioned way: a spreadsheet, a lot of Zillow tabs, some gut feel, and a healthy dose of “well, it seemed fine.” It worked out. But “it worked out” is not a strategy, and I’ve always wanted something more rigorous — something that forces me to ask the boring, unglamorous questions before I fall in love with a listing photo of a nice kitchen.

So I’m building one. It’s called, very unpoetically, the REW platform (real estate underwriting — I never claimed to be a marketer). And I want to talk about it now, while it’s unfinished, rather than waiting until it’s polished enough to be impressive. Partly because I think the process is more interesting than the finished product. Mostly because I suspect I’m going to get a bunch of this wrong, and I’d rather be honest about that from the start than pretend I built a flawless machine on the first pass.

The Actual Problem I’m Trying to Solve

Here’s the question that matters: out of every possible place I could buy a rental property, how do I quickly rule out the bad ones and spend my real time and energy only on the good ones?

Most people do this backwards. They fall for a specific house, then start justifying the numbers to themselves. I’ve done this. It’s a great way to talk yourself into a mediocre deal because you already mentally moved in.

So I’m trying to build a pipeline that works in the opposite order: start broad, get skeptical fast, and only let a deal survive if it earns its way through several rounds of me actively trying to kill it.

Right now, that pipeline has three stages.

Stage One: Is This ZIP Code Even Worth Looking At?

Before I care about any specific house, I want to know something more fundamental: is this area one where owning a rental makes sense at all?

I built a scoring engine that pulls data from a handful of sources — Census, HUD, FRED — and boils a ZIP code down to six metrics I actually care about as a landlord:

  • Population growth (are people moving here, or leaving?)
  • Unemployment (is the local job base healthy?)
  • Price-to-rent ratio (are prices in line with what rent can support, or wildly detached from it?)
  • Median income (can the local population actually afford the rents I’d need to charge?)
  • Vacancy rate (is there a glut of empty units I’d be competing against?)
  • Supply pipeline (how much new housing is already under construction or permitted nearby?)

That last one took me the longest to get right, mostly because “how much is being built near here” turns out to be a genuinely annoying question to answer with public data. I ended up pulling county-level building permit data from the Census Bureau and matching it up as best I can to individual ZIP codes. It’s not perfect. I know it’s not perfect. But it’s a meaningfully better signal than “I have a feeling about this neighborhood,” which was more or less my prior methodology.

The output of stage one is just a score and a rough read on the market. It’s not a green light to buy anything. It’s closer to deciding whether a neighborhood deserves five more minutes of my attention.

Stage Two: Now Let’s Try to Kill It

This is my favorite part, mostly because it’s the part I was worst at doing manually.

Once a ZIP code clears the first screen, I don’t move straight to a full underwriting model. Instead, I run a quick, deliberately unforgiving pass on the specific property: rough rent estimate, rough expenses, rough financing assumptions, and a gut-check cash flow number. Nothing fancy. The whole point of this stage is speed and skepticism, not precision.

I’m explicitly trying to find a reason to say no. If a property can’t survive a lazy, surface-level version of the math, it has no business surviving the detailed version. This saves me from the trap I fell into with my own properties: spending three hours building a beautiful, detailed model for a deal that a five-minute sanity check would have thrown out immediately.

Think of it as triage. A property that fails here doesn’t get a eulogy. It just doesn’t move to the next room.

Stage Three: Full Underwriting, For the Survivors Only

Only the properties that make it through both filters get the full treatment: a detailed cash flow model, sensitivity around rent and expense assumptions, and eventually — this part isn’t built yet — Monte Carlo simulation across a range of market conditions, so I can see not just “what’s the expected return” but “how bad could this realistically get, and how bad could it get in an unlucky sequence of years.” Longtime readers know I have a soft spot for that kind of analysis; I wrote about the same idea applied to a stock/bond portfolio a while back, and I think the same logic applies just as well to a single rental property.

That full underwriting step is the expensive one, in terms of both my time and the computer’s. Which is exactly why I don’t want to run it on every listing I glance at. The first two stages exist entirely to protect the third one.

Where This Actually Stands Right Now

I want to be honest about the state of things, because I think “in progress” is a more useful thing to model publicly than “finished.”

The ZIP scoring engine works, mostly, though I’m still finding edge cases — ZIP codes that straddle county lines are a special kind of headache I did not anticipate when I started this. The quick-kill screen exists but needs more real-world deals run through it before I trust its instincts. And the full underwriting stage is still mostly aspirational; right now it’s a folder full of half-finished code and a Monte Carlo module I keep meaning to properly hook up.

I’m also in the middle of moving the whole thing off my laptop and onto a little Linux box that lives in my house, partly because I like understanding my own tools end to end, and partly because I’d rather not depend on someone else’s server for something I’m going to trust with real buying decisions. That’s its own rabbit hole, and probably its own post.

None of this is a product yet. It might never be, in the sense of something anyone else uses. But it’s already changing how I think about the two properties I own, and it’s forcing me to write down assumptions I used to just carry around in my head, which is worth something on its own.

Why Bother

I could just keep doing this in a spreadsheet. Plenty of successful investors do exactly that, forever, and do fine.

But I like building things, and I like being forced to be explicit about my reasoning instead of trusting a gut feeling I can’t fully explain even to myself. If I’m going to make real decisions with real money — and eventually, real decisions on behalf of anyone else who ever looks over my shoulder — I want a process I can actually defend, one metric at a time, rather than a vibe.

I’ll keep sharing this as it develops, including the parts that don’t work, the ZIP codes that break my map projections at midnight, and whatever the quick-kill screen gets embarrassingly wrong the first few times I trust it. That feels more honest than waiting until it’s shiny.

A reminder that we’re not licensed financial or investment professionals — just sharing what we’ve learned and how we think about it as we build it. Talk to a qualified advisor before making decisions with real money on the line.

How to Actually Pay Off Your Mortgage

3 minute read

The word mortgage comes from French. It comes from the combination of mort (meaning death) and gage (meaning pledge). It’s a bit sinister, but it literally translates as pledge until death. For a 30 year mortgage, that might not be far from the truth.

We have a small 2br/2ba condo that we’ve now rented for about 10 years. I can hardly believe it’s been that long. Being the slow and steady folks we are, we’ve just steadily made our payments against the note.

When interest rates were really low in the early 2020s, I made extra payments thinking that avoiding the interest over the full life of the loan was advantageous. Keep in mind this may not have been an optimal strategy. I was excited about the idea of owning a rental unit free and clear. We could have refinanced or kept the cash as capital for future acquisitions.

We’re now in the final slog. If we can continue to plow our retained earnings back against the note instead of taking them out as profit, we should have the property paid off by the end of this year.

It’s hard to articulate just how slow this last stage really is. When I started making aggressive payments, I could see the months remaining on the note ticking lower with each passing month. The progress was visible. But now, in the final months, we’re up against less friendly math.

To be fair, nearly all of our payments go towards principal. Therefore, there’s hardly any interest left to pay. But, the real prize is to not have a required monthly payment. Here’s what our journey looked like, and my best guess as to how we’ll finish up.

Why The Last Year Feels So Different

Early in a mortgage, most of your payment is interest. That’s not a conspiracy, it’s just math: the bank is charging you a percentage of whatever you still owe, and early on you still owe basically everything. As the balance shrinks, less of the payment is interest and more of it is principal, even though the total payment (if you’re not making extra payments) never changes.

I can’t share our actual loan numbers, but I can show you the shape of it with a hypothetical. Let’s say you took out a $100,000 mortgage at 4% for 30 years. Your fixed monthly payment, principal and interest only, works out to $477.42. Here’s what the last 12 payments of that loan look like:

Payment #PrincipalInterestRemaining Balance
349$458.73$18.69$5,148.04
350$460.26$17.16$4,687.78
351$461.79$15.63$4,225.99
352$463.33$14.09$3,762.66
353$464.87$12.54$3,297.79
354$466.42$10.99$2,831.37
355$467.98$9.44$2,363.39
356$469.54$7.88$1,893.85
357$471.10$6.31$1,422.75
358$472.67$4.74$950.08
359$474.25$3.17$475.83
360$475.83$1.59$0.00

Look at that interest column. By payment 349, you’re paying $18.69 in interest on a $477 payment. By the final payment, it’s $1.59. Compare that to payment one on this same loan, where $333.42 of the $477.42 would have been interest. That’s the whole story of why the early years feel like you’re barely moving the needle and the last year feels almost silly by comparison, you’re basically just handing yourself money at that point.

This is also why my extra-payment strategy from a few years back was a mixed bag. Every dollar of extra principal I threw at the loan when it still had a big balance was doing real work, knocking out a chunk of the interest that would have accrued on it for years. A dollar of extra principal now, this close to the end, saves us maybe a few cents of interest. The math hasn’t changed direction, it’s just running out of runway to matter. I also told myself that in a low interest rate environment, paying down debt was actually a superior option to cash in a savings account.

Not About the Interest Anymore

If the interest savings are basically rounding error at this point, why keep pushing? Because the number we actually care about isn’t the interest line, it’s the “required monthly payment” line, and that one hits zero regardless of how small the interest gets. Once that note is gone, every dollar of rent is ours to keep, invest, or do whatever we want with, no note, no bank, no monthly obligation hanging over the property.

That’s a different kind of win than the interest math measures. It’s the difference between “the loan is cheap to carry” and “there is no loan.”

Where This Leaves Us

Assuming we keep redirecting the rental income the way we have been, towards mortgage payoff, we’re on pace to send that final payment before the end of the year. I’ll admit I’m looking forward to it more than the spreadsheet says I should, given how little interest is actually left on the table. But there’s something to be said for owning a thing outright, even a small 2br/2ba condo that’s spent the last decade making other people’s lives a little easier while quietly paying for itself.

Mortgage, pledge until death. We’re about to prove the etymology wrong on this one.

A reminder that we’re not licensed financial or investment professionals, just sharing what we’ve learned and how we think about it. Talk to a qualified advisor before making decisions with real money on the line.

Exponential Growth Here We Go!

9 minute read

It’s now a tradition for bloggers to do year end write-ups and forward looks. This post certainly aims to pull together threads of a 2020 review and a 2021 look ahead. I’m also introducing a demonstration of exponential growth and a trade-off between two different modelling approaches. Let’s begin. while my general sentiment is to say, “Good riddance” to 2020, we’re super privileged to have escaped mostly intact (knocks on wood)…

Let’s start with what matters most:

Health

We’re healthy, all of us. We took as many precautions as we could to minimize our Covid19 risk throughout last year. We’re patiently waiting for our turn to get vaccinations and look forward to some semblance of normalcy. Our hearts go out to the millions of families who have lost loved ones and to the millions more whose lives have been upended.

We survived the in-hospital birth of our second child. We now have two healthy girls! After a significant scare with my wife’s health post-delivery, I have a healthy partner again. I am so grateful to have healthy girls in the house.

Next, as this is a website about the journey to financial independence, let’s talk money.

Wealth

I actually wasn’t planning to write a 2020 review/2021 forward look. But, then I stumbled onto a thread at boggleheads about the shape of folk’s net worth curves. I think this is a fascinating topic and worthy of exploration. As we’re still starting out the 2021 calendar year, I was inspired to reflect on several lessons from 2020 and look forward to 2021 and beyond.

Exponential Growth Is Real

The path for financial independence feels like a marathon. But, unlike a marathon, the first miles on your journey to financial independence are the hardest. We scrimped and saved to pack pennies into our accounts only to see minor or maybe modest gains year over year. It felt like financial independence was totally out of reach. But, through the steady inspiration and encouragement of the online personal finance community, we kept at it. We’re not there yet, but that exponential growth curve makes me do a double take every time I see it.

Here’s a plot of our net worth since I started tracking it in 2009.

An exponential growth model of net worth. Notice how the standard error is better than a linear model.
Exponential fit of our net worth growing over time. How cool is that!?

While it doesn’t feel life altering yet (in part because we cannot touch most of our net worth), it sure looks like we’re on an exponential growth curve, even with our conservative asset allocation. Why do I think this: a little statistical concept called standard error.

Standard Error

I’m not going to delve deeply into stats here, but this concept is useful here and will be again in many of the other topics discussed. Standard Error is a measure of spread. It tells is how much distance is between a group of data and some statistic. In this case, we’re looking at how far the points are from the fitted line. When comparing different models, smaller standard error (less distance) means the fitted line is likely a better fit for this data.

Let’s try it. We see the fit and standard error for the exponential growth model. Here’s the same data with a linear fit. Just eyeballing it, you can see this line doesn’t match the data as well. Standard error calculates the distance from the fit line to each point. Models (lines) with better fit have smaller standard error.

A linear growth model of net worth. Notice how the standard error is worse than an exponential growth model.
Linear regression model fitted to our net worth growth over time. Not such a good model, but in this case, I’m OK with that.

Take a look at the exponential model again, especially at the most recent months. The most recent points are consistently above the fitted line. You could attribute this to our investing genius. Or, maybe irrational exuberance round 2. This model is not perfect either. We need to be very careful not to extrapolate too far into the future lest the difference between the model and reality becomes too big. I don’t think we’ll be 401(k) billionaires in 20 years!

Between the two models, it’s obvious that exponential growth is a better fit, both visually and using math. Now that we can measure our net worth growth and fit a decent model to it, let’s dig into why the shape of the curve looks the way it does. We’ll also discuss what we could be doing differently to change the shape.

Analysis: Why Our Net Worth Is At An All Time High Despite The Pandemic

Despite the worst health crisis in a century, our net worth is at a record high. Why?

  • We kept our jobs
  • We benefit from the booming equity market
  • We benefit from the booming real estate market
  • Our rental business has lower but still positive cash flow

We Kept Our Jobs

Let’s take each in turn, starting with our jobs. Like it or not, our jobs provide 90+% of the income into our lives. Therefore, as much as I grump about being a W-2 employee, these revenue streams are important! We both work hard to contribute as much value as possible to our employers in the hope that they will continue to provide gross income in exchange.

Call it fate or luck, both of us have continued to be gainfully employed throughout the pandemic (knock on wood!). This means our ability to save/invest/grow net worth continued throughout the pandemic. One of my favorite pod-casters has a whole series on why the number one task of any employee is: “Don’t lose your job.” Obviously, that can be easier said than done depending on the industry and ones’ specific circumstances. Regardless, the number one priority for each of us is to maintain our respective revenue streams.

We Benefit From The Booming Equity Market

While we’re not 401(k) millionaires (nor “Teslanaires”), we have consistently invested in a broad mix of index funds for the past ~20 years. (OK, OK, we do have some “dumpster fire money” in individual stocks). That said, we’ve largely maintained an asset ratio of 60% stocks and 40% bonds over this period. We re-balance when things get too far from that mix. I know: it’s boring. No options trading. No short selling. I couldn’t even tell you what a put or a take is. And, I don’t really care. What I do care about is the overall growth of the equities market, namely the S and P 500 and the total market indices. Their values have exploded relative to the values of our other asset classes (e.g., bonds, cash, and real estate).

If I am honest, over the past several years, stocks have been the main engine of our net worth’s exponential growth. We keep these other asset classes around for when the market inevitably turns. But, just like JL Collins says, “Toughen Up Cupcake.” Embrace the volatility that comes with exponential growth via the stock market.

We Benefit From The Booming Real Estate Market

Speaking of other asset types, real estate remains my favorite. I love the tangibility of it. I love the chance to provide meaningful value directly to other people. I love the way the government treats it when tax time rolls around. Thus far, we only have one rental unit, a nice 2 bed, 2 bath condo. We took this plunge back in 2015. While we’ve had one challenging tenant, for the most part, it’s been an awesome investment. We negotiated with our current tenant at the start of the pandemic: lower rent in exchange for an 18 month lease. It was a relief not worrying about filling an empty unit during the lockdown. Most importantly: we’ve been able to maintain positive cash flow throughout these crazy times.

And, guess what, due to the booming real estate market, the theoretical value of the property rose too. Of course, we’re not interested in selling any time soon. But, we do track the market value of the property as part of our net worth (discounted to an investor friendly price). Lately, our real estate has grown, maybe not with the same exponential growth that equities have, but I believe real estate will be a lot less volatile whenever the next downturn comes.

Our other real estate, our primary residence, also shows a decent lift in the market value. Again, we’re not planning to sell any time soon, but these increases do contribute to net worth growth. They also buffer our net worth during down turns. While real estate may not be negatively correlated with stocks, it tends to be less volatile. Unfortunately, our house (like everyone’s) is not really an asset. It consumes cash rather than contributes it.

Our Rental Business Has Lower But Still Positive Cash Flow

You cannot eat net worth.

This is an interesting realization. So many of us are taught to invest in stocks and bonds so that we can take advantage of their long term appreciation. The plan is to sell some of these appreciated assets during our retirement years. The hope is that we draw down our pile slowly enough to die before we run out of money. As long as you stick to certain assumptions, this works pretty well.

Let’s talk about tax deferred retirement accounts for a minute. If you want to draw from your retirement pile before retirement age, the government charges a fee of 10% Further, because you put tax advantaged dollars in, you will pay income taxes on the dollars you take out. No opportunity to pay the potentially lower taxes on dividends or capital gains.

The cash that a rental property generates (assuming it is not held in a tax advantaged account) is available for use immediately. And you don’t have to sell a bathroom from your rental property to get the income. (This is unlike stocks where, unless you are only spending the dividends, you have to sell part of your base.) That’s what rent is for. I can feed my family today using the positive cash flow from our rental. Or, I can reinvest it for the future. This flexibility is awesome.

When the pandemic hit, our tenant reached out to us looking to renew his lease with us. In exchange for an 18 month agreement, he asked for a 20% discount. He’s a great tenant, and there was a pandemic just starting! We wanted to keep him We did a little math and offered a 15% discount. We agreed and signed the new lease. I’ve never been happier to give a discount! So, while our business income is down, we avoided (for at least a while longer) a dreaded vacancy.

Resiliency

To me, all these things add up to the beginning of a resilient lifestyle. If one part of the system fails, the rest of the system can absorb the shock and we can continue onward. It helps that we have a pretty big gap between our total income and our total expenses, again part of a resilient system is avoiding overloads. For example, if I lose my job, between my wife’s job and our other income sources, we could continue to maintain a substantial portion of our current lifestyle. If we have a vacancy in our rental property, we can afford to cover the expenses using cash reserves and surplus income until we can get a new tenant. We have tried to set up our affairs such that some part (or parts) are always able to perform.

To see a master of multiple income streams and truly resilient financial setup, check out John C over at actionecon.

There will be ups and downs; there will be bumps in the road. The hope is that through good times and bad, we continue to stay the course: keep earning, saving, investing, and growing. When the pandemic hit and now, as things recover, our assets continue to grow… hopefully for decades to come.

Actions to Take in 2021

No one has a functional crystal ball, so I’m always leery of forecasting economic or market movements. Regardless of your circumstances, I think there are some fundamental ways to approach finances in 2021.

  1. Grow your gap either by increasing your income or decreasing your expenses. This is a good action to take in almost any set of economic circumstances, market conditions or time of your life. Today is no different. The job market may be terrible or amazing; reducing expenses gives you more financial runway in case of a change in your employment. The market may be high or low. Having a bigger gap gives you the ability to invest that cash directly or save it for another opportunity.
  2. Adjust your asset allocation. Whether 2020 was financially kind or terrible for you, it’s a good time to review your specific situation and adjust your mix for the coming year(s).
    • By some measures, the US stock markets are significantly over-valued. If your asset allocation percentage is out of balance, this might be a good time to rebalance. You can lock in your gains from the past 10 months of ear-popping highs. Be sure to balance prudence with the fear of missing out. No one knows how high (or how low) an asset class will go tomorrow.
    • Age adjustments. We turn 40 this year. We have 2 kids. Our risk profile looks way different now than it did 15 years ago. Back them, we could say go all-in on the stock market. Now, our asset base has grown, and our appetite for full risk has perhaps decreased a bit…or not. I’ll save a discussion of how we approach risk/allocation for another time. Regardless of what our asset allocation was for the past 10 years, we may need to have a different ratio for the next 10 years simply because our runway to needing to use our assets is a lot shorter. And, the same may be true for you. Think carefully about how much risk you are really willing to accept. My heart goes out to the family of this young investor who took his own life after (mistakenly) thinking he lost almost $750,000. I know our allocation is pretty conservative, but I sleep well at night. I hope you do too.
  3. Pay down debt. For us, this would most likely be early payments on the note at our rental/primary residences. We’re not rolling the dice with Bitcoin. Instead, every extra dollar we pay towards our mortgages, comes with a guaranteed interest cost that we avoid paying. It’s like our own bond fund.

Keep plugging away; exponential growth is alive and well. With that, we wish you and your loved ones a prosperous 2021 and beyond.

How to Afford Your Dream House Without Going Broke

3 minute read

We are buying a Big A$$ House and it scares the living daylights out of me. So I’m going to blog about it.

First, let’s define big.

Six bedrooms. Four for immediate family, one for guests, and one to offset the cost (more on this later) of all the rest. Four+ bathrooms. Probably north of 3000 square feet of climate controlled goodness for us humans, one dog, and our Stuff.

Next, let’s talk money. In our neck of the woods, if we buy this kind of turnkey place, it’s probably $800,000. No, that is not a typo… let me write it out to be certain you fully grasp the magnitude: Eight Hundred Thousand Dollars. My heart is racing again just thinking about it.

If we bought a fixer, we might be able to get an old and busted place for $450,000. Then, we need to put in up to $150,000 to fix it for a total of $600,000. These are just estimates of course, but I’m already seeing opportunity!

As I write this in Dec 2019, interest rates are around 4%. Let’s say we’re able to put in $160,000. (We’ve been eating a lot of peanut butter and jelly to save for this). At 4%, our monthly payments are ~$3100 for the put-your-toothbrush-in-the-bathroom-and-it’s-ready purchase and ~$2300 for the fixer, assuming full financing of the renovation. I know there are intangibles: whoever heard of a full gut-job renovation going smoothly? But I do believe the market charges a premium for no-hassle.

Next up: maintenance, taxes, bills. Let’s assume these are equivalent between the two options. A good estimate for maintenance is 1% of the house value every year. That’s $8000 per year.

Taxes in the county we’re considering are $1.014 per $100 of assessed value (1.014%). Again, let’s keep things simple and assume the assessed value is $800,000 for the ready to go. Taxes become $8,112/yr. For the reno option, we’ll assign the assessed value at the purchase price + repair value. I think that will be conservative. Reno taxes are then close to $6100/yr.

Bills (Gas, Electric, water) can be pretty significant when you’re heating/cooling such a big space. An efficient build averages $210/mo for a total of ~$2500/yr. Let’s apply that to both options.

Add that all up and our annual recurring costs for each of the two options look like this:

  • Turnkey ($800,000 purchase) total: $55,300
    • Mortgage Principal & Interest: $36,600
    • Maintenance: $8,000
    • Taxes: $8,112
    • Bills: $2,500
  • Reno ($450,000 purchase+ $150,000 reno) total: $42,100
    • Mortgage Principal & Interest: $27,500
    • Maintenance: $8,000
    • Taxes: $6,100
    • Bills: $2,500

Ouch. we’re basically locked in to this cost of living for the next 30 years.

Now, let’s make this a bit more exciting. We’ve planned to take on a renter in either case. As part of the deal, each property must have a 1 bedroom suite in the basement. The suite must be isolated from the main house (with a locking door), have a kitchenette, separate access, and a full bathroom (at least a shower). Rents for a 1 bedroom/1 bathroom apartment in this area range from $800-$1200 per month in this area. Let’s pick the midpoint of $1000/mo to keep the math easy.

All of a sudden we get an extra $12,000 of rental income to apply to the total recurring costs. And, we can write off a proportion of the recurring costs. For a 3000 sqft house, we would estimate 500 sqft being allocated to the rental. That means we can write off 17% of every expense associated with the property. Here’s the line item reductions:

  • Turnkey ($800,000 purchase) total offsets: $15,105
    • Mortgage Principal & Interest: $12,000
    • Maintenance: $1333
    • Taxes: $1352
    • Bills: $420
  • Reno($450,000 purchase+ $150,000 reno) total: $14,434
    • Mortgage Principal & Interest: $12,000
    • Maintenance: $1,000
    • Taxes: $1,014
    • Bills: $420

Remember these are deductions not credits. To accurately estimate our total expenses, we need to apply our tax bracket first. Let’s say we’re in the 24% tax bracket. Here’s the final costs of these two options once the reductions are included.

  • Turnkey ($800,000 purchase) total: $40,200/yr
    • Mortgage Principal & Interest: $24,700
    • Maintenance: $6700
    • Taxes: $6760
    • Bills: $2,100
  • Reno($450,000 purchase+ $150,000 reno) total: $27,700
    • Mortgage Principal & Interest: $15,500
    • Maintenance: $5,000
    • Taxes: $5070
    • Bills: $2,100

This still is no yurt, but it’s a whole lot better than just paying out of pocket.

If you are in to frugal living, the entire concept of a house like this is probably just silly. But, if you live in a high cost area, are trying to get your kids into good schools, or simply have the ability to hack your residence, it can be a very worthwhile endeavor. Some other house hacks to consider:

Continue reading “How to Afford Your Dream House Without Going Broke”

We’re In The House (hacking) Market … And You Should Be Too.

3 minute readWe’re in the market for a new house/rental property. We’re considering house-hacking, a mixed use rental property where we live in one part, and rent out another.

3 minute read

4 min read

We’re in the market for a new house. Because I’m cheap we’re on the path to financial independence, I want to incorporate a rental property.  Fusing the two is a form of house hacking, a method of turning your single family home into a small multi-family rental property. Today, I’m going to walk through how we are analyzing the cash flow for a house hack where we combine our primary residence with a rental unit.

A friend of ours passed along a community for us to look into.  I figured it’s worth showing our evaluation approach (OK, it’s my evaluation approach.  My wife is much more interested in the big picture rather than how the math is done).

The community is in Fulton, MD.  (Montgomery county for those of you that read my last post on growing counties in MD). Fulton is a planned community under construction.  It has a Town Center with a community area complete with exercise facilities, a pool, and common spaces.  There’s a mix of neighborhoods, ranging from apartments, condos, and townhouses to single family “estates”.  The community is in the southern part of Howard County MD, so it definitely checks our box for good schools.

Let’s talk more about the math of evaluating a mixed use rental property where we live in one part, and rent out another.  While we’re not explicitly looking for a duplex, that’s essentially how I’m approaching this topic. Here’s two of my favorite bloggers weighing in on general rental property evaluation: Afford Anything, and Financial Samurai.  Finally, here’s an article specifically about duplex investing on Bigger Pockets, one of the biggest real estate blogs out there.

Analyzing Cash Flow When Hacking Your House

Let’s start with cash flow.  For a typical owner “un-occupied” (rental) property, cash flow must be positive to even think about moving forward (rents must be higher than expected costs).  In your personal residence, total costs should be less than some % of your gross income.  We’re looking to blend the two, For better or worse.  See how this seems different: we’re looking to buy a place with a portion of the costs offset by a renter.  If it was a classic duplex, we’d likely want to “live for free” such that the renter covers not only their portion of the costs but 100% of ours as well.  Somewhere between “live for free” and rents subsidizing our lifestyle is the trade space we’re looking into.

With that said, the math still ends up being pretty straightforward.  Here’s a link to the spreadsheet I’ll be using to evaluate potential properties that fit into this kinda-sorta-duplex. (Note: I am tweaking a spreadsheet that I use to evaluate potential rental properties, so don’t worry too much about the Cap Rate, Cash on Cash %, or NPV metrics.)


We can estimate what an individual property will cost us to own and operate/maintain as our primary residence. We can estimate market price point for a rental property that looks like ours. E.g., a 1 BR1BA basement apartment. We can subtract the two to find out what our net cost of living will be.

Financials of house hacking where rental income offsets primary residence expenses.
Financials of house hacking where rental income offsets primary residence expenses.


If you add up the monthly costs above, it would cost over $5,000 a month to live this way! But, by taking on a renter, we can drop our estimated net costs to about $3,500 a month (and that is before any tax benefits).

Next, appreciation.  Zero (this one is easy).  I never assume we’ll benefit from any appreciation on a rental property.  There’s some good reasons for this: real estate tends to appreciate only as fast as inflation.  This keeps the math simple when evaluating prospective properties, and keeps my analysis conservative.

Finally, taxes.  I figure out what the estimated property taxes will be so I can factor them into cash flow.  The source for the tax information is either based on the listing (if available) or the historical tax records…You know those are all public records, right?  Here’s the MD website.  And, here’s a link to an online public records search site so you could look start your search anywhere in the US.  After that, any deductions, expenses, etc are all gravy.  I would never advocate buying a rental property just because of the tax benefit.  The underlying investment needs to be sound first.

So, how does our primary residence/rental unit stand up?

Now the good news.  A 1 br/1ba in this neighborhood is also a pricey affair.  I saw $1,900/mo as the nominal rent for such an apartment.  So long as we don’t mind neighbors downstairs indefinitely, we could end with a net monthly cost of $3,468.19.  That’s still a big number, but it helps to illustrate why I’m so keen on having a rental property baked into whatever becomes our next home.  Note that I took a wild guess to arrive at ~20k to convert part of the basement into a rental unit.  Here’s hoping that’s in the realm of reasonable!  Because these numbers are still pretty big for us, I’m leery of making this kind of commitment without doing some serious homework.

What do you think?  Would you ever accept a long-term rental situation in order to afford a big honkin’ house?  Is there another way to make this kind of move and keep it affordable?