How to Live Rent-Free
- Daniel Rosenwald
- Jul 31, 2020
- 6 min read
Updated: Jul 31, 2020
Whether you're buying a 200-unit student housing complex or a 4-unit low-rise, investing in real estate is a great way to earn passive income while also enjoying asset appreciation and tax advantages. However, it doesn't have to be a large investment requiring outside capital and fancy accounting. Using a little bit of saved cash, buying property can also be a great way to live rent-free and accrue equity in an appreciating asset.
In this article, I'll go over the basics of finding a small multifamily property that can allow you to live rent-free.
The Concept
Feel like you're wasting money every month paying rent for an apartment? Rents are insanely expensive right now, especially in hot rental market cities like Los Angeles and San Diego, where 1-bedroom apartments easily go for $2,000+. Instead of throwing that money at a landlord never to be seen again, would you prefer to actually make money or live in an apartment for free? Thought so. Here's how:
You can buy a small multifamily property, meaning a 2, 3, or 4-unit apartment complex, live in one of the units, and rent out the others. Often, the rent from the other units will cover your expenses and mortgage, and you can live in your unit rent-free! In the best case, you may even have money left over each month, which is called cash flow - and that would mean you'd be getting paid to live in an apartment. Not to mention, you're also building up equity, or ownership in the property, as you pay off your mortgage each month. Even if rents don't fully cover your expenses each month and you have to come out of pocket to pay your mortgage, you'd be paying that money anyway to your landlord at your old apartment. Why not use it to pay off a mortgage instead and build up ownership in a property that you can later sell for a profit? Exactly. It just makes sense. So you've realized you want to ditch your apartment and find a small multifamily property to own and occupy. Where do you begin?
Finding the Right Property
Like I mentioned, you're going to want to go with a 2-, 3-, or 4-unit property. These are also known as duplexes, triplexes, and fourplexes respectively, and are best suited because they are all considered residential properties for legal purposes. When you get to 5 units plus, it becomes commercial property, and this is viewed differently in the eyes of brokers and lenders, so it can just become a little bit more complicated.
So, we know we want a duplex, triplex, or fourplex. Finding the right one all starts with speaking to a broker or agent. It's completely free to reach out and have a conversation, and they can be great resources to update you on the state of the local real estate market, and what you should expect to find out there. In addition, when you find the agent you jive with and like, you can sign a buyer's agreement with them and they will work for you through the property search and purchase process. The best part is, they get paid by the seller in most residential transactions, so there really is no cost to you.
Making the Numbers Add Up
So you found your agent, and know what type of property you need to buy. How do you know which property will work out numbers-wise?
In order for the deal to make sense, you need to look at a few key numbers, which will guide your search. Let's define some key terms:
Gross Monthly Rental Income: The amount of rent money you'll take in each month from all of your tenants (not including you)
Property Insurance: Payment that insures your property against theft, property damage, and some natural disasters. Usually required by lenders
Property Taxes: Money paid to the local government for owning property. The amount is based on the value of the property. Required by law in most states
Mortgage Principal: The part of your mortgage payment that repays some of the original amount borrowed
Mortgage Interest: The part of your mortgage payment that pays the lender their interest, or "annual fee", for letting you borrow money from them
Mortgage Payment: The total amount you pay each month to the lender for your mortgage. Typically this includes both principal and interest
Utilities Payment: Electric, gas, water, trash, sewer bills. These are charged by the city
Other Expenses: Things like maintenance and repairs, cleaning, and gardening bills
Each month as a landlord, the green above is the money you take in, and the red is the money you must pay. If the green = the red, you're living rent-free. If green is more than red, you're cash flowing - literally making money to live in your apartment building. If red is more than green, you have to pay that difference as your personal "rent" for your own unit. This isn't necessarily bad, and I would suggest considering even deals where you have to pay your own rent, as long as its not more than your current apartment rent.
Let's do an example.
You find a $1,000,000 fourplex (4 units). You put 20% down ($200,000), and get a 30-year fixed rate mortgage loan at 3.0% for the remaining $800,000. Your combined mortgage payment including principal & interest, property taxes and insurance all comes out to $4,000 a month. You build in an additional $500 a month for utilities and other expenses. So your total costs each month are $4,500. You charge each of your 3 tenants $1,500 for rent each month, so your gross monthly rental income is $4,500. Your income = your expenses, and you live in the fourth unit rent-free. Meanwhile, as you pay the mortgage principal each month, you are slowly building up equity in the property.
Of course, the above example is out of a lot of people's price ranges, but I used a million dollars because it's an easy number to work with. It can be scaled up or down according to your market and price range. And of course, this deal looks pretty because it works - not every deal works. Most of the properties you look at won't pencil out this way, and you will often have to offer the seller less than he or she is asking for in order to make the numbers work. Don't be afraid to go for a property that needs a little bit of TLC - these are often the properties that you can get for a discount.
Financing
In the example above, I mentioned putting 20% down and getting a 30-year fixed rate mortgage loan at 3.0%. This is considered a pretty standard residential mortgage situation at the date of writing, as we are in a low interest-rate environment. However, there are different types of loans available to different types of buyers. For example, veterans of the US Armed Forces are eligible for a 0% down home loan through the VA program, and first-time home buyers are eligible for 3.5% down loans through the FHA loan program. The best way to find out all of your options when it comes to financing your small multifamily property is by contacting a mortgage broker at your local bank or credit union.
Managing
Finally, once you own the property, you become a landlord, and as such, you're going to want to be a good landlord. There are plenty of resources online that outline best practices for being a landlord, including this checklist. At the end of the day, it comes down to being professional, and being decent. That means taking every part of your ownership and management seriously, from proper tenant screening, to making ensuring clear and legal lease agreements. Do your accounting properly, and set aside cash for repairs. Treat tenants with respect, follow fair housing laws, and make those repairs when tenants request them.
Conclusion
While this was just an overview, this strategy is tested and proven, and can truly start you off on a path of financial independence. The web is at your fingertips with plenty more useful resources on the topic: Google "house hacking" or "living rent-free" and surely you'll find many more resources and forums where you can learn and discuss this powerful strategy for building wealth.
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