Don’t be a Slave to Rent: How to Live Rent-Free in Any Big City
You’re a twenty-something or thirty-something, aspiring-something, and you’re living in a bustling—read, expensive—city, like New York, or L.A., or San Francisco. Life is good, but you’re living paycheck-to-paycheck…month after month. You start to wonder if you’ll ever have any savings. But when you’re paying eight, or nine hundred bucks, or one thousand, or more, each month, for rent, your destiny seems forever limited to living on the financial edge.
It doesn’t have to be this way according the organizers behind, “Live Rent-Free in NYC” a recent pragmatic workshop in New York.
The workshop was led by a (recently retired) real estate agent named Roberto Gonzalez, and was provided through Skillshare, an organization that allows experts to give classes on the cheap (kind of like the Brooklyn Brainery, which we’ve written about before).
Currently, 70 percent of New Yorkers are renters—and those people generally feel less responsibility toward maintaining the place they live in as well as their neighborhood. Having more homeowners in a city (that currently has so few), Gonzalez believes, is a good thing, and not just for the homeowners themselves—it can benefit everyone. And a recent Morgan Stanley report showed that the number of homeowners has declined since the housing crisis, meaning that there are now even more renters—which makes 2012 “the year of the landlord”—and which likely means that rents are going up.
“Don’t be a slave to rent,” said Gonzalez. “Free up your time so you can pursue your dreams.” I was curious as to how this could be possible. I’d love to feel that I’m not throwing my money away every time I pay rent. But how could I, a freelance journalist, ever hope to save up for a down payment on a home? I thought of the still ongoing subprime mortgage crisis that had devastated the housing market in 2009, and wondered how Gonzalez could advocate home ownership as a reasonable thing, after that. And then, what about this “living rent-free” part?
Gonzalez explained: the key is to use your home as a form of income, by renting it out and using that revenue to cover your mortgage payments. And this should be possible, with a bit of financial planning, for everyone. And Gonzalez told us that this is a “unique point in history,” when the cost of borrowing money has gone down—so, taking out a mortgage is cheaper than it ever has been. You can borrow $100,000 and pay it back on a 30-year fixed mortgage at $400 per month, according to his calculations–or even lower: today on bankrate.com there are banks offering 3.85% – or $385 monthly payment on every $100,000 borrowed. Of course, it’s not so easy as a snap of the fingers. Below are details about how owning a home in a city like New York or San Francisco–where renters are a constant presence–can bring in revenue.
The plan might not be as smooth-going as it sounds. John Rouse, a Brooklynite who co-runs a property management company called Making Brooklyn Home, reviewed Gonzalez’ plan and told Dowser that, “The concept seems viable. However, there are so many variables that make it risky that I wouldn’t recommend a person overextending themselves financially because they feel they can count on Airbnb cash flow. For example, you would have to make sure the ‘house rules’ as stated in the buildings by-laws permit your place to be rented out for short term stays – or be prepared to sneak around the house rules. Even if rules permit short term stays noise or damage caused to the building by your “tenant” could result in a rule change or an expensive fine/repair bill. Also, it takes time to advertise, coordinate, and collect on a rental. Depending on how often one needs to rent their place out to raise the appropriate cash flow to pay one’s mortgage an opportunity cost exists that can definitely cut into your ‘creative’ time and spirit.”
There are some essential steps that Gonzalez says can lead a person toward being a cash-flow-positive homeowner (and even if you don’t feel ready to own a home, or don’t currently live in a city where the influx of visitors is strong enough to make this a profitable venture, you can learn from the financial and real estate tips presented here):
Prepare your two homeowner “reputations.”
First—and something you can do right away—you need to build a positive reputation on peer-to-peer rental websites, like Airbnb, and the second is with mortgage lenders. Airbnb is the most stable and user-friendly site, and it offers free photography – Gonzalez’s neighbor Seth Porges (who is an editor at Maxim) has written a blog post on best Airbnb practices, and he also managed to fund a mobile phone app after raising thousands of dollars by renting out the apartment he owns on Airbnb. Subletting your place is a sure win in most cities, where there is more supply than demand than supply. Other options include Roomarama, Homeaway, and Vrbo. These sites offer guests (read: renters) fully-furnished live-in-ready dwelling options without a long-term lease commitment, and with the benefits and protections of a global brand-name. While guests pay a substantial premium for these benefits, they still pay far less – and get a much more personal experience – than they would at a traditional hotel. You can start subletting out the place you currently live in (or just a couch or room within it). Put up great photos and charge below market rates. Later, when you own a home, you’ll be able to use the reputation you’ve built to get people to pay top-dollar to stay in your place.
(B) The second reputation you need to build is with mortgage lenders, and it starts with learning your credit score (you can do that for free online). Above 700 is ideal for getting a loan, and above 650 is okay. Loan officers also look at your income, and banks rely on tax returns—so, make sure you declare all income, even if you have to give up some under-the-table arrangements. The long-term benefits of being taxed will be greater than short-term benefits of not.
Start saving money.
This step might take some time. You’ll need to save money for a down payment on your future home—which you’ll rent out part of to generate revenue. You’ll learn the amount once you start doing real estate research (step III). And don’t rely on will-power alone for saving–because eventually you’ll cave in. Instead, have a portion of your income directly transferred to an interest-bearing account. Also, have separate checking accounts: one for income and one for spending. You need to automate your finances: you need to be able to predict how much money you have coming in and how much you need for survival and expenditures. Expenditures, such as student loan payments, other monthly payments like cell phones or utilities, should also be automated. Call your utility companies and ask them to re-set your billing date and sign up for a level payment plan so you pay the same amount every month (and at end of year you pay the difference between that amount and your actual usage). Then arrange for all your income to come in on the 1st, and your fixed costs to go out on 4th of month; what’s left is your monthly surplus. You should use a credit card for certain payments (route them through your bank account to automate them), and this time of the month is when you’ll pay down your credit card debt. And make your credit card work for you by using a rewards card to generate some income.
Learn the housing market.
Once you’ve saved up some money, start looking at properties. Look for areas that are up-and-coming: new schools or shopping centers being constructed in the near future, good transportation, parks (New Yorkers can check out for-sale properties on the website Streeteasy). Create “Google Alerts” on these neighborhoods and become an expert on developments in them that might impact long-term property values. Gonzalez told us that for many people, the best options are condominiums–condos have minimal restrictions on renovation and subletting, and they generally do not require board approval for sublets. Two-family homes are a great option for folks that would rather have their own private living space. Beware of co-ops—they usually frown on subletting (and they typically require much larger down-payments). One key to getting a low down payment is to look for Federal Housing Authority-backed properties, which will allow for a 3.5 percent down payment (whereas condos usually involve a ten percent down payment). Gonzalez says that this has become more common during the recession, since people now are less able to pay large down payments. Be prepared for closing costs–lawyers, taxes, and fees usually comes to 4 percent of purchase–so the total amount of money you’ll need to generate through your savings plan, for the down payment on the home, is 7.5 percent of the home cost (if you get a FHA-backed loan). Remember, in addition to the mortgage payment, you’ll also have to cover monthly “common charges” such as building and grounds maintenance, so when you’re looking at properties, so be sure to take note of these.
Buy, baby, buy (but buy carefully, and only if you’re ready).
Before you look, you’ll want to find a real estate attorney, which should cost around a $2500 flat rate. Gonzalez has a video outlining his strategy for finding a good one, and he advises choosing someone who communicates clearly. Then, begin making offers. A multiple-offer strategy creates competition between sellers, so that you can negotiate down the price. Once you have the contract for a place you love, put it up on Airbnb right away with photos, so that, even in the first month you’re already rent-free (usually mortgage payments are not due for two months). Meanwhile, furnish it and make it look great. You can keep on living in your rental apartment, and use the home you own solely for revenue, or you can move into a part of the house if you think it won’t deter guests—that’s up to you. Before long, though, you should be enjoying the benefits of passive income, and spending more time doing what you love, and less time working for The Man. In fact, Gonzalez is following his own advice–he recently quit his job at Sotheby’s to focus on acting. Hopefully his workshop will help other city-dwellers be able to follow their dreams, too.