How To Invest In Your Future While Never Paying Rent
What would it be like to ditch your dreadful monthly rent and put those savings toward traveling the globe or making smart investments for retirement instead? It’s known that about 30% of people’s gross monthly income goes straight to their mortgage or rent. If you’re willing to get a little creative, cutting your cost of rent entirely is 100% achievable.
A large portion of real estate investors have started their thriving careers by buying a duplex, and only inhabiting one of the two units. By renting out one unit, that tenant’s rent will be able to cover your mortgage and bills. So, you’re not paying any additional rent, AND you’re building equity at the same time. Double win.
Do Your Research
Before you get too excited, it’s important to do some research. First, you’ll want to determine a safe area to buy that has steadily increasing value, and rent prices that will cover your purchase price.
Another important factor to consider for your rent-free lifestyle is finding a place where you’d genuinely want to call home, since you’ll be living there, too. Odds are, you’ll likely be living in the duplex for a year at minimum, but this will be determined by your loan.
On top of closing the deal in an opportune location, get ready to study up on all things landlord-ing! Luckily, there are an abundance of resources, such as books, podcasts, websites, and forums, that can teach you everything you need to know.
First things first, make sure to learn the ins and outs of marketing the unit to potential renters in the neighborhood. You’ll want to set up an LLC for your new business, and determine what the standard lease will be.
You can also consider hiring a property management company in the area to take care of all the logistics of renting and management. That is, if you have some wiggle room in your budget. Many of the property management companies that exist today will take around 10% of the gross rent cost for a tenant who’s able to sign a long-term lease. This will vary company to company, though.
Purchase The Duplex
One of the safest ways to dive into the world of real estate investing is to buy a duplex. There’s actually a specific term used in the industry to describe the strategy of living in one of the units of the duplex and renting out the other. It’s referred to as “house hacking”.
With house hacking, you get to live without paying rent, build equity, AND you’re only responsible for paying for tax, maintenance, and water for ONE property. More wins. Additionally, when you decide to move out, you can start to collect rent from two separate residents, rather than only one tenant, like you would if you rented out a single-family home.
If you haven’t been sold yet, it gets even better. By using this strategy, you could get approved for an FHA loan and your down payment could be only 3.5%. For context, a typical down payment for an investment property loan creeps in at a whopping 20-25%. Duplexes qualify for these ultra low down payments (contingent upon it being your primary residence for at least a year), whereas multi-family residences do not.
It’s recommended to get involved with a real estate agent who’s local, trustworthy, and has experience with investment properties. Work with someone who’s committed to helping you find a gem of a duplex in a favorable neighborhood. Then, examine the potential income you can collect from the property, no matter what the price of the listing is.
The process of measuring the approximate income you can expect from the other tenant against your monthly costs will give you a number for your estimated monthly earnings. Don’t be surprised if the number is on the lower side to start. You are living the rent-free lifestyle, after all.
Follow This Rule
The 1% rule is an important rule to consider when evaluating a duplex. This refers to choosing a property where you can realistically collect monthly rent that adds up to 1% of the purchase price. So, if you’re buying a $300,000 duplex, you would need to get at least $3,000 monthly in gross rent.
Though because you’re not paying any rent yourself, unfortunately that $3,000 won’t actually be deposited in your account yet. But, it will provide the understanding and comfort that this property will be feasible to rent out when your time comes to hit the road and fill both sides of the duplex.
After a year of living in the duplex, you’ll have the opportunity to leave. You could get another duplex to keep the house hacking going. Or, you could move into a single-family home to grow your career in real estate investing, and begin to benefit from the financial gains and tax breaks.
Get Funding
If your goal is to continue building your portfolio with real estate investments, but you’re not too keen on managing everything that comes with that responsibility, you may consider going after funding. The optimal choice would be crowdfunding. And no, it’s not only for start-ups and product engineers.
Crowdfunding makes it possible to invest small sums of money into real estate and involves multiple people adding money to a pool with the intentions of investing or providing loans to investment property owners who require financial support. This method is ideal because it can actually lead to profits without expending too much time or taking large financial risks. However, a risk that does come with crowdfunding is having to put your faith in others to make decisions on how the property is managed, since your input will be minimally considered, if at all.
To get great results, make sure to do comprehensive research on the company and determine what will need to be invested to gain the profit you need. You’ll also want to read through numerous reviews, know the amount of time the company has been in business, and be clear about how much they’ll charge over the course of your involvement. One well-known crowdfunding company in the real estate industry is called Fundrise, which gives you the option to start with an investment of just $500. Happy rent-free living!