#10 - On How You Can and Should Live Rent-Free in the Twin Cities

For most young people living in the Twin Cities, or any other major city in the United States for that matter, rent is one of their biggest expenses. The purpose of this post is to demonstrate that this expense can be avoided to a great extent by buying and renting out a property in the right manner. We will consider two different scenarios in which this can be accomplished. The first one involves buying a single-family home (which would also apply for condos or townhomes), and the second one will explore the acquisition of a multi-family home.


The Single Family Scenario

Let's start with the single-family home scenario. In this example we will take into account a generic, $200.000 single-family home somewhere in Minneapolis, preferably close to the University of Minnesota. In today's market that is a reasonably standard price for a decent single-family home in that area. Let us assume then that we pay $200.000 for the house, which has 3 bedrooms and a finished basement.

Using a FHA loan, we will pay 3.5% of the value of the home as a down payment ($7000) and we will ask the seller to pay for the closing costs. We will then finance the rest of the value of the home ($193.000) at a 4% annual interest rate for 30 years. This means that we will only have to bring about $7000 to the closing table in order to buy the house and gain control over a $200.000 financial asset.

Ok, so now we have a $200.000 single-family home in Minneapolis, we move in and start paying into our own mortgage instead of someone else's. (That alone would be reason enough to buy the house.)
We will also need to start paying for the related monthly expenses or PITI payments in real estate jargon. Those will be, in this case, something like this:

• Principal & Interest - $921.41
• Property Taxes - $208.33
• Operating Expenses (water, gas, internet, electricity, etc...) - $300
• Property Insurance - $100
• Mortgage Insurance - $100
• Total Expenses - $1629.74  

Fortunately, we now have a 3 bedroom house of which we only really need to occupy one of them. So we can rent out the other 2 bedrooms for, say, about $500 each. We also have a finished basement that we can rent out to a student or to a young professional for about $500. In total, we can take in about $1500 per month in rent.

We can then conclude from this example that our net monthly payments every month would only be $129.74 after we subtract our total expenses from our total income. ($1500-$1629.74 = -$129.74) Considering that renting a room in Minneapolis would cost us about $500 and renting a small place would cost us about $1000, paying little more than $100 per month would be a steel!

Not only that, we also have to take into account that, over the years, the natural tendency is for payments to remain stable and for rents to go up, which means that we would eventually reach a point when we would either start to make a profit or would have to rent out fewer bedrooms in order to cover the mortgage.


The Multi-Family Scenario

Let's now look at a scenario in which we are buying a multi-family home instead of a single-family home. Let's use a duplex as our example. A duplex is basically a 2-unit apartment complex and when you buy a duplex you can live in one unit and rent out the other unit or rent out both units to different tenants.

Since duplexes are typically more expensive than single-family homes, we will consider in this case a $250.000 property with 2 units, each one having 2 bedrooms and with one of the units having a finished basement.

Once again, we will use a FHA loan and put the minimum 3.5% as a down payment. We will, once more, ask the seller to cover our closing costs. We will finance the rest at a 4% annual interest rate and will pay around $4000 annually in property taxes. This will lead to the following monthly expenses:

• Principal & Interest - $1151.76
• Property Taxes - $333.33
• Operating Expenses - $300
• Mortgage Insurance - $100
• Property Insurance - $100
• Total Expenses - $1985.10

As you can see our expenses have increased a bit in this case but fortunately our income will also increase if we have a duplex since we have an extra unit we can use in order to generate more income. In this case we can rent out the extra, 2 bedroom unit, for about $1000. We can also rent out the spare bedroom as well as the basement in the unit we are occupying. That would bring our income to a total of $2000 and our net income to $14.90 ($2000-$1985.10). In other words, we would live for free and have our tenants help us pay our mortgage.

Conclusion

So really, now that you know that you can live for free in the Twin Cities, what's stopping you from buying your first property? Not only is it a great way to avoid an unnecessary expense (rent) but it is also an amazing way to start building considerable wealth in the form of equity in the property. You will be acquiring an income-generating asset that will appreciate in value as time goes by and you will be increasing your equity every month with each monthly payment to the bank and the best thing is that your tenants will be paying for most of it!