How Buying a House Helped This 24-Year-Old Save $20K in 2 Years
When I graduated from college in 2012, I landed my first “big-girl” job in New Jersey -- 700 miles away from friends or family. I needed a place to live and I checked out various studio and one-bedroom apartments, but quickly became frustrated.
Although I chose to pursue a high-paying career in accounting and had a great job, I was taking home about $3,000 per month. The one-bedroom apartments near my job averaged about $2,000 per month, utilities included.
I attended a low-cost state college, worked all four years and was conservative with spending. Fortunately, I was able to graduate without any student loans. However, I had a $500 monthly car payment and the unavoidable expenses of car insurance, maintenance, food and gas.
Running the numbers, I realized $2,000 a month could work, but I’d have to live on a very tight budget and wouldn’t be able to save any money. I needed a better option.
That’s when I started thinking about buying a house and renting out the spare bedrooms to help with the mortgage and allow me to save money.
Two years later, I’ve met interesting people, learned a lot and managed to put away roughly $20,000.
Here are the steps I took to liberate myself from the one-bedroom apartment blues.
Talk to a Mortgage Lender
Online mortgage calculators are a good starting point, but I wasn’t comfortable with the results.
I ran the numbers myself. If I wanted to eat ramen noodles for 30 years and never go out with my friends, then I could afford the mortgage they recommended.
Instead, I sat down with a mortgage lender at a local bank to go over my take-home pay and the amount of money I wanted “free” in my budget for saving and entertainment. He was able to tell me what housing price would make that achievable.
Even though the plan was to earn money from roommates every month, I made sure I could afford the house on my own -- just in case something unexpected happened.
Unlike renting, you never know what big-ticket items -- such as a furnace or hot water heater -- are going to break and need immediate repair.
I never wanted to be in a position where I relied on my rental income to pay the mortgage; instead, I wanted to put it away to cover those unexpected expenses.
Develop Expectations and Talk to a Realtor
Before I met with my realtor, I put together my list of criteria.
I planned on having roommates, so I wasn’t concerned with high-end finishes. Most renters won’t treat the house as they would if they owned it, anyway.
It was important for me to have my own private living area -- and my own bathroom.
I met with a realtor with great Zillow reviews. Two weeks and 15 houses later, I was 22 and under contract on my first house.
It was a three-bedroom, two-and-a-half-bathroom house with a finished basement I turned into my private living room.
Price the Rooms and Find Tenants
Craigslist gets a bad rap due to some high-publicity cases, but still has a lot to offer.
To price the two spare bedrooms, I pretended to search for a room in my area and looked at similar rooms’ rental prices. I settled on pricing the larger room at $525 and the smaller one at $500.
To find tenants, I used Roommates.com, an online platform that helps connect people searching for rooms with those offering them for a monthly subscription fee. It serves the same function as Craigslist, but seems a little safer.
I first chose female tenants for safety reasons, but later had two male roommates (both with no issues). I made sure to do thorough screenings -- with background and credit checks.
Estimate Your Rental Income
It’s tempting to estimate rental income at 100% occupancy and not include any maintenance expenses.
But it’s not realistic.
To estimate my income, I multiplied the total monthly rental amount for both rooms ($1,025) by 12 -- or $12,300 per year.
Then I reduced the amount by 20% for vacancy and 10% for repairs, leaving me with an estimated $8,610.
My entire mortgage payment (principal, interest, taxes and insurance) was $1,000 a month, so my estimated annual cost of housing was $3,390. I didn’t factor in utilities because I would have had to pay those in an apartment anyway.
Owning my house and renting out rooms is much cheaper than living in an apartment, plus the principal portion of the mortgage payment is similar to moving money from one pocket to another. It’s not a true expense.
The Balance Between Friend and Landlord
At first, I wondered how anyone would take me seriously as a female landlord in her early 20s.
But it actually came easier than I thought -- after a few learning experiences.
I didn’t have a signed lease with my first tenant and didn’t discuss house rules with her before she moved in.
She left in the middle of the night with no forwarding address. She left unpaid rent and damages far exceeding the security deposit, and I vowed it would never happen again.
After that, each tenant signed a lease containing a house-rules addendum before they moved in. It stipulated every expectation -- from thermostat settings to household chores.
This addendum may seem strict, but I explained it was to protect all of us and make sure we were all on the same page.
After discussing each item with potential tenants, no one had any issues. I rarely had to enforce the rules. When I did, I pointed right to the agreement they’d signed.
I’m building my equity in a house while saving a substantial amount of money each month. Life is great!
Your Turn: Have you ever made money as a landlord? If not, would you try it?
Lisa Blair is an accountant living the dream of crunching numbers. She spends her time living in Excel and occasionally remembers to look out the window to remind herself what the sun looks like.