southwestdeafservices.com Blog Reader Case: Should this professional actor buy a home?

Reader Case: Should this professional actor buy a home?



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FIRECracker
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One of the reasons why we got a book deal was because a Hollywood actress read our blog and enthusiastically plugged us to her literary agent. So, when I saw this reader case in my inbox from another Hollywood actor, it immediately grabbed my attention:

Hello Firecracker!

Huge fan and admirer of yours! I’m Leigh (a pseudonym for privacy purposes) and I’m a professional actor in my 30s in the tv/film industry.  

I have an S-Corporation, but for simplicity, I have combined my personal and corporate income/expenses in these figures. 

A large portion of my expenses are because I rent homes in both NY and LA, because I need to work on both coasts throughout the year. I’d like to purchase a property in NY soon (hence the large down payment savings I have in cash), but am torn because of the wild housing market and cost of living in NY.   

I wonder if I should be more aggressive in the market instead of investing in housing or house-hacking.  I’m also looking to set myself up in the future for career ups and downs. 

Here are my current numbers;

INCOME

(My income varies each year, but over the past 5 years,  I have made an average NET Income of $279,600 per year. I am projected to make this amount for 2022 as well, but there is never a guarantee in my line of work…)

2021

(PERSONAL CAPITAL current net worth: $1,000,140)

INCOME:

GROSS: $370,000

NET: $314,000


MONTHLY SPENDING:

$8,000/month 

($4,000 of that is for housing…yikes!)


DEBTS:

2018 Toyota Rav 4

0% interest over 5 years 

Outstanding Balance: $26,327.81


FIXED ASSETS:

2020 Happier Camper (fiberclass trailer)

Value: $35,000


SAVINGS:

*in 0.5% High Yield Savings: $237,521.60

*in 1.0% High Yield Savings: $191,975.97 

$429,497.57 TOTAL in HIGH YIELD SAVINGS

*in regular checking account: $56,711.84

TOTAL LIQUID CASH: $486,209.41


INVESTMENTS

CRYPTO: $26,721.51

RETIREMENT: 

-ROTH 401k: 19,500.03 (not yet invested)

-Regular 401k: 234,142.98 (%100 in FSKAX)

-ROTH IRA: $119,389.61 (%100 in FSKAX)

    TOTAL RETIREMENT: $373,032.73

BROKERAGE:

$105,221.40  (%100 in ITOT)

TOTAL STOCK MARKET INVESTMENTS: $478,254.613


Any thoughts would be much appreciated!

Warmly,

Leigh

Now, two things jumped out at me after reading this actress’ story:

1) “Average NET Income of $279,600 per year…but there is never a guarantee in my line of work”

2) MONTHLY SPENDING:$8,000/month  ($4,000 of that is for housing…yikes!)

Their salary, while high, fluctuates and isn’t guaranteed. They are also spending a breathtaking $4000/month just on housing!

They’re moving back and forth between L.A and NYC for work, leaving one of their rentals empty half the time, which means they are paying double rent! YIKES!

Real estate? More like real-e-WASTE! *congrats self for literary genius-ness*

So how can we eliminate or reduce this waste? Should they buy a place in NYC? Live nomadically? Rent their place(s) out half the time?

Well, as we always say on this blog, to clarify these types of tough decisions, we need to MATH THAT SHIT UP!

With a yearly spending of $8,000 x 12 = $96,000 and according to the 4% rule, Leigh’s FI number is $96,000 x 25 = $2.4 Million

I’m going to ignore their Personal Capital net worth since it seems to include the camper van and recalculate it like so: $486,209.41 (cash) + $478,254.61 (liquid investments) – $26,327.81 (debt) = $938,136.21.

Finally, Leigh saves $279,600 (average net salary) – $96,000 (yearly expense) = $183,600, netting an impressive 66% savings rate.

Plugging all these numbers into our trusty spreadsheet, they should reach financial independence in:

Year Starting Contributions ROI (6%) Total
1 $938,136.21 $183,600.00 $67,304.17 $1,189,040.38
2 $1,189,040.38 $183,600.00 $82,358.42 $1,454,998.81
3 $1,454,998.81 $183,600.00 $98,315.93 $1,736,914.73
4 $1,736,914.73 $183,600.00 $115,230.88 $2,035,745.62
5 $2,035,745.62 $183,600.00 $133,160.74 $2,352,506.35
6 $2,352,506.35 $183,600.00 $152,166.38 $2,688,272.74

(Note, in this scenario we are assuming their salary is increasing by the rate of inflation to offset inflation and a conservative long-term return of 6%/year)

Slightly over 5 years.

Wow. Not bad at all, even with $8000/month spending because their salary is so high, their time to FI is quite short.

But they’re thinking of buying a house in expensive New York City. How does that change their FI timeline?

Buying a place in NYC means they would still need to continue renting in L.A, so it doesn’t help in offsetting the rent in L.A, only in NYC. They could potentially rent out their place part-time in NYC when they’re in L.A, but the L.A rental would still need to be empty when they return to their house in NYC. So, the only thing this would do is to offset some of the rent in NYC.

Does the math make sense? According to Zillow, the median home price in NYC (including suburbs) is currently $737,699 .

If they bought their house with cash, that would leave them with $938,136.21 – $737,699 = $200,437.21 to invest.

And just because they won’t have a mortgage doesn’t mean they won’t have continuous costs of maintenance, property taxes, and insurance to pay every month. Assuming a conservative 1% of the net worth of the house for insurance, 0.95% per year for Manhattan property taxes, and $100 per month for home insurance, that gives us an ownership cost of $7377 + $7008 + $1200 = $15,585 annually or $1,299 per month.

Since $4,000 per month is their double rent for NYC and L.A, assuming they are paying rent of $2,000 per month in each city, buying the house with cash drops their NYC monthly housing costs to $1,299 per month, saving them $701. But it also traps a large portion of their net worth as equity in the home. What does that do to their FI number?

With housing costs dropping in NYC, their new yearly spending becomes $7299 per month or $87,588 per year. Using the 4% rule, their FI number goes down to $87,588 x 25 = $2,189,700. Given that they make on average $279,600 after taxes, their yearly savings would become $279,600 – $87,588 = $192,012.  With a remaining $200,437.21 to invest after buying the house, they would reach FI in:

Year Starting Contributions ROI (6%) Total
1 $200,437.21 $192,012 $23,546.95 $415,996.16
2 $415,996.16 $192,012 $36,480.49 $644,488.65
3 $644,488.65 $192,012 $50,190.04 $886,690.69
4 $886,690.69 $192,012 $64,722.16 $1,143,424.85
5 $1,143,424.85 $192,012 $80,126.21 $1,415,563.06
6 $1,415,563.06 $192,012 $96,454.50 $1,704,029.57
7 $1,704,029.57 $192,012 $113,762.49 $2,009,804.06
8 $2,009,804.06 $192,012 $132,108.96 $2,333,925.03

Around 8 years!

That means buying the house in NYC increased their time to FI by 3 years. Which isn’t too bad. And if they can rent out the N.Y home when they’re in L.A, that would help reduce their costs and shorter their time to FI.  My biggest worry, though, is that “there is never a guarantee in my line of work” which makes it risky to have so much of your net worth stuck in one asset if income isn’t stable.

But don’t worry, even if they don’t buy property, there is still a way to reduce their housing waste with the following options.

Having lived out of AirBnbs continuously while travelling, I can attest to the freedom of this lifestyle. Not having to move furniture, being able to jump on plummeting rental prices during the pandemic, and not having to worry about damages to your property by tenants while travelling is the best thing ever!

And no, it doesn’t mean you have to move every few days or weeks. You can negotiate long term rentals with hosts. We were able to do just that, staying in one Airbnb for 5 months because the landlord liked us and decided to ride the pandemic in their cottage. They even gave us a discount for agreeing to take the place long term.

The best part of living out of Airbnbs is that you don’t waste rent by leaving your long-term rental empty while you’re in another city for work. Once you check-out of your current Airbnb, your rent can be 100% redirected to the new place in your new city. In terms of flexibility, nothing beats Airbnb.

And we are not the only ones who’ve tried out this lifestyle. Here’s an article from bestselling author, James Altucher, about his experience living out of Airbnbs:

https://slate.com/human-interest/2017/03/whats-it-like-to-airbnb-hop-instead-of-renting-an-apartment.html

Here’s another one about how you can save money living out of Airbnbs and earn points to offset the cost:

“Contrary to common belief, living out of Airbnb full-time can actually work out cheaper than a traditional lease. Plus, there are lots of perks that come with it. You can earn thousands of points and miles from your “rent” each month and enjoy the flexibility of moving whenever you wish.”

Looking at Airbnb monthly rates for 1 bedrooms in L.A and N.Y, you can expect to spend around $3000/month. Even if that is more expensive than their currently long-term monthly rental rate, it’s still saving them money because they’re no longer paying double-rent. They’re only paying for 1 rental but have the flexibility of living in 2 cities. Just make sure you are renting the place for longer than 30 days to avoid breaking city rental laws. Plus, it will give you an Airbnb monthly discount.

What does this do to Leigh’s time to FI?

By reducing their rent down from $4000/month to $3000/month by living out of Airbnbs instead of having 2 rentals, their yearly expenses would go down to $7000 x 12 = $84,000/year.

Their savings also increases to $279,600 – $84,000 = $195,000. Their FI number also goes down to $84,000 *25 = $2.1 Million.

Put it all together and this is what it does to their time to FI:

Year Starting Contributions ROI (6%) Total
1 $938,136.21 $195,600.00 $68,024.17 $1,201,760.38
2 $1,201,760.38 $195,600.00 $83,841.62 $1,481,202.01
3 $1,481,202.01 $195,600.00 $100,608.12 $1,777,410.13
4 $1,777,410.13 $195,600.00 $118,380.61 $2,091,390.73

Only slightly over 4 years!

So, living out of Airbnbs decreased their time to FI by 1 year from their current situation and 4 years from Option 1 of buying a house. This is because their money isn’t trapped as equity in the house and can be used to generate passive income.

The downside to this option is that in order to live out of Airbnbs, you have to pare down your possessions to fit within one piece of luggage. Not something that everyone will choose to do.

Leigh says that their $4000/month housing expense is due to having 2 rentals, so another option is to sublet out each place when you’re not there? Right now, they’re paying double rent, so if you can get a subletter or Airbnb tenant to take the place while you’re working in another city, you can go from paying double rent down to only a single rent. And since both NY and LA are metropolitan cities where people like to travel to for work, you shouldn’t have any problems finding tenants.

If Leigh can make this work, they should be able to reduce their double-rent of $4000/month to $2000/month. All while getting the added benefit of reducing their financial risk by not having to own a property.

This would reduce their yearly spending down to $6000 x 12 = $72,000. Their yearly savings goes up to $279,600 – $72,000 = $207,600. Finally, their FI number goes down to $72,000 x 25 = $1.8 Million.  This means they will reach FI in:

Year Starting Contributions ROI (6%) Total
1 $938,136.21 $207,600 $68,744.17 $1,214,480.38
2 $1,214,480.38 $207,600 $85,324.82 $1,507,405.21
3 $1,507,405.21 $207,600 $102,900.31 $1,817,905.52

Only 3 years!

So, if they are successful in subletting or Airbnb-ing out their rentals and having their tenant cover the rent while they are travelling for work, they go from paying double rent to single rent and reduce their time to FI by 2 whole years!

The biggest downside to this option is that Leigh would need to get permission from their landlord to sublet or Airbnb out their places. Contrary to popular belief, this isn’t impossible. You can sweeten the deal for your landlord by buying extra rental insurance to assuage their worries. You can also offer them a profit-sharing incentive for any of the proceeds you make by Airbnb-ing the place out. Make this offer as attractive as possible to your landlord by minimizing the risk of property damage with insurance (Airbnb has $1 million insurance coverage for hosts) and maximizing their earnings by profit sharing.

If Leigh doesn’t want the hassle of subletting their place, they can try home exchange. Admittedly, this will require a lot of stars to align, and they will need to find another traveller or travellers with the opposite schedule as them. Maybe someone else who travels between those 2 cities for work—like another actor or musician. Leigh can sign up to Home Exchange, which has 400,000+ listings for free and message other users to see if they can match up either situation.

If done successfully, they can get rid of one of their rentals, and simply swap homes with someone else. No money changes hands in this case, so unlike the sublet option above, you don’t have to worry about paying taxes on net profits, or convincing your landlord. You’re simply swapping homes with your friend from time to time.

The math would be the same as Option 3 above, reducing their time to FI by 2 years, since they’ll be going down from paying double-rent to single rent.

The downside to this home swap option, based on my experience, is that it’s difficult to find someone who has an exact complementary schedule to yours. So far, the requests I’ve gotten is either for a week or 6 months. I haven’t yet found anyone who’s perfectly compatible with my travel schedule. In that sense, Leigh will probably have better luck choosing option 2 or 3. That being said, it’s still worth it, since you can try it out for free (you only pay for membership once you are ready do a swap) and the platform gives you guest points for signing up (which can be redeemed for stays at users’ homes). Just be prepare to send a lot of messages.

What do you think? Can you help brainstorm some ideas for Leigh to reduce their rental costs? Should they buy a home in NYC? Let’s here in the comments below!


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