Real estate played a major role in Cody Berman's path to financial independence.
The "Retire by 30" author started with a house hack, a strategy that involves renting out part of your home to offset or eliminate your housing costs.
"I think house hacking is probably, on the expense front, the biggest lever you can pull bar none," Berman told Business Insider. "One-third of the average American's paycheck goes to housing. If you can eliminate that or vastly reduce it — or, even better, if you can turn your housing into an income — all of a sudden, you gain a third or more of your monthly expenses back to invest in other things and build your financial freedom."
From there, he started buying long-term rental properties.
By late 2021, shortly before his 26th birthday, Berman considered himself financially independent. At the time, he said he had about $500,000 invested in the stock market and 13 rental units producing about $3,700 a month in cash flow. His digital-products business was also taking off, earning more than $10,000 a month in mostly passive income.
Berman and his wife, Lauren, still do a version of house hacking today.
They bought a property with a one-bedroom, one-bathroom house, plus a separate building with a four-bedroom, two-bathroom apartment and 600 square feet of office space. They live in the smaller house and rent out the apartment and office.
"Instead of paying $1,000, $1,500, $2,000 per month in rent, we actually make $800 a month from living here," he said. "And we don't share a wall."
Berman, who has since sold some of his rentals and shifted more of his real-estate exposure toward syndications, said two rules helped him and Lauren build the rental portfolio that contributed to his early financial independence.
1. Use the 1% rule as a starting benchmark
In real estate, the 1% rule suggests that a property's monthly rent should equal at least 1% of its purchase price to have a good shot at generating positive cash flow. For example, if an investor buys a property for $300,000, the rule suggests the property should be able to generate at least $3,000 a month in rent.
Berman used the 1% rule as an initial filter. If a property fell short, they kept looking: "That was our starting criteria. How do we find a place that meets the 1% rule?"
That meant expanding their search beyond the more expensive part of Massachusetts where they lived at the time. Their first rental property ended up being in Connecticut, where the price-to-rent ratio made more sense.
"We had to just kind of expand our view, because none of the houses were meeting our number criteria," Berman said.
It took time to find a place that met the rule — they toured a couple of dozen properties before buying their first one — but ultimately, it was worth the effort.
2. Don't buy a property you wouldn't live in yourself
The second rule, Berman said, came from experience: "We do not want to invest in properties or buy a property that we would not want to personally live in ourselves."
One of their early properties looked strong on paper. It was a $170,000 duplex that started cash-flowing right away, with about $2,250 in monthly rent and roughly $1,350 in monthly expenses.
"On a cash-flow basis, it was a home run deal," Berman said, but the property quickly became a headache. "The tenants were tattling on each other. We had a tenant who got arrested on the porch for drunk driving."
The experience changed the way they evaluated future deals. Strong cash-on-cash return and price-to-rent ratio weren't always enough; they also wanted properties that would attract reliable tenants and be easier to manage.
"We were like, we pay rent on time, we don't cause problems," he said. "We want people like us in our buildings, so let's just invest in places where we would want to live."
Now, the "would we live here?" test is one of their nonnegotiables.
"It sounds silly, but it's a golden rule now that we live by when we buy real estate," Berman said.
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Kathleen is a correspondent at Business Insider, covering investing and the path to financial freedom. She's been writing about personal finance for BI and other publications, including CNBC, since 2015.Her coverage includes the Financial Independence, Retire Early (FIRE) movement, real estate investing, and side hustles. She also occasionally covers small businesses and enjoys writing personal narratives about her own experiences navigating the world of money.Elkins graduated from Williams College in 2014 and resides in Los Angeles. Outside work, she trains for marathons and triathlons in the Santa Monica Mountains.Follow her on LinkedIn.Popular articles:
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