How to live in Cleveland for free - Crain's Cleveland Business

How much do you pay for housing each month? The rule of thumb is 20% to 40% of your monthly paycheck should be allocated just to living expenses.

Imagine saving that entire amount of money instead of giving it to the bank or your landlord.

I moved from Los Angeles to beautiful Cleveland for work and stumbled upon this lucrative financial planning strategy called "house hacking." I went from spending $1,200 per month on rent to buying a multifamily property in Lakewood and, instead, it paid me $710 each month to live in it.

Cleveland has a high rent-to-price ratio, meaning it has above-average rents and relatively inexpensive home prices. This makes it a great market for cash-flow investing. Pittsburgh has a comparable rent-to-price ratio, meaning it could be another good place to look for a house hack.

I bought a three-family dwelling for $200,000 in Lakewood in 2017. I lived in one unit with a friend and rented the others. My monthly mortgage payment (principal and interest), insurance, taxes and utilities were about $1,750. The rents total $2,750. After expenses and setting aside 10% for reserves, my net profit is $710, or $8,520 annually. Add in the monthly savings from eliminating my rent and my savings plus new income is $22,920.

There are life-changing benefits to this strategy. First, it eliminated a $1,200 monthly rent outflow. Second, I then had a $710 inflow for a $1,910 total positive monthly effect. Third, I am building equity and participating in appreciation that Lakewood has experienced.

This reorganization of the relationship between your finances and housing situation also comes with a slew of tax benefits. I am not a certified public accountant, so I will not offer any direct advice, but this beautiful thing called depreciation may shield income that is produced over and above your expenses. You may also be able to deduct interest expenses and property taxes from your personal taxes.

I have implemented this strategy with multiple houses and could have started my first one with only $7,000. I could put down a little higher down payment to mitigate risk and interest expense.

The young professional crowd may be saying, "I don't have $7,000 or $10,000." I didn't either at the beginning, but I made sacrifices in the short term until I saved enough, and I was well compensated for those sacrifices. I mean, I cut out everything. I didn't go out or eat out for months and even waited until I bought the house before I bought a car.

For everyone else reading this, it can be a good way to supercharge savings before retirement or significantly reduce the amount of money you need to spend in retirement, so I would recommend everyone consider this financial planning technique.

1. Find an experienced local real estate agent who has worked with investors before.

2. Follow the 1% rule. Find a house that has monthly rents equal to or greater than 1% of the home purchase price.

3. Focus on three- and four-unit houses to maximize possibility of cash flow and add diversification.

4. Don't fall in love with a house. Feel comfortable with walking away from a deal if it gets bid up too high.

5. Just keep looking. The Cleveland real estate market is hot right now. I had to submit five offers above asking price before one was accepted.

6. Google "house hacking" and explore what you find. A surprising number of people have made this strategy work for them.

Want to be a landlord? Some people aren't comfortable with that responsibility, but in my opinion it's great experience learning to work with new people and face difficult situations. You can always get a management company, but it is more cost-efficient to self-manage since you will be living there.

Want to take on real estate risk? Consider this strongly. We are 10 years into an economic expansion and Cleveland was hit especially hard by subprime lending practices in the last recession. Build a margin of safety, in case all your units become vacant simultaneously.

Ready for surprises? This strategy is simple, but not always easy. It takes lots of upfront work, but gets easier once set up properly.

Moving within the next year? Most owner-occupant residential mortgages require you to live in the property for 12 months. But you are not stuck in this home beyond the first year. If you must move, the rental and sales markets are very strong in Cleveland, so there is flexibility.

Burger is a portfolio manager at a Cleveland-based financial advisory firm.

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