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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:
Huge fan and admirer of yours! I’m Sam (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;
(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…)
(PERSONAL CAPITAL current net worth: $1,000,140)
($4,000 of that is for housing…yikes!)
2018 Toyota Rav 4
0% interest over 5 years
Outstanding Balance: $26,327.81
*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
-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
$105,221.40 (%100 in ITOT)
TOTAL STOCK MARKET INVESTMENTS: $478,254.613
Any thoughts would be much appreciated!
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, Sam’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, Sam 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:
(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?
Option 1: Buy a place in NYC
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:
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.
Option 2: Live out of AirBnbs
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:
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 Sam’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:
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.
Option 3: Sublet your rental(s)
Sam 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 Sam 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:
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 Sam 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.
Option 4: Home Exchange
If Sam 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. Sam 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, Sam 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 Sam to reduce their rental costs? Should they buy a home in NYC? Let’s here in the comments below!
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17 thoughts on “Reader Case: Should this professional actor buy a home?”
You’ve done a great job of pointing out various plans to FI success and what’s required to make them work.
You didn’t, however, focus on a plan to fail. What do I mean by that?
A plan to fail focuses on what could go wrong and how one deals with the bad situations that come up. How can one mitigate the unacceptably bad into something that can be lived with? Or can one?
The obvious one is that income drops substantially or, even worse, dries up.
The savings rate is very high so a big cut in income would not be a disaster, it would just delay FI plans until the income level recovered. That’s good. Owning a second home would, however, up fixed expenses and make things tougher to handle.
The public is fickle. An acting career can just dry up and it’s worse for women than for men. The acting income could just drop to nothing and stay that way. There are plenty of cash savings that could tide things over for quite a while, but my understanding is that much of those savings would be depleted if a second home is purchased. So, how long could they go before the equity in the homes is at risk because their acting income dried up?
Are there other lines of work they could get and what do those pay? If this happens in an economic downturn (because bad luck events often cluster together!), what would be the lead time needed to make that career change?
This particular person isn’t as prone to the above risks as someone with less savings and higher expenses would be. But it’s good to go thru this process as a counter point to the success planning you went thru because it can reveal situations that need to be avoided — and often can be avoided if one plans for it.
Great comment. while a path to success is important, balancing the approach with mitigating bad outcomes is needed too. Otherwise, in similar fashion we should all just be 100% equities (or leveraged) if fastest statistically probable way to FI is all we’re going for.
Another option, maybe share a rental house with say a flight attendant or pilot ?
Something suitable with enough space and your own privacy where it it doesn’t seem like you are living with roommates.
Also, a maybe mobile home parked in a trailer park in L.A. ?
(They already have a 2020 Happier Camper fiberglass trailer, so maybe upgrade to something bigger and live in it)
I don’t envy anyone having to live in LA or NYC. Both have high State taxes that are only increasing and the quality of life is deteriorating.
Buy housing in a State with no income tax and do Airbnb in the big cities where you work
Here are brain teasers for this Actor…
Do you enjoy your line of work?
Will NYC give you the best opportunity to execute your passion and in return fairly compensate you with financial resource to live and raise your family?
If the answers are resounding “YES” to both, buy the modest home in the city with 30 fixed mortgage.
Along the way, slowly add side hustles to strengthen up the financial security for the family.
For the majority of the population, going wild in switching career paths will cost time and money more than they can imagine.
In this specific case, trying to shift from Acting to Crypto to RE Estate and other temptations are nothing more than a futile effort to cross the FI line.
Grass may not be that green beyond the FI line!
Its great that Sam has saved so much already. It goes on to show that they can really manage finances well.
Since life is so unpredictable, all you can really do is show a framework of how to make decisions. You did that here so well that they can just re-use it for their specific case as situation unfolds.
For example, when they retire, they can just reduce the double rent and to-fro flights costs and bam, your number gets really small.
The other part is investing in house vs. stock market. And that’s where the FI community differs the most… people here would recommend investing in stock markets (broad based ETF funds like VTI) vs. house since on an average it hasn’t performed as well (if you really look closely at the numbers on an average without bias). Of course there’ll be exceptions but on an average the numbers do seem to indicate stock market is the best investment option out there.
If Sam retires early, does he really need two places to stay and pay $4k in rent? If not, spending should go down significantly. And with the new spending, he will be very close to FI right now… Or am I getting it wrong?
Liquid cash $486k. Huh?
Sam, you read this blog. Why are you not investing your money? Get some ETFs and get on with reaching retirement. Honestly, I don’t understand why so many people make such silly financial decisions.
And lose the FOMO for real estate. Interest rates are rising. Real estate values have peaked. You want to buy real estate? Whyyyyyy?
Good on you to save the money you have. Now, get some balls and actually invest it.
Nice to see that. I have 700k in cash and don’t have the balls to invest….not at least until the Shiller PE drops below 30
Most returns are from a relatively small number of companies on a relatively small number of days. Missing a few of those days really hobbles returns.
It means you’re not an investor. Speculator? Gambler? Head in the sand letting fear make your decisions for you? Likely.
Always be invested. Understand the power of rebalancing. Understand you need a fixed income component to your portfolio to rebalance with.
Not trying to be mean. Just trying to shake some sense into you.
Hi guys. I have an unrelated question. I see you guys have a yield shield in place and I really really liked that approach. But now we have an ETF that might be perfect for the first years of FIRE. It’s the JEPI. It pays a juicy 7% yield via options trading (of course limiting the fund upside a bit, we understand that) inside the fund while keeping a full exposure to the US stock market.
This incredible yield would cover the 4% rule and leave plenty for appreciation while allowing us to keep our allocation to stocks/bonds intact.
Would it be something you recommend? Could you write a post about it? I’m reading more and more people on the FIRE community using JEPI for a kind of a yield shield. Thoughts?
Renting a spot in a nice campground with the travel trailer would be worth checking out, at least for the short term. There are nice mobile home communities and campgrounds all over the country. Expenses could drop significantly. I did this for a year, cutting monthly expenses to less than half of apartment living. I’ve maintained most of the frugal habits I developed at that time and sold the trailer after I decided on more permanent housing.
I don’t know Sam’s precise situation but as someone who works with actors it’s rarely as clear as “I’m in this city for the next 2 months, then I’m in that city” there is flying back and forth for a few days at a time with short notice for auditions, press events, shooting. It feels like the solutions offered aren’t taking into account that she needs the security of having someplace to land in both cities at the same time because an erratic schedule is part of the life. Yes, clearly if you are on a shoot somewhere for 2 months and know you won’t be in the other city, go ahead and rent out that place, and if you get an audition/callback whatever during that time you can probably go to a hotel for the 2 nights and still come out ahead in the rent. But a big yes to looking for solutions that allow her to earn miles or cash back on housing!
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