Living in an Expensive City on a Smaller Salary (my story)

[Greg Gibson]

NOTE: I hope this is helpful for how our family has used many of the principles taught here at BP to live the past few years in Washington, DC.

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By all accounts, Washington, D.C. is one of the most expensive cities in America. Depending on what list you look at, DC sits at either number 3, 4, or 5 as the most expensive.

Furthermore, we (my family and I) do ministry in the Georgetown community (the 20007 zip code), which is one of the most expensive neighborhoods in one of the most expensive cities.

Average rent for a 2-bedroom home is around $3,500. For a 3+ bedroom home, you are in the market for over $4,000+. Furthermore, you can’t buy anything that is a 3 bedroom for under $1.2 million. Needless to say, unless you have a trust fund stashed away somewhere, you have to be resourceful. And on a ministry salary—one that you are fundraising at that—you have to think outside the box a bit.

IN THE BEGINNING:

When we first moved to the city, we rented a 2-bedroom in Arlington for $2,400 a month. It was fine at first, because there were some pretty sick amenities that came with the apartment, but as winter came, the pool closed up and the city became less attractive because of how cold it was. We had a 9-month lease on this first apartment, because we knew it was only a temporary landing pad for us. Around month 6, however, I could no longer take 4-humans and 2-dogs living together in a two bedroom apartment. My son was 4 at the time, and boyhood-winter-energy is very real thing.

I was ready for a change, and Grace wouldn’t let me get rid of the dogs, so I had to call an audible.

As I began looking for places to live in our area, I realized that a 2-3 bedroom home was way out of our price range. We are a single income family. My wife stays at home with our children, and I am a pastor who at that time raised my own salary.

And we were looking at 3-bedroom homes to rent for $4,000+ a month.

I needed a solution, because we didn't make that much money.

THE PRINCIPLE OF LEVERAGE:

As we were faced with the problem of rent and space for our growing family, I began to think through the principle of leverage. I began to ask the question, “What can we leverage in order to live where we wanted to live?”

First, I answered the question of where we wanted to live. We wanted to live in Georgetown, which is where our church is.

Next, I simply just needed to figure it out. So, again, I began to think outside the box a bit.

Washington, D.C. is one of the biggest tourist cities in America. In fact, nearly 22-million people visit DC every year, and Georgetown is a destination neighborhood in a destination city.

I knew that those were two things we could leverage.

THE SOLUTION USING LEVERAGE:

Because of the tourism, I began to look into AirBnB. I asked how we could leverage the fact that DC (and Georgetown) was a place everyone wanted to visit. With the principle of leverage in mind, we began to look for homes that were ideal for our family. Not the other way around.

I wasn’t asking the question, “What can we afford, and where can we afford to live?” I was asking the question, “How can we live where we wanted to live?”

Ideally, we needed a 3-bedroom (for 4-people), and at least 1 bathroom (but 2 would be nice). We also began to look for a place that had an english basement with a separate entrance.

One day in the midst of a winter snow storm, I’d had enough of the tight quarters where we were living, so I jumped onto Craigslist and began to look around. I saw an ad for a 3-bedroom, 2 bathroom, with a basement that has a separate entrance for $4,300 a month for a 1-year lease.

It had everything we were looking for, and it checked all of the boxes. The home was in the neighborhood we were pastoring Veritas City Church, and it was in the school district that we wanted for our kids. Everything was lining up, but it was still WAYYYYYYY out of our price range.

Again, insert the principle of leverage.

First, we asked for a 2-year lease at $3,850, which they granted. By asking for an extra year, they went down $450 a month on the lease. We knew having 2-years with a family was appealing to a landlord, as we are more likely to take care of the home than a house full of college kids (no offense, college kids).

Second, we signed a lease knowing that we were going to rent out the english basement on AirBnB as much as possible (which we had the approval in our lease and from our property manager to do). This allowed us to cut the cost of our rent substantially.

At the apex of the rental year in Washington, D.C., we can net $2,800 a month just by renting out our basement. That puts our rent at about $1,000 a month to live in Washington, D.C., in the neighborhood we wanted to live (Georgetown), and in the school district we desired. Simply unbelievable!

HERE’S THE BREAKDOWN OF OUR RENT:

The principle of leverage can be applied to anything. With a little bit of sacrifice, a little hard work, a little thinking outside of the box, and a few hours of cleaning per week, we were able to live exactly where we needed to live to do ministry with our church.

What is more, we were able to save money, and because we were renting (and giving money to the rent fairies), we were able to put aside money into savings and purchase rental properties in another market.

Here were the numbers:

$92,400 / TWO YEAR PROJECTED RENT COST AT $3,850 A MONTH
$48,000 / PROJECTED AIRBNB RENTALS OF THE BASEMENT (BASED ON A CONSERVATIVE $2,000 A MONTH NET PROFIT)
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$44,400 / TOTAL PROJECTED ACTUAL RENT COST
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$1,850 / PROJECTED CONSERVATIVE ACTUAL MONTHLY RENT TO LIVE WHERE WANTED TO LIVE

GAINING EQUITY THROUGH THE PRINCIPLE OF LEVERAGE:

That wasn’t enough, however, because at this point, I was still at a net-negative of $44,400. Even though we were renting, I wanted to come out ahead after 2-years.

So, one more time, I began to think outside of the box.

During the first year of renting in Georgetown, my brother and I started an LLC and began to purchase property in the East Tennessee market. I was only able to do this because we were saving money on rent by renting our our basement on AirBnB. Every penny I saved, I put aside to purchase more real estate in a market we could actually afford.

This was my plan for gaining equity even while we were renting in Washington, D.C.

Here’s the breakdown:

IN 2017: We purchased our first rental property for $83,000 (with 25% down). We each put in $10,375 into this purchase. After 5-months of renting out our basement, I was able to save about $10,000, which became our downpayment for this property.

IN 2018: We purchased our second rental property for $83,000 (with 25% down). Again, we each put in $10,375 into this purchase. At the end of 2017, we used the rest of our savings to take our kids to Disney World for the first time (which was freaking incredible), and 5-months into 2018, we were able to purchase (with our savings) our next rental property.

Both properties appreciated and brought in substantial cash flow. Furthermore, because we were paying down the mortgage every month, we saw a great increase in our equity (even though we were renting in Washington, D.C.

IN 2019: Both properties jumped to over $100,000 in value. We payed the mortgages down to around $70,000 total between the two with our rental cashflows from the two properties. We refinanced both properties at an 80% LTV and now we have $50,000 ready to purchase our third property (which is going to be a big daddy cabin in the mountains).

IN 2020: We plan to purchase 10 doors (one cabin, a 4-plex, and then a 5-plex, putting our total properties at 12 by the end of 2020).

To break it down a bit further for you, here’s what the final numbers looked like after 2-years of renting in Washington, D.C.

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$220,000 / VALUE OF RENTAL PROPERTIES PURCHASED
-$70,000 / PAYMENTS STILL LEFT ON RENTAL PROPERTIES
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+$150,000 / EQUITY AFTER 2-YEARS
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+$50,000 DOWN PAYMENT FROM REFINANCE FOR ANOTHER PROPERTY
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$200,000 / TOTAL EQUITY OF PROPERTIES PURCHASED
-$44,000 / COST TO RENT A HOME IN WASHINGTON, D.C. FOR 2-YEARS AFTER RENTING OUT OUR BASEMENT ON AIRBNB
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$156,000 (TOTAL EQUITY AFTER TWO YEARS DIVIDED BY TWO PARTNERS WHO STARTED THE LLC)
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+$78,000 / TOTAL EQUITY AFTER TWO YEARS OF RENTING IN WASHINGTON, DC
+20,000 / EXTRA SAVINGS FROM RENTING OUT OUR BASEMENT ON AIRBNB

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In case you missed it, that is almost $100,000 of equity by just RENTING OUT OUR BASEMENT AND THINKING DIFFERENTLY ABOUT THE PRINCIPLE OF LEVERAGE.

It was a win-win any way you looked it.

CONCLUSION:

As you think about living in an expensive city on a smaller salary (whether in ministry, funding a start-up, or whatever it might be), think strategically about what the first couple of years might look like for you.

Listen, there is no single recipe for success. Some people would never do what we did, and that’s okay.

But you have to know your limits, what your family can handle, and what you are willing to risk. It can definitely be done.

My hope from this is not for you think how amazing we are for what we did, but to encourage you that you can do a little bit more than you probably think you can.

And the thing I am most proud of as we have rented in Washington, D.C., is that we have given 10% of our income away through it all, and today, we are giving away 16% of our income back to the local church and to other ministries in DC.