Budget to a “Free House”

The story of purchasing my first home and how budgeting made it possible.

As I drove over the Bay Bridge, returning to San Francisco from the Sierra foothills, I stared admiringly at the shimmering windows of the homes on the East side of Twin Peaks.

“How could anyone ever afford to live in one of these homes?!” I wondered, while simultaneously imagining what the people living in these homes must be wondering themselves as they look out over the Bay.

Owning a home—let alone a single-family home with a view of one of the world’s most iconic cities—is a daunting endeavor and one to which almost every person aspires, despite it often seeming impossible.

This is the story of my first home: how I came to afford it, how I found it, financed it, and ultimately how I turned it into a cash-flow positive investment—what I like to call my “free house.”

This is also a story about the power of budgeting—how diligently tracking our income and expenses empowers us to make seemingly impossible dreams a reality. I’m so convinced of budgeting’s efficacy that, at the end of this post, I’ll share with you the budgeting tool I’m building (Lopery) to help others obtain their own “free houses.”

“This is going to be impossible”

While I was working at Airbnb in 2017, I knew I was making enough money to incrementally save up for something. A house seemed liked the worthiest of investments but housing in the Bay Area was untouchable — even with a software engineer’s salary.

I started doing analysis of the broader CA market and, rather than finding a primary residence, I searched for investment properties instead. I compared average nightly rates of vacation rentals to housing prices, and discovered Mariposa County, at the foothills of the Sierras and the gateway to Yosemite (pop. 17,000). Average annual Yosemite visitation is north of 3m, demand for lodging is high, and housing prices were approachable.

This wasn’t exactly the shimmery SF home dream I had fantasized about but it was a real possibility. The question then became…

“Can I afford it?”

Queue the spreadsheet. For years, I had been evolving a personal finance spreadsheet. Each year, I’d duplicate last year’s and make improvements. To answer the question, “how much could I afford?” I needed to know two things:

• How much do I make?
• How much do I spend?

Answering the first question was simple. But figuring out how much I spend was a bit more tricky.

I broke down my spending into two buckets: living & lifestyle. Living expenses were fixed, recurring, essential things like my gym membership, car payment, rent, cell phone, and internet. I made rows for each of these and summed them.

Everything else was discretionary. I could make choices about the groceries I purchased, shows I went to, how many drinks I ordered at the bar. Each month, I exported the transactions from my banks and imported them into a spreadsheet. Eventually, I even built a Plaid app that did this automatically. I used one credit card for all these “lifestyle” charges so I didn’t have to categorize anything. Then, I looked at the totals for the last three months and averaged them. This number was what my lifestyle cost every month and since I wasn’t willing to change my lifestyle this was the number I needed to complete the equation:

Savings = income - living expenses - lifestyle expenses

For me at that time, it turned out to be $2,000/mo. Knowing this, I configured my direct deposit to automatically contribute that amount into a separate account each month and in five months I had saved $10,000.

I also started looking at homes in Mariposa and the types of loans for which I would qualify. It was critical to find a purchase price, where the monthly mortgage payment would end up being less than or equal to my monthly savings rate. Otherwise, I’d buy a home I couldn’t afford without making more or spending less money.

I found a property with two dwellings on it for $299,000. I applied for a FHA loan that required 3% down and purchased this property with the $10,000 I had saved. The amount I had been saving each month now went towards covering the monthly mortgage payment. Bingo!

I also ran through the “worst case scenario” case of losing my job and income and decided I could be content living in Mariposa and reducing my overhead if it came to that.

“Free house?”

I began working on turning the property into a vacation rental. The $2,000 I had been saving each month, now went to the bank to pay off the loan. So it didn’t feel like it was costing me anything—my lifestyle didn’t have to change. But I knew that if I could get Yosemite tourists to pay the mortgage for me, I’d get that $2,000 each month back to save up for something else.

Any bonus income I made, I shoveled into permits and improvements to get the dwellings ready. Mariposa County has 30-pages worth of requirements to legally list a vacation rental so I went to work ticking off each requirement one-by-one.

It took a little over two years, but finally I did it! I created the listing and started hosting my first guests.

This income started to offset my monthly expenses so I was able to start saving again. This property has two separate dwellings on it, which created a lot of possibilities. I could live there, while renting out one, which I did during most of COVID. Or I could rent out both. Now that I was saving again, I put every extra dollar towards getting the second dwelling permitted to rent.

After another year and half of diligent saving and permit rigmarole, the economics completely changed. With the 2nd house bringing in vacation rental income, I didn’t have to put in cash each year to cover the mortgage, cleaning, landscaping, and maintenance costs. Instead, I started making money. Every dollar earned (net) started working against the initial set up cost such that, in time, it will have cost me nothing to own this property.

Budgeting at the cornerstone

This entire story was powered by my budget. Without knowing what my lifestyle cost me, I couldn’t determine what I could afford. Knowing what I could afford, forced me to focus my search and ultimately find the property I own today.

In fact, I’m so enamored with budgeting that I’m now building a budgeting app that actualizes the exact same principles into a nearly effortless experience. People know they should be budgeting but they don’t because it’s hard. But it doesn’t have to be.

Lopery is the combined result of 20 years of budget mastery between myself and my co-founder, Morgan Engel. Lopery boils down all your income and recurring expenses to a single Safe to Spend number—all in about 5 minutes of set up. You can track that number on a weekly basis to stay on track. If you consistently spend less than your weekly Safe to Spend, you can set up new automatic recurring savings, just like I did by adjusting my direct deposit. If you’re consistently spending more than your weekly Safe to Spend, Lopery will show you how that’s impacting your savings over time.

Lopery isn’t just for buying a home. Lopery is for anyone. If you already own a home, use Lopery to determine how much additional money you can move into investments now (vs. months from now). “All the benefits in life come from compound interest — relationship, money, habits — anything of importance” — Naval Ravikant. Get that compound interest working for you now!

Lopery also isn’t just for high-earning people either. Use Lopery to build your safety net. If you lose your job, make sure you’ve got 3 months of income set aside to cover your living expenses. Adjust your Safe to Spend to get there and Lopery will help you stay on track.

Other apps either require you to do a bunch of manual work each month for them to be helpful. Lopery integrates with your banks so it’s always based on real, up-to-date data. Other apps focus on your net worth, but Lopery helps you make day-to-day decisions to grow it. Other apps are free, because they sell your data to offer you financial products you don’t need. Lopery is a paid subscription service to ensure your data belongs to you.

Morgan and I decided to build Lopery because we’ve tried everything else and were woefully unsatisfied.

I wrote this blog post to hopefully inspire you to try it and see how simple and powerful budgeting can be. Turn your impossible dreams into realistic possibilities.

Sign up today for free access to Lopery through the end of 2023.