In this newsletter I discuss the benefits of buying multi-unit apartment complexes and living in one of the units to cut your housing expenses to zero. But before we get to the analysis, first a word from our sponsor…

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How to cut your housing expenses to zero

Six months from now I plan to leave the corporate world indefinitely. I’ve only been at it for a short five years that has kind of felt like a life time. In the office at 7:30am and home a night by 8:00pm. Monday through Friday and sometimes on the weekends. Business trips that increase my 60 hour work week to sometimes 80 or 90 hour weeks. Running on empty.

Don’t get me wrong, I have learned a significant amount in these five years. My skills as an investor are day and night compared to when I first started as a glassy eyed one year analyst. I’ve traveled all over the United States, met with countless management teams and have a rolodex of valuable contacts.

Living in an office day to day in front of a screen is not for me. Sure, if I stuck this career out for another 10 plus years I’d have a multimillion bank account. But I’d just be another fat man in a red convertible at that point. The absent father who misses his kid’s game for a meeting. A life of monotony and dreariness for that one incremental dollar.

So at the end of the year I plan to pack my bags and ditch corporate America. Win my time back and go back to being the scrappy entrepreneur I once was. Do what I want to do with my time on my own time.

I know I likely won’t ever have to go back to the corporate world, but the anxiety of returning is a big fear for me. At this point in my life I’d rather live on the streets than return to the office. Ride the rails with the hobos than fly first class as a businessman. So I view the first couple years without at 9-5 as key to success.

To optimize my savings and to give my financial life the endurance to survive without the traditional 9-5, my plan is to cut my biggest expense, housing, to zero.

Right now I am spending $1,800 per month for a small one bedroom apartment in a large city. $1,800 per month is $21,600 per year. As detailed before, my average expenses per year are around $50,000 per year. Housing expenses are 43% of my annual costs. An insane amount — especially when I think about the relatively little amount of time I spend inside of my apartment.

So to cut out my housing expense I plan to purchase a 2-4 unit apartment complex over the next six months and live in one of the units. I have attached a crude model below that shows the implied economics of this transaction.

The model above assumes that the apartment costs $350,000 (average cost of a 4 unit apartment in the area I am looking) and I rent out three of the units for $1,000/month. The fourth unit is rented at $0 per month as I would be living there. I’m sure I am missing some expenses as this is just a crude model, but the implied free cash flows per month would be $673 or a 9.61% cash on cash return.

And remember, this also cuts out $21,600 per year in expenses while also allowing me to build equity and have potential appreciation in a real estate asset.

But the real juice in house hacking comes in the ability to put an ultra low down payment on a 2-4 unit apartment complex. It’s a pretty neat rule. As long as you plan to live in one of the units you are allowed to put a down payment as low as 5% on an acquisition. The model below shows the economics of an ultralow 5% down payment scenario.

In this model the cash on cash return explodes from 9.61% to a whopping 16.93% as there is less upfront money transacted. Sure, the free cash flow decreases by $229/month as the mortgage payment increases, but I would be saving $52,500 in upfront costs that I could invest in other assets. In addition, in this scenario I would still be living rent free.

Over the next six months I plan to purchase my first apartment complex with plans of living in one of the units. It will be my first foray into real estate and hopefully a great learning experience. If I enjoy investing in this asset class it won’t be the last deal I make. Feel free to reach out if you have experience doing something like house hacking. I would love to connect and learn more.

Snippets

• Coal's popularity as power generator shows problems of clean energy transition: Thermal coal may be the world’s least liked commodity, but it is also one of this year’s best-performing global assets due to a rebounding demand for electricity. The price of Australian coal has surged from 80% YTD to nearly $146/metric ton, its highest in more than a decade. And despite environmental concerns, Liberum head of commodities strategy Tom Price thinks supply will fall faster than demand, as China and India will continue to buy coal in the export market for another decade.

• My Take: Sure, thermal coal is going nuts right now. But so is met coal. And the thermal and met coal producers are trading at relatively the same valuations. I have placed my bets with a small met coal miner that I think will begin to post record results as met coal prices are continuing to explode higher. With a fixed price business model, higher pricing equates to significant operating leverage.

• I went to the movies yesterday evening to see M. Night Shyamalan’s ‘Old’. Excited to say that the movie was packed full of patrons. I remain increasingly bullish on movie theaters and will continue to buy my favorite little movie theater this week. The domestic box office for July so far is at $430 million. I expect July to end at $500 million and continue to grow incrementally month after month. I think by 2022 we will be back at a normalized box office. Should this happen my favorite little movie theater has potential upside of 50-100%.

Disclosure: The team at Alpha Letter is not long KETAMINE ONE (OTC: KONEF | NEO: MEDI).

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