Thinking of becoming a landlord? If you’re thinking of boosting your income with rental properties, here’s how to make sure you’re making a wise financial decision.

I’m an inherently thrifty person. I come from an immigrant family, from whom I learned to live frugally out of necessity. My parents drove older cars, clipped coupons, wore cheap clothing, and passed these habits on to me.

But when I entered the adult world, I wasn’t prepared for the ridiculous cost of housing. If you’re lower-income or if you live in an expensive market, housing can consume as much as one half your take-home pay.

During my college years, I lived in the cheapest hovels available, which usually involved cramming half a dozen roommates into a tiny space. One day, I decided to crunch the numbers on an apartment I was renting. Using Zillow and Trulia, I realized the landlord’s total rent received roughly equaled his mortgage.

Landlords pay for numerous costs including vacancies, insurance, and a host of other permits and fees. When the rent equals the mortgage, they run a deficit and need to pay for the rest.

I vowed to only become a landlord if I found a property at which the rent could equal twice the mortgage.

A few months later, I did.

How We Ran the Numbers on Our First Rental

The property we found was across the street from the one we were renting. After sitting on the market for more than 18 months, the original asking price had come down to $225,000 (from $440,000), roughly half the initial listing price.  This was during the recession when housing prices were tanking and the housing market was weak.

At a purchase price of $225,000, we could buy the property, containing three apartments, for $1,361 per month.  That included principal, interest, taxes, and insurance.

I soon found out the entire building was collecting a total of $2,300 per month from rent. That represented $1,100 from the first unit, $700 from the second unit, and $600 from the third unit.

With a little research, I learned real estate investors often used a broad scale known as the 50 percent rule. It states that operating overhead such as repairs, maintenance, management, and vacancies will gobble up half the rent. This rule doesn’t include principal and interest on the mortgage, but does count property taxes and insurance.

Using the 50 percent rule, I estimated $1,150 of the $2,300 per month rent would be spent on operating overhead. This would leave enough to cover the principal and interest, and I’d make a few hundred dollars every month.

From touring the house, I realized that the largest unit—the one that rented for $1,100— was being underutilized. It had a second living room that we could convert into an extra bedroom. This would allow us to move into one of the units rent-free, while still collecting the same amount for rent.

This house would generate a rental income high enough to cover not just the mortgage, but also all other expenses such as repairs and utilities—and would leave me with a buffer of a few hundred dollars per month.

It was obvious I needed to buy this house, so my boyfriend and I purchased it in the summer of 2010.

How We Adapted to Being Live-In Landlords

The advantage of living in a place that puts extra money in your pocket every month, rent-free, is clear.

The disadvantage of being a live-in landlord, particularly in a 100-year-old home, is the stress.

We were painfully aware of how much needed to be fixed and had an extremely limited repair budget. This meant we’d shop online for cheap tools and materials during the day and, every evening and weekend, would do all the repair work. Since we were first-time homeowners, we were slow at everything and faced a huge learning curve.

For several months, we’d pull 20-hour work weekends. We didn’t have time to exercise, see our families, or have much of a social life.

I could never leave work or turn my attention elsewhere. The physical to-do list was always there, staring me in the face, surrounding me as I slept.

Additionally, being a landlord who’s available on-site 24 hours a day meant that I dealt with a lot of non-urgent demands. For example, a tenant once woke me up to report that his microwave was broken and he hadn’t checked to see if it was plugged in.

We weren’t living solo, either—my boyfriend and I had roommates found on Craigslist. There’s a certain awkwardness that occurs when your roommates are also your tenants. On one hand, you enjoy hanging out with your roommates, watching Game of Thrones together. On the other hand, you know you’ll have to evict them if they can’t pay rent.

In hindsight, I didn’t understand that I should run this as a business, not as a home. If I could turn back the clock and start over, I’d approach this with the mentality of an entrepreneur, not a housing hacker.

I would have spent my time focused on funding the repairs, not swinging the hammers. I would have hired contractors earlier. I would have hired a professional bookkeeper and set up accounting software from day one. I would have reviewed quarterly profit and loss statements, like a real business. I would have read a few more books about rental property investing.

The drawbacks we faced were necessary growing pains. The advantage of paying zero out-of-pocket housing costs are tremendous, especially when you’re in your late 20s and just getting started in life.

How We Grew our Rental Properties

For the first year, we focused on repairing the house and eventually took out another loan to pay for home repairs. Those repairs resulted in higher rent—the three units now rent for a total of $3,950 per month, a huge increase from $2,300 in its pre-renovated condition. The added rent more than covers the cost of the loan, and puts even more money into our pocket every month.

Thanks to the fact that my boyfriend and I didn’t pay a dime for our housing (plus we get paid from the house), we were able to save quite a bit of money. We used this to buy a second rental property a year later.

We used the cash flow from our first two properties, as well as a portion of our paychecks, to buy a third, a fourth, and fifth rental property.

It’s been five years since we bought that first rental house and now we own five properties. We own two out of those five houses with no mortgage. This type of success would have been impossible if we had paid one-third or one-half of our income towards housing.

Should You Buy a Rental as Your First Home?

On one hand, having zero out-of-pocket expenses was one of the best decisions I made. On the other hand, being a DIY investor and on-site landlord is stressful. Having roommates that double as tenants may have given me a few gray hairs at an early age.

Home ownership is a huge responsibility, particularly when tenants are counting on you. I didn’t understand how big this responsibility would be before I entered into it.

Several years after living in our triplex, my partner and I decided to move out. We went (roommate-free) to a two-bedroom condo and paid the entire mortgage. It was a big step—a bit of a scary step—but it made me feel like a true Grownup.

Paula Pant quit her 9-to-5 job, traveled to 33 countries, launched a business she runs from her laptop, and uses the profits to invest in real estate. She shares details about these adventures and more on her website, Afford Anything.

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