Pay Down Debt Or Leverage Up To Buy More Property?

Palace Of Fine Arts, San FranciscoI’ve been dreading this day for the past five years. First Republic Bank sent me a letter in the mail stating that one of my 5-year CDs is coming due and that I have a seven day grace period to withdraw my funds before they renew for another 5-year term. I would be fine with renewing except for the fact that the renewal interest rate is only 2.2% vs. the 4.2% I’ve been receiving. I’m not locking my money up five years for a lousy 2.2% a year, no way.

The post “CD Investment Alternatives: Why I’m No Longer Investing In CDs” provides a longer explanation of why buying a CD now is suboptimal. But curiously enough, it doesn’t highlight the one investment that I’ve been gravitating towards since I received the letter from the bank: real estate.

Real estate is my favorite asset class, even though I’ve discussed selling my rental properties in the past due to the headache of dealing with tenant issues. I just love being able to live in my investment, do things to improve the value of my investment, and wake up 10 years later with a high probability of holding an appreciated asset with a lower mortgage. The tax benefits aren’t bad either.

A deep dive assessment of all my assets shows that real estate has provided the highest return on capital invested with the least amount of stress. I have a tendency to speculate in stocks in order to find that multi-bagger return that has eluded me since 2000. Many of my speculative bets have turned sour and I don’t want the temptation to speculate with larger amounts of money. The last thing I want to do is use my risk-free money to invest in stocks. I absolutely hate losing money and I’ve already got 25% of my net worth in the stock market. (See: Net Worth Allocation Recommendation By Age)

Either Zillow Is Broken Or We’re In A Massive Housing Bubble

In January 2014 I wrote a post entitled, “Exploit Online Data To Lower Your Property Taxes“. In the post I highlighted a chart of my house’s estimate value by Zillow. The chart looks like a internet stock from 1999-2000. The chart significantly impedes my efforts to lower my property taxes this year because property assessors use online sources such as Zillow to partly make their assessments.

Since the publication of the post, the chart has continued to go up every day (see below). We’re now close to 300 days in a row of price increases according to Zillow. Are you looking at a new billionaire in the making who only hangs out with super models? Or is Zillow completely wrong? There is no way my home price could be up 60% since May 2013. Furthermore, there is no way prices can rise every day in a straight line for 10 months in a row. Just looking at the gap between the bold blue line and the dotted line (average price of my area) shows things are out of whack.

Thank goodness San Francisco is limited to raising property taxes by around 3%. But for someone like me who was able to successfully lower my property valuation for years, I will now be reset back to the original assessed value +3% a year catchup if I fail this year.

Housing Bubble Chart

Zillow is either broken, or San Francisco is in a massive housing bubble. Thanks to the robust growth of tech companies here in the Bay Area (e.g. Facebook at record highs, AirBNB and DropBox going public next, etc), I don’t think San Francisco is in a housing bubble. I don’t even have to mention rent control, land restrictions, good weather, and an international city as other reasons for propping up demand. We’re probably in the sixth inning of a dramatically tight ball game. 

Do Landlords Have The Right To Maximize Rental Profits?

Rent Control Causes A Shortage

Rent control leads to a shortage

One of the key income streams to obtain for financial independence is rental income. Not only will rent increase over time in good locations, your asset value will also increase as well. One day the mortgage will be gone and you’ll have this wonderful asset producing a stable income to take care of you and your family. But before you get to glory, a lot of hard work and soul-searching must be committed along the way.

The other day I received a lovely comment on my post, “How To Raise The Rent, Extend A Lease, And Get Rich As A Landlord“. We all know by now that landlords are greedy and evil people, especially those of us who own property in San Francisco. So this comment below simply reinforces the notion that you should never let your son or daughter marry a property owner.

YOU SHOULD ALL BE ASHAMED OF YOURSELVES!!!!! Conniving to use your power over your tenants to manipulate them into a situation that forces them to choose between the stress and hassle of uprooting their lives, and coughing up some amount you designate oh so carefully and gently deliver to line your own pockets.

I know you own it and you deserve to make a profit. BUT COME ON….The mortgage DECREASED by 23% but you still jack up the rent? You expect us to think that maintenance costs jumped up THAT MUCH that a 23% decrease in your mortgage doesn’t offset it???? That’s just a lie you tell yourself to ease your conscience. And the despicable lies you tell them to make them feel like they’re getting a deal and that you “probably” won’t increase it next time when you’re publishing articles on how to beguile them so you can do just that??? Wow.

It’s your property and it’s a business, granted, but you are absolutely heartless for sticking it to those who make their home in your “business”. Renters already have NO RIGHTS in this city so thanks a lot for publishing the tools for those in power to continue to stick it to us. I honestly don’t know how you sleep at night…oh wait….on the Egyptian cotton sheets the brand new parents who are probably doing their best to save for their kids college funds are buying you. Sweet Dreams Samurai.

That’s it! I’m giving away all my property now. Who wants some? The commenter makes some good points. However, if you know how to negotiate well by understanding one’s Best Alternative To A Negotiated Agreement (BATNA), you can increase your returns – and that goes for both sides. Besides arguing why landlords have the right to maximize profits, I’ll also share with renters how they can keep rents down in this post. Call me an equal opportunity advisor.

The only beef I have with this commenter is that she missed one thing: I only sleep on the finest Moroccan cotton sheets after I bathe myself in Evian water. Where’s my baby giraffe? Come on now!

Exploit Online Data To Lower Your Property Taxes

Victorian Mansion In San FranciscoEver since 2008 I’ve been fighting to lower my property taxes every year. If I didn’t fight, the SF Property Assessor’s office would undoubtedly keep raising my assessed value all throughout the financial crisis because they need to extract as much money from homeowners as possible. Renters certainly aren’t going to volunteer to pitch in if they can simply vote to raise property taxes. Too bad everything just comes around in the form of higher rents. In other words, together we must stand united against the government.

Your main mission as a homeowner is to convince the assessor’s office your property is worth as close to $0 as possible. Anybody who is proud their assessed home value is higher is being silly because the government will take advantage of you. The same goes for people who make a lot of money telling everybody exactly how much they make. Practice the mantra of Stealth Wealth and believe your primary home is a dump in order to build your net worth further.

Two Ways To Live In Your House For Free: Cash Flow And Principal Appreciation

National Home Price Index ForecastThe only reason why I open up my primary monthly mortgage statement is to check the split between principal and interest. My payment is fixed for three and a half more years at 2.625% so there’s never a change in absolute payment. It’s just fun to see the principal portion as a percentage of total payment go up over time. Progress is happiness.

The flip side to less interest payments is less deductions. I’ve calculated that mortgage interest payments are only truly worthwhile if you’re in the 28% tax bracket or higher. In other words, if your income is less than around $100,000 for singles or $200,000 for joint you’re not getting that much bang for your mortgage interest buck due to the standard deduction (~$11,900 for married couple, $5,950 for single) and the Alternative Minimum Tax. You’ll still be able to itemize and save on taxes, just not an optimal amount.

In this post I’d like to share with you how every potential homeowner or existing homeowner can live in their house for free using two main strategies that occur over the long run.

Should I Sell My Rental Property And Simplify Life?

Median Sales Price San Francisco. Source: Trulia

Source: Trulia. Median Sales Price San Francisco.

There are two reasons why I’ve been thinking about selling my main rental property. Real estate is on fire here in San Francisco and it’s always better to sell higher than sell lower. We’ve clearly passed through the worst of the property market and sales prices are up anywhere from 15-25% in the last 12 months alone. Meanwhile, the median asking rent is commensurately up 21% YoY to $3,398. Spending $41,000 a year after tax on rent seems hard to sustain, even if you are making over $150,000 gross a year and working for Google.

The second reason for wanting to sell has to do with hassle. The older I get, the less I want to deal with conflict. I’m currently writing this post during a moment of frustration so my thoughts may be biased. However, it is my hope by writing things out we can come to a rational decision for those who are also thinking about selling their rentals.

At about 2pm the other day I get a blast e-mail from our HOA management company saying,

“I have seen a number of complaints regarding tenant occupied units which needs to be addressed by the Unit Owners. In particular are the following issues:

1. Parking without authorization in someone else’s parking stall.
2. Parking beyond the confines of the parking stall’s floor marking.
3. Not breaking down and bundling their cardboard boxes in the garbage area.

The lack of compliance by tenants places the Unit Owner in serious jeopardy as the Board will be meeting next month to discuss in conjunction with other business matters, solutions and punitive assessments. You are required to have your tenants sign off acknowledging receipt of these documents.”

I’m accustomed to receiving such e-mails because it’s always the same three issues over and over again when a new tenant moves into the complex. No matter how much the landlord stresses these three issues to our tenants, an owner will inevitably complain to the HOA or the property management company about new tenants. The older the owner, the more they will complain, especially if the tenant is younger.

Owners feel they own more of the place than their condo dictates. The longer the inhabitant, the more rights they think they have. Furthermore, there is a bias against younger people because they are viewed as more inconsiderate, entitled, rude, and lazy. The funny thing is an older generation’s bias against a younger generation has held true even during the times of Socrates.

“The children now love luxury; they have bad manners, contempt for authority; they show disrespect for elders and love chatter in place of exercise. Children are now tyrants, not the servants of their households. They no longer rise when elders enter the room. They contradict their parents, chatter before company, gobble up dainties at the table, cross their legs, and tyrannize their teachers.” – Socrates, 470 BCE.

A PHONE CALL SOME TIME PAST MIDNIGHT