Invest In Real Estate For Capital Appreciation, Rental Income, Or Lifestyle?

Park View PropertyDespite real estate ranking second to last in my Passive Income Rankings, don’t worry real estate fans, real estate still is my favorite asset class to build wealth.

One of the reasons why I love real estate is because of the utility it provides. I don’t buy real estate for rental income or capital appreciation. I buy real estate for improving my lifestyle first. If the property so happens to appreciate in value while I enjoy the place over the years, fantastic. If not, it doesn’t matter because I’ve derived tremendous satisfaction from all the property brings: location, view, amenities, and memories. Capital appreciation is just a bonus.

Money earned is best spent on improving your lifestyle. It may be fiscally prudent to hoard as much cash as possible for a rainy day. You might grow your wealth faster by buying multiple rental properties while you rent a piece of crap place to save money. But I find that to be a waste. There has to be a better balance when it comes to spending money. If you can spend money on an asset class that provides a better lifestyle and a chance for capital appreciation and rental income, you’re hitting triples and home runs!

At What Cost Is Net Worth Diversification Worth It?

Net Worth DiversificationThe following is a guest post from Chris, a fella I met while stranded in Frankfurt, en route home from my business trip to Switzerland and Mallorca to do more research on the happiest countries in the world. Chris has a dilemma and could use the community’s help! – Sam

It was early evening when the airplane broke so the airline had to put up all of the passengers in a local hotel – to make matters challenging we were unable to get our checked luggage and had to survive on the contents of our carry-on bags. Upon entering the lobby I quickly noted that the hotel check-in line was 17 passengers deep so I decided to “wait” in the hotel bar (which was oddly empty) while my fellow, disgruntled travelers begged for rooms. Another fellow passenger noted the length of the queue and opted for the bar seat right next to me.

My bar partner and I got to drinking, laughing, and chatting about possibly catching a cab into town to procure clean under-garments – I don’t recall how long we sat at the bar, the check-in line was non-existent by the time we got room keys, my decision-making was “gin and tonic clouded” and I was happy that I chose to spend the time making a new friend instead of wasting time in a check-in line. My bar partner was Sam, he told me about his FS journey and I’ve been a regular visitor to the FS site since.

Does Remodeling Pay Off? Probably Not!

Property Renovation

Manhattan Brownstone Living Room

In “How To Make A Lot Of Money In Real Estate: Focus On Expansion,” one of the questions was on whether remodeling really recoups the cost and provides such a large return.

One of the biggest fallacies homeowners have is thinking whatever they spend on remodeling will automatically bring them great returns when it comes time to sell. I used to think this way as well until I started remodeling and property expanding myself.

Let’s be clear. Almost all property remodeling does not recoup the cost spent remodeling based on national averages. Only in super expensive cities does remodeling sometimes bring in extra value to a sale because time is more valuable to higher income buyers. In such cases, home buyers in places like San Francisco, London, or New York may be willing to pay a premium to avoid the hassle of remodeling.

In order to create more value, remodeling (renovation) must include expansion. Do not confuse remodeling with expansion!

How To Make Lots Of Money In Real Estate: Focus On Expansion

Remodeling and Expanding

Building The FS Hot Tub!

In 2014, I bought a fixer for about $714 / square a square foot in the Golden Gate Heights neighborhood of San Francisco. Nobody really knows where the neighborhood is, and that’s just the way I like it because everybody eventually will! Golden Gate Heights is just several blocks west of UCSF and has homes facing the Pacific Ocean.

Real estate is my favorite asset class to build wealth because it is tangible, inflates with inflation, has preferential tax benefits, and provides an income stream if rented out. When I buy real estate, I’m the CEO of the property. When I buy a stock, I’ve got to trust the CEO and his or her management team to execute. Sometimes the CEO is great, sometimes the CEO sucks wind, yet still gets a multi-million dollar exit package that makes me sick.

Nobody cares more about your money than you. Hence, the goal for wealth builders is to own investments where you can better control the outcome. And if you can’t own investments that you control, let someone you trust manage your money if you don’t have confidence in managing your money yourself. I trust myself to work harder and scrutinize expenses and revenue more than anybody. My bottleneck is time.

In this post, I’d like to point out a very important rule before buying any single family home. If you follow this rule, I’m confident with the right execution, you will be able to make far more money than if you didn’t.

Losing A Property Bidding War Never Felt So Good

Amazing property

Bring the Grey Poupon

It took about three months of intense searching to find my new home in the western portion of San Francisco largely because I was unfamiliar with the area and price points. Every house I saw looked cheap compared to where I used to live, hence I needed time to recalibrate my thinking. I must imagine Californians retiring to places like Florida, Texas, Washington, Nevada, and Oregon must go through the same recalibration process since everywhere is so much less expensive.

During my house hunt, I met a number of realtors. Some were good, some were clueless. There was this one fella I met who happened to be the listing agent along with his mother of a house I wanted to buy (mother son team). It was a great 2,200 square foot, 4 bedroom/4 bathroom house with two levels of decks overlooking the ocean. The house was perfect for $1.2 million.

San Francisco is currently no ordinary property market. Prices are purposefully set low in order to attract a bidding frenzy unlike many other real estate markets where prices are set high and negotiated down. Instead of earning his cut from his mother for selling the house with her (a sure thing), he agreed to represent me in the purchase of the house. It was a gamble he decided to take probably due to a little more money, his belief that he could convince his mom to sell to us, and to earn a good win for his own real estate resume.

Bankers, Techies, And Doctors: You’ll Never Get Rich Working For Someone Else

Although I estimate an entrepreneur needs to make at least 35% more to replicate his or her day job income to run in place, I’m truly beginning to realize after two and a half years how much more upside there is to entrepreneurship than to working for someone else.

I came from the world of banking where 23 year old graduates with one year of experience can clear $100,000 no problem. Despite ascending from Financial Analyst, to Associate, to VP, to Director within 10 years, and earning Director level compensation for three years before leaving, I still wasn’t able to earn and save enough money to buy my dream home in Kahala, Oahu.

Dream House In Kahala, Oahu, Hawaii

Contemplating on never being able to afford my dream home

The above is a picture of me sitting on a lanai, looking down the southeast coast of Oahu towards Koko Head. The home is on Blackpoint Road in the exclusive Kahala/Diamond Head neighborhood. Since I was a kid, I’ve always dreamed about living here one day. But I’ve come to realize my childhood dream will likely never come true.

The asking price for this 6,000 sqft Kahala home with 4 bedrooms and 4 bathrooms is $3.5 million ($583/sqft). The lower level is a 1,800 sqft rental apartment that is going for a below market rate rent of $2,500 a month. The main house is therefore not that huge. $3.5 million is actually great value given the view and the size of the house. Other houses in Kahala are easily asking for $900/sqft or more.

If I had $4 million cash, I would buy this house in a heartbeat. It needs at least $300,000 in renovations given it is quite dated. But the lanai and the spectacular view are priceless. All I think about when I’m looking for my dream home is being able to sit outside in 72-85 degree weather with an ice cold beer and write about various adventures. 

Should I Buy A Fixer-Upper Property?

Home Remodeling Gut Job

Breathe in fresh sawdust air

“Forget money. Remodeling is the number one cause for divorce.” – Anonymous

Before my current house, I had never bought a fixer-upper before. The most I did in the past was build a new bathroom out of a closet, put up a wall to create an en-suite bathroom, and remodel my ground floor by adding a shower and blowing out a center divider so one could fit a bed. Oh, I also changed all of my windows, which wasn’t so bad.

After my remodeling activities, I swore never to do another remodel project again because it kinda feels like hell on earth. But that was almost 10 years ago.

After getting ferociously outbid on a particular piece of property ($1.2 million ask, went for $1.8 million), I decided to look away from nicely done properties. There seems to be a massive embedded premium for new or recently remodeled properties that I wasn’t willing to pay. All I really wanted was a view, gosh darnit it. The property itself almost seemed secondary!