Increasing Passive Income Through Leverage And Arbitrage

Sunset in San Francisco, Golden Gate Heights

Priceless View Of The Sunset In Golden Gate Heights, San Francisco

Earlier in the year, I had a nice conversation with a well-known San Francisco angel investor about risk and reward. I had a chunk of money coming due from an expiring 5-year CD and I wanted to get some advice on what to do with it. I asked him whether he would be leveraging up or paying down debt in this bull market. He responded, “Sam, I always like leveraging up. It’s how I made my fortune.” This angel investor is worth between $50 – $100 million dollars.

Of course you can’t just leverage up into any old investment. The investment has to be something you know fairly well and has a good risk/reward profile. The only thing I have confidence leveraging up on is property. Everything else seems a little bit like funny money.

Although I quit my job a couple years ago to try my hand at entrepreneurship, I’m a relatively risk-averse person because I’ve seen so many fortunes made and lost over the past 15 years. If I was risk-loving, I would have done what so many brave folks do nowadays and quit as soon as I had a business idea, instead of methodically moonlight before and after work for three years before negotiating a severance. The breakfast sandwich guy I used to go to for 10 years while I was working told me he was worth $3 million dollars during the dot com boom in 2000. I went back for old times sake last month and he is still there!

Despite my risk-aversion, I do believe money should be used to increase the quality of your life and the people you care about. As a result, I did something recently that might seem financially risky, but I think the move actually lowers my financial risk profile now that I’ve had a chance to fully process the situation.

I finally found my panoramic ocean view Golden Gate Heights home! A room with a view has been on my bucket list forever. But it never occurred to me to look in San Francisco, despite being so close to the ocean because I thought such homes would be unaffordable. San Francisco already has the highest median single family home price in the nation at $1 million. To add on a panoramic ocean view would make prices outrageous, or so I thought.

It’s the same curmudgeon as never asking out a super model because you think she or he will say no. You’ve just got to ask and I’m sure you’ll be delightfully surprised once you try.

After spending months aggressively looking for my next ideal property within my budget, I found a view home for less than half the cost of my existing home on a price/square foot basis. How is this possible you might ask? The farther west you go from downtown and the established neighborhoods, the cheaper prices are in general (see the graphic I created in The Best Place To Buy Property In San Francisco Today). But the farthest away you’ll ever be is 7 miles because San Francisco is 7 X 7 miles large. Given I’m only going into a downtown office two times a week, I don’t mind the extra 15 commute. To be able to watch the sun go into the ocean every day for the rest of my life is priceless.


Buying property in 2014 is not as good as buying property in 2011-2013. Prices in major cities such as Miami, Las Vegas, Phoenix, Los Angeles, New York City, and San Francisco have risen quite aggressively over the past several years. But I couldn’t have bought property in 2011-2013 because I was in the middle of leaving my job and I didn’t have a large enough downpayment for what I wanted. I needed to prove I could create wealth on my own for at least a couple years before buying another property. (See: How Much Do I Need To Make A An Entrepreneur To Replace My Day Job Income?)

Some positive things happened since I left work. First, I didn’t sink to the bottom of the deep blue sea, but caught a wave of growth in my business. I got over my fear of failure with every new minute I spent online. Second, a large chunk of change was coming due from a 5-year CD I mentioned previously. The great thing about putting your money away in a CD or long-term investment is that you get used to not seeing or needing the money – very similar to paying yourself first or maxing out your 401k. I wanted to invest the CD proceeds into something more tangible or rewarding than just trying to make more money. Finally and most importantly, my primary property’s valuation went ballistic.

I wrote a post on March 13, 2014 entitled, “Zillow Is Broken Or We Are In A Massive Housing Bubble” to get my mind straight before actually buying another property. When I wrote the post, the valuation had risen every single day for nine months in a row for a 60% gain, which didn’t make any sense. I was absolutely sure the chart would start leveling out. But that wasn’t the case at all. Its valuation actually spiked by another 30% four months later as of today!

Here is a price chart of my previous primary residence of 10 years on Zillow:

San Francisco Home Prices On Fire

Without property price appreciation from my existing properties I purchased in 2003 and 2004, I would have a much more difficult decision buying more property in SF, even with rents skyrocketing. But by coupling the property portfolio appreciation with the fact that I was buying a home 50% cheaper than my existing home, I mustered up the courage.

I had a 30+ year real estate veteran and #1 nationwide producer for her firm come by and do a free assessment of my house the other month and she said I could get the first absurd value in the chart above “no problem.” I didn’t believe her because I know my home and I know the strategy of buttering up clients to snag a listing.

I then had to do an official appraisal on my primary residence as part of my mortgage application process for the new Golden Gate Heights home. That figure coincidentally came out to the first absurd value as well. So maybe, just MAYBE, the house is worth Zillow’s first estimate, but definitely not the latest estimate. Several houses close by recently closed for $1,500 and $2,200 per square foot, which is causing the entire neighborhood to go bonkers. But these houses are on quieter streets or are more upgraded, and Zillow can’t tell the difference.

Logic would say that when prices are going crazy, it’s a good time to sell. But I thought 2012 was a decent time to sell too (thank goodness I didn’t). Maybe I’m being absolutely stupid for not selling now, but if I sell my home, I wouldn’t know what to comfortably do with the proceeds because I already have proceeds from my 5-year CD which I have to put to work. Earning 0.1-0.2% in a money market is not an option. Furthermore, if I sold my home, I fear I will be priced out of the north end of San Francisco forever (Pac Heights, Marina, Cow Hollow, Presidio Heights).

The best time to buy property is when you can afford it, because long-term price appreciation is generally always up and to the right due to inflation. Because the property price point is multiple times higher than your salary, it’s hard for individuals to catch up e.g. a 10% appreciation on a $1,000,000 home requires a 100% appreciation on a $100,000 salary just to stay even.

Note: I decided not to highlight the specific valuation of my home, even though it would make the illustration easier to understand because there are readers from all over the country and the world who would find doing so to be poor taste. Percentages should be able to make the point. But because I have already publicly stated in prior posts my desire to make $200,000 in passive income, I am highlighting the debt and rental numbers in the next section. 


The ideal mortgage amount is $1 million dollars if you can generate a ~$200,000 income. The interest on a $1 million mortgage is the maximum mortgage indebtedness you can deduct from your income excluding $100,000 in HELOC money for home improvements. I’m not really down with individuals taking out a HELOC because the interest rates are always higher, and I’ve found people to get in trouble by spending money on unnecessary things e.g. cars, vacations, etc.

You might think I’m crazy for taking on a lot more mortgage debt after already having a $1 million dollar mortgage for my other residence in the chart above, but hear me out. The interest I currently pay on my old primary residence is $2,200 a month at 2.65%. Add on property taxes and insurance, and the total cost is roughly $4,000 a month, all of which is deductible.

But the rent I locked down was $8,700 a month, for a $4,700 a month profit for a two year lease. The incredible thing is that I had multiple sets of people who were interested in renting at this price or higher. One rental agent actually e-mailed me asking how come I was charging too little. I’ve essentially extracted $56,400 a year in relatively passive income while still controlling an asset that has the potential to continue appreciating over the next 30 years. In the short-term, I have no doubt the asset could correct by 15%. In fact, I’m counting on it to eventually correct because trees don’t grow to the sky forever.

I have a fundamental problem with paying a 5% or greater selling commission in this internet age. It is amazing that the internet has cut costs for every single industry except for the real estate industry. I encourage sellers to go on strike and never sell their property until such costs are lowered to a flat rate or more reasonable rate. Selling a property now means you are automatically losing 5%-6% to fees. Furthermore, if my return on equity can beat the 4% per annum ownership cost, I’ll essentially be able to live in my home for free all these years.


The other reason why I decided to take on a $1 million mortgage at 2.5% was to conduct debt arbitrage. I was originally going to put down $200,000 more for the home as stated in my no financing contingency offer. But the bank said that all I needed to do was put down 20% since the loan was already approved by the underwriter. And given the bank makes more money the more they lend, they were happy to lend me at a 80% LTV once my finances were approved.

Originally I was a little wary of the bank giving me more money than I assumed. But I took them up on the offer by only putting 20% down. I used the extra money to pay down my other rental property mortgage at 3.375% for an annual savings of $1,750.

Always maximize your financial arbitrage opportunities when you see them. They don’t come around very often.


In 2012, I set out a goal to build a $200,000 passive income stream by June 2015. Year one produced roughly $78,000 a year in passive income. Year two produced roughly $110,000 a year in passive income. With the move to rent out my long time primary residence, passive income is now +$56,400 – $16,000 lost from annual CD income for a total passive income stream of ~$150,000, assuming I do nothing else.

I’m shooting for $200,000 year in passive income because I believe $200,000 is the ideal income for maximum happiness. The government starts going after you if you make much more than $200,000 with higher taxes, AMT, credit eliminations, and deduction phaseouts. $200,000 keeps you in the respected and not-hated mass affluent crowd. $200,000 is also a level where one should be able to comfortably raise a family of three in almost any expensive city around the world.

A $50,000 a year passive income gap is going to be very hard to overcome in one year, but I’m definitely going to try. There is something about writing out goals and making them known that really helps keep people accountable. Even if I fail, I always think about an old Chinese saying, “If the direction is correct, sooner or later you will get there.

The older I get, the more aggressively I’m going after my bucket list items. I know several people who’ve died at the age of 50, and that’s only 13 years away for me. I’ve always wanted a room with a view of the ocean and I’ve finally found it. Hopefully the real estate market won’t crash tomorrow. But if it does, I’ll work hard to make sure I don’t exacerbate the decline and I’ll remind myself that a forever home is never to be sold.

Financial Samurai Passive Income Portfolio 2016

Latest Passive Income Streams

Recommendations For Building Wealth

* Manage Your Finances In One Place: The more passive income streams the more you have to keep track. I aggregate all 32 of my accounts with Personal Capital so I can easily stay on top of my finances. Not only is it free, Personal Capital tracks my net worth automatically, allows me to manage my cash flow month-to-month, and has a fantastic Investment Checkup tool that highlights how much you are paying in portfolio fees and how you can optimize your investments. They also recently launched an amazing Retirement Planning Calculator that pulls in your real data and produces realistic financial outcomes using Monte Carlo simulation. I’d definitely give it a try to see how you’re doing. It’s the best free financial tool on the web today.

* Shop Around For A Mortgage: LendingTree Mortgage offers some of the lowest refinance rates today because they have a huge network of lenders to pull from. I always spend the time to shop around online in order to get the lowest rate with the best terms. When banks compete, you win as they say and it’s the truth.

Updated for 2016 and beyond

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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  1. Chris says

    Well played Sam. Would love to see some pictures of the new house. Are you going to rehab it?

    On another note, when you talk about your passive income, it would be helpful and interesting to see it itemized by house(s) and online income.

    Getting ready to move out of my most recent REO/Rehab and hoping to turn 1200$/month in net profits on it. Absolutely amazing you can charge 8,000$+ for rent a month??

      • Jnew says

        I also believe real estate is one of the best ways to accumulate wealth.

        Where else can you:

        1. buy an investment that subsidized by the government with federal and state deductions for your interest costs, taxes and expenses.

        2. Deduct “depreciation” of the the building and capital costs when their value typically rises over time and does not decrease

        3. Have a 3rd party rent the investment and theoretically pay down your mortgage for you in whole or in part while you still get to deduct the interest

        4. When you sell the investment you get taxed at the lower capital gains rate vs typical income tax rates

          • ktaylor says

            Or forego paying taxes on the equity gain (potentially indefinitely) by rolling your gain from one property into another “like kind” investment via a 1031 exchange

      • says

        First, it is a leveraged investment (20% down payment). Second, the IRS/government subsidize your financing thanks to a generous deduction. Third, tax treatment of profits. Fourth, tax shelter of all.part of income. Fifth, real estate is a “limited” commodity, particularly the good locations. Sixth, financing is at a very low interest rate. There are more, but these were the ones off the top of my head.

        I speak from experience because I used to own income property (apt. buildings & shopping center) and it helped me achieve financial independence (38 years old).

  2. Swank says

    I think what you have proposed makes sense for you Sam since you have done many things to prepare yourself for this type of leveraging up investment. Since you have saved up such a large nest egg (helps with risk ad version), negotiated a severance (income), already own real estate property (wont’ be surprised by any of the downsides), and done your research you seem prepared and this will help you reach your goal of $200k in passive income.
    I think SF and NYC are outliers for the real estate market, since as you have stated they can’t really build outward beyond the 7×7 mile radius. Therefor a correction to the market would not be as severe as in Phx, Vegas or other similar markets. Also SF is a hotbed for start ups and a very desirable place to live.
    Good luck that view is incredible.


    • says

      Thanks Swank! SF is pretty much all built-out on the 7X7 area. The one thing SF is considering is allowing more areas to build higher. Right now, the concentration of over 3 story buildings is all around downtown SF.

      But, residents won’t approve the higher building limits, so I don’t think it will happen in mass. Just project by project.

      I believe SF is re-rating itself into an international city due to all the tech companies. SF is still so cheap compared to places like HK, Manhattan, and London. One day.

  3. BH says

    I disagree with the statement, “The best time to buy property is when you can afford it, because long-term price appreciation is generally always up and to the right due to inflation.” The best time to buy property in recent history was in 2009 (at least where I lived), and if you were smart and daring enough to do whatever it takes to snap of property at that time, leveraging your 401k, borrowing hard money, whatever, then you would have sold it for a multiple of 3 or greater in 2013. I think the true winner in real estate is not a “buy and hold” investor (with the exception of good cash-flow properties), it’s the smart investor who buys when everyone else is afraid and sells when everyone else is buying. I know there are still good deals right now, but I disagree with your basic premise. I think timing is everything in real estate.

    • says

      Hindsight is a beautiful thing isn’t it?

      But if you look at the chart above, 2003 was better than 2009. And 1980 was better than 2003. And 1940 was better than 1980 and so forth.

      Share with us your real estate experience and what you are buying today.

      Also, let me know how I can make my chart in my post more clear. Thanks!

      • BH says

        Your chart is clear and makes your points. On the other hand, real estate is local, and in Arizona where I lived during the recession, the best time to buy (at least in my lifetime) was 2009/2010. And yes, hindsight is 20/20. But “buying when others are fearful” is something worth keeping in mind.

        I work for a real estate investment company – we are buying mostly in Georgia, Texas, Denver and parts of Florida. Personally, I held on to 2 investment properties purchased during the recession and am saving my pennies for the next downturn. Neither of them are leveraged because I don’t feel confident enough in my investment options. I might suffer from paralysis for the rest of my life because it’s never going to be 2009/2010 again.

  4. JayCeezy says

    FS, congrats! It is great to hear when somebody reaches a goal, so much of life is the striving and struggle. Really like your idea of the two-year lease on your current property, while you take advantage of the available low rate for your new home. Locking in the price on your new home, while keeping the option to capture any future appreciation on your current home (and the 2 of 5 year residency rule for capturing the tax-free $250K/$500K capital gain) is bold. Keeping good thoughts for this parlay, and your goal ($200K/yr passive income) direction “is correct.”

    • says

      Thanks! I haven’t reached my passive income goal yet, but it does feel great to find that ocean view property I’ve wondered about, but didn’t think was feasible until I actually looked.

      I would always pay for the courtyard view hotel room on vacation b/c the ocean view room was 2X more. Now I think I’ll continue to stick w/ the courtyard view hotel room b/c I no longer need one.

      • JayCeezy says

        I’m paying what for “a view”?!?!! For that price, when I look out I should see bare breasts pressed against the window! – Garry Shandling

  5. John says

    Apologies if you already covered this thought:
    If you were to sell your home, part of the profit would be tax free.
    If it becomes a rental, And then you sell, the “profit” is now subject to cap gains AND The new Medicare tax (3.4?). There is a 2/5 year occupancy exclusion I think that MIGHT apply if you decide to sell in the not distant future.
    How did that enter into your computations for return vs seeking out another opportunity with the proceeds, like a business.
    I am, and have been in similar situations with either converting primary residence to rental or taking the gain (250 single/500married tax free).

    • says

      Hi John – The first $250K/$500K is tax free as you say if you live in it for 2 out of the last 5 years. I’ve got a two year lease, and after that two years is up, I’ll reconsider selling. But if I do sell, I’ll do a 1031 Exchange so I don’t have to pay taxes on those proceeds. I’ll have to look into the medicare tax on property. Not sure if it applies, and I didn’t think about that.

  6. G says

    A view to die for! Congratulations. The fact that you can generate income from the other home is brilliant, and good move in keeping it. With an interest rate that low, why bother paying it off now? My buying house project is on hold, I am not happy with what I have seen so far, far too expensive. Prices have gone up. I am not going to rush in to buy…..perhaps marrying into money is an option too to catch up :-)

  7. says

    Passive income is still just an idea for me but I am deeply interested in making it happen in my future. I’m 23 right now but would love to be “retired” by age 35.

    I’m working on an online business in the podcasting market which hopefully will leave some room for automation.

    I hate the idea of being stuck in a cubicle 9-5 until I’m 60 so I can live on $20,000 in social security (if there’s any left). I create my own future.

    • says

      It’s nice that you are thinking about passive income now in your early 20s. I didn’t really think too much about it until I hit 30. But I was very focused on saving as much money as possible in my 20s b/c I knew I wouldn’t be able to last for 20+ years in the financial services industry.

  8. Bill S. says


    Congratulations on your new “forever” home. I do have a question about San Francisco real estate in general. What do homebuyers do for Earthquake insurance? With property values so high and the California State program so limited? Is there such a thing as private earthquake insurance?

    • says

      Hi Bill,

      Yes, there’s earthquake insurance if you want it. It depends on where you are situated a well. Some areas are more subject to others, but after the 1989 earthquake, the large majority of homes were retrofitted and new construction with new technology has created much more defensibility in homes.

      What do people do in your neck of the woods? I have a friend who lives on the East Coast and the have hurricanes every year, so he has flood, fire, hurricane insurance.

  9. says

    That’s awesome Sam. It’s good to see that you put your money to work and get almost 4x the return. My goal is to earn some side income online via my site and eventually make it more passive. It’s slow going for now but it’s building every month. Thanks for the update!

    • says

      Thanks Thomas. It comes at a price… action, downgrading, and elevated stress. I think I would be way more stressed out if I was searching for a higher price point. The thing is, I have another chunk of change from CDs coming due in 2017, so worst case I will live off that while trying to repopulate my depleted liquid cash hoard. It’s kinda fun, since it is a challenge. Having a reason to save is motivating.

      Good luck with your goals. Slow and steady is really the way to go!

  10. says

    Hi Sam,
    I’m putting in a new offer on an investment property today in the DC area. It’s not as crazy here as it is in the Bay area, but the jobs and overall growth is still very strong. I have plenty of money in stocks and p2p lending generating passive income, and one other rental. But right property here can return more than a good dividend stock portfolio. In the right location (I’ve found it with this place), I’m confident it will appreciate. I’ll be taking on a considerable amount of debt for this move, but I’m not very leveraged up at the moment at this point, so the added risk is measured.

    No I don’t think you’re crazy for not selling your house. The person paying $8700 rent is the crazy one!

    • says

      The DC area is one of the richest areas in the world due to so much government/taxpayer money! We should have kept our house in McLean from the early 90s. Must be a quadruple now if we did! Good luck on the DC condo. If you love that area, then I definitely think buying in that area is a good long term investment. Lots of people have gotten rich thanks to the government. Good luck!

      As for the rent, $8,700/month might sound a little steep…. but it actually could be a relative bargain for what they’re getting!

  11. nbsdmp says

    Congrats Sam, looks amazing! I don’t think you’ll regret having purchased this place even one day…waking up and seeing the water and panoramic view is priceless. I was fortunate enough to buy my “forever” home on the waters edge with a panoramic sunset view in the end of 2010…needless to say you can never time the market, but that was pretty much the bottom here. Now I get unsolicited inquiries asking if I’d sell…tough to not even consider the option of taking a seven figure gain off the table in 4 years time. Hell, I’m honestly thinking about taking the chips off the table and buying an oceanfront home in Costa Rica with just the gain…now I am cursed, as you will be…once you’ve had the view, there is no going back! Enjoy in good health & with a few cocktails from time to time : )

    • says

      Very nice! Keep the forever home and buy your oceanfront home in CR as well! I’ve really seen the ocean view homes appreciate much faster than other homes, and you probably won’t regret the CR purchase. I’m going to take a trip to Nicaragua within the next 12 months to try it out. I think you can get some great homes on a half acre on the water for under $400,000.

      • nbsdmp says

        Keeping the forever home is definitely a consideration, the only thing on my mind is more in the camp of life simplification vs. complication. The challenge is what the hell do you do with the money to earn any type of decent return and that is a tangible asset…answer in most cases = real estate. LOL, so I need to ponder this one a little bit more. Just the idea of having a modest oceanfront home base in a tropical climate that you can walk out your back door and go surfing, then having enough money to travel and have fun whenever you want seems very intoxicating at this five minutes. As one of my mentors at my first job put it “it’s good to have options”.

  12. says

    Great read Sam! I am a huge believer in passive income, but I personally do not think there is a cap where one should try to stop making more money. I know taxes go up and deductions go down after $200k, but your still going to keep most of your money no matter how much you make. When you factor in the tax benefits of real estate or other long term investments the taxes really aren’t that bad compared to earned income. Real estate is the same as earned income but the depreciation really reduces taxes.

    I’ll have to do some checking hit there was a recent study that showed the more money you have the happier you are. There is no cut off at a certain point. The happiest people in the study were the multi millionaires. To get $200,000 in passive income you probably need to be a multi millionaire, but I think going for more will increase happiness and reduce stress.

    I stopped paying attention to if te masses thought rich people were jerks or just lucky. Once I started doing that I realized most people I talk to aren’t that way. The more money you make the more you can give away as well.

    Totally spot on with sharing goals publically. The same has happened with me and my blog. I am very open about many if my goals and it has really helped motivate me. One of My big goals is to buy 100 rentals and I have number 11 under contract. Of course in my area I can buy them for under $150,000!

    • says

      100 X $150,000 = $1.5 million is definitely doable given it just takes $300,000-$450,000 in down payment money right? I don’t think I can handle more than 10 units, unless all the units were in one building and I had an onsite property manager, handy man, etc.

      I’ve made much more than $200K during my time in banking, and I was no happier. In fact, I think I was less happy (but still happy) do to the amount of work hours and stress and bosses required to make more. I do believe $75,000 is low despite what all the researchers who not coincidentally make around $75,000 say.

      The $200K is based on a a careful analysis and documentation of money and happiness on my site over the past 5 years with income spanning from $4/hour at McDonald’s to a lot more.

      Have you shared how much you are making and your income goal?

      • says

        $150,000 is on the high end. My last rental was $106,000 and I would say the average is around $110,000, but prices keep going up! It will still take a lot of money and a lot of good deals, because I do not buy them unless they make me a lot of money.

        I have not shared specific income amounts or goals, but I hint around and give ideas. I will share my goal for 2014, which was $750,000 the middle of last year, then was upped to $850,000, then 1 million and at the start of the year I made it 1.2 mil, but that was an extremely aggressive goal. I had what I thought was an extremely aggressive goal of $450k for 2013 and I surpassed that even though it seemed impossible at this time last year.

        I think if you are working for someone else the stress of making more money would be a cause for not making more than $200k. But if you have your own business and a team set up you should not have the same stress as someone with a boss expecting them to earn every penny of that crazy salary. I think the happiness may come from the job side of it and its expectations and not so much the actual money side.

          • says

            I have my fix and flip business; working on ten right now and my real estate team that has 7 licensed agents on it and a couple more people. We sold over 200 homes last year. The rentals don’t make the money the other stuff does, but the other stuff is much mess passive.

  13. says

    “prices have risen aggressively over the past several years” – that is no wonder, seeing the Fed flooded the markets with no-cost money. It can’t go into e.g. food, as most people have more than their fair share or we would not have an obesity problem. It can go into gadgets, but with productivity soaring in these areas, prices tend to go down despite increased demand. All that remains are assets such as shares or derivatives or “concrete” (and gold of course). So it is anyone’s guess which will burst first: the monetary bubble, i.e. a massive depreciation of the dollar, making such as above “wise” and prescient investments or will the asset bubble (which I still would think it is) burst earlier and leave some “under water” again?

    • says

      It’s the reason why I wrote the post, “The Best Way To Get Rich: Turn Funny Money Into Real Assets“. What is money but a currency of exchange? If the Fed floods the market with money, it depreciates and has to go somewhere. That somewhere should be something real, which appreciates with the wave of cash.

      But who really knows what will happen of course. I think we are in a low interest rate environment for the next 3-5 years and Wall St. economists will have to lower their 10-year yield assumptions for end of year from 4% down to 3%. And I don’t think we get to 3% EOY either.

      I’m optimizing for lifestyle. I have a theory that more people will optimize for lifestyle and such assets like panoramic ocean view properties will tend to appreciate faster as a result. But all this is mute because I don’t plan to sell, and I’ve monetized my other residence with a two year lease.

  14. CL says

    Hey Sam,
    Question for you regarding 401k contributions. Im currently starting my 2nd year as an analyst in IB where I make $70k base. I’m currently contributing 15% of my pre tax income with 5% company match. Should I scale back and only contribute enough to get the match and put the difference in my personal investing account?
    Also any thoughts on how to save and invest my bonus?

    As always appreciate the blog and look forward to hearing your thoughts.

    • says

      Hi CL,

      Congrats on making it to year 2 of IBD. I recommend maxing out your 401k without fail for as long as you are working. I presume you will probably get a $20,000-$50,000 bonus come year end, which a portion of which you can use to help top up the current $17,500 limit. That’s what I did as I wanted to have some type of reasonable cash flow throughout the year.

      I would then try and save 20% of your income AFTER you have maxed out your 401k and either invest the money in index ETFs, or split it up into risk-free assets like CDs, then ETFs, then some bonds. It all depends on what you plan to buy. I wanted to buy property.

      See: How Much Should People Have Saved In Their 401k At Different Ages

      How to Better Management Your 401k For Retirement Success

      Top Mistakes That Are Hurting Your 401k Returns

      To start!

    • mrpriceisright says

      If it were me, i would first make sure the matching maximum is reached, then look into a Roth IRA. While the benefit of tax free 401k may appear appealing, the benefit of compounded growth of a roth ira, and the benefit of not paying taxes on either growth or withdrawal , are phenomenal. I consider the ultimate Roth IRA investment to be an income producing property, owned by the Roth IRA. This can be done when the Roth ira is large enough to purchase property. The benefit is that the income from the property can go back into the IRA, or be withdrawn (at retirement age) as needed and is tax free. Property can also be owned in a regular IRA, but the withdrawals are taxable, just like a regular IRA.

  15. Jm says

    About to close in a part of LA with a great view of the hills, mountains and city including downtown LA. Amazing as there really isn’t currently much of a view premium in this area. Looking forward to my sunsets as well, love the view from yours!

  16. says

    I am always interested in learning more about passive income. I like your suggestion a while ago about investing in peer to peer investing projects. I haven’t gotten around to doing that but I am still researching into it. Real estate, I think, is still a great investment but you have to be careful and look into it carefully since it is such a huge risk.

  17. Dries says

    Has someone ever tried to model how a similar investment in a REIT would do after 20 or 30 years? I imagine REITs can use a lot of leverage as well.

  18. swensodts says

    I still have trouble understanding the math – $200,000K income nets about $11,666.67 per month, you’re throwing around all kinds of interest numbers, fine but that still leaves the principle and the big one TAXES – A million dollar home in NY with 200K down payment @ 2.65%, ~25,000 in taxes would leave you with a ~$5,500 per month house payment – Are you saying that’s doable? To take 50% of your take home pay and throw it down on the house?

    • says

      In California, the property tax rate is ~1.2%, so the property tax on a million dollar home would be $12,000 a year. The effective tax rate on a $200,000 income is closer to $12,500 a month (25%) and all mortgage interest and property taxes are deductible too.

      $5,500 a month house payment with $2,000 of that going to principal on a net income of $12,500 a month is totally doable imo. What are you going to do with the extra $7,000 a month after taxes? Of course max out your 401k pre-tax, leaving you closer to $6,500 a month net. You can save $2-$3,000 of that, and spend $3,000-$4,000 on whatever you please. I have trouble spending more than $2,000 a month on everything if I’m not traveling. You?

      Of course things change if you have many kids to feed and a spouse to support. But, that’s what the extra $7,000 after tax a month is for.

      • swensodts says

        Sorry for the late reply, I know you’ve moved on to other articles, but to me that’s still scary tight @ $5,500. I spend about $4,000 per month in other expenses.

      • Barb says

        What? The California property tax rate is 1.2%! No wonder the state is broke. In Chicago, my $300K condo has taxes just under 5K.

  19. says

    I think it’s easy in retrospect to recognize buying property was better or worse in the past, but making the move to buy when you can reasonably afford it is key. The are lots of good options to increase your passive income once you get started. Thanks for the clear breakdown.

  20. says

    Given that you are clearing so much more than your costs, renting your old place is a good strategy. It gets a bit tricky when you barely cover your costs. I regret selling my home when I got married. We rented it but then sold it a year later with our then home so we could get a larger home. We had four kids and a 3 bedroom house so it seemed justified. But my head was in a totally different place then.

  21. says

    My husband and I would love to be at a point in our lives where we could afford to purchase a rental property income. This would be done many years from now, but we are constantly tossing the idea around.

  22. Syed says

    That’s awesome you’re able to charge such an amount for renting your house. There’s something to be said about good timing.

  23. Karl says

    I really enjoy your blog. Quick question for clarification: you mentioned getting a $1m mortgage at 2.5%. Did you find a 30-yr fixed mortgage for 2.5% or was it some other structure? Are you able to share which lender you went with? Thanks!


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