After living in San Francisco since 2001, my wife and I have had enough of the City by the Bay. The streets have gotten too crowded, traffic has gotten unbearable during rush hour, and the cost of living has reached absurd levels. I’m thinking of cashing out during the tech IPO boom and retiring to Hawaii.
With the median home price at roughly $1.6 million, it would take about $300,000 a year in income just to live a middle-class lifestyle, assuming you can find a bank willing to underwrite you a mortgage based on a house price equal to 5X your annual gross income.
Up until 2017, we found San Francisco to be one of the best cities in the world to live. But since having our son in the spring of 2017, our outlook of the city has diminished for the following reasons.
Cashing Out During The Tech IPO Boom
1) San Francisco has the lowest percentage of kids in the U.S. As a result, there are fewer family-friendly places to visit, fewer first-time parents to interact with, and fewer kids for our son to play with.
2) Despite the dearth of kids, there is an even greater dearth of preschools. Many parents are forced to apply to five or more preschools because the acceptance rate is usually under 10%. One school we applied to had 80 applicants for one non-sibling spot. Of course we got rejected. See: How To Increase Your Chances Of Getting Into A Top Preschool
3) The public school system starting in kindergarten is based on a lottery system. In other words, even if you pay property taxes your child is not guaranteed a spot in your neighborhood schools. Social engineering is a noble concept, but unfortunately it also negatively affects many families.
4) Private schools can cost between $30,000 – $45,000. Given there is no guarantee for your child to gain admission into your neighborhood public school or a well-rated public school, many parents are forced to pay big bucks to send their kids to private school. But even paying $30,000+ for private grade school doesn’t guarantee your child admission into the best-rated private schools because there’s also a dearth of private schools.
5) San Francisco feels like one big grind, largely driven by super type-A parents who get their kids to do too much, too soon to give them a competitive edge for college admissions. After all, 14 of the 33 parents indicted by the Department of Justice for the college admissions scandal hail from the SF Bay Area.
Our Plan To Cash Out And Escape During The Tech IPO Boom
Although neither my wife and I were smart enough to be techies, we do own several assets that techies may want to buy. Here are my favorite neighborhoods to buy property in SF.
These assets are: 1) a four bedroom, two bathroom ocean view single family home in Golden Gate Heights, 2) a two bedroom, two bathroom park view condo in Pacific Heights, and 3) a two bedroom, two bathroom Lake Tahoe vacation property.
Our goal is to sell a couple of properties during the upcoming tech IPO boom by Uber, Lyft, Airbnb, Palantir, Pinterest, and Slack to newly minted millionaires for hopefully as high of a valuation as possible. Some estimate there will be as many as 10,000 new millionaires looking to buy a home.
We would reinvest the proceeds in various passive income investments such as dividend stocks, short-term treasury bonds, venture debt, and private equity.
People like us are trapped in a vicious cycle in the SF Bay Area because they feel a tremendous burden to continue working to earn ever higher salaries to pay for forever increasing housing prices.
The only way to break free from the trap is to sell. And selling during the tech IPO boom is exactly what we plan to do.
Real Estate Arbitrage To The Rescue
Cap rates in San Francisco are roughly 2.5% – 3%. In other words, owning investment property in San Francisco is purely about capital appreciation, not income generation. One could easily earn a risk-free 2.5% a year by investing in 3-month treasury bonds today.
Our plan is to sell the Lake Tahoe vacation property valued at roughly $450,000 and our 2/2 rental condo in Pacific Heights valued at roughly $1,300,000. After paying fees and taxes, we should have about $1,500,000 in net proceeds to reinvest.
Our Lake Tahoe property is generating roughly $4,000 a year net of all expenses, while our Pacific Heights rental is generating roughly $36,000 a year net of all expenses. In other words, on $1,750,000 of capital, the properties were only generating about a 2.4% net return before taxes.
The tech IPO boom has helped boost the real estate market in the Bay Area.
Reinvest The Proceeds
We plan to re-invest 50% of the proceeds in AA-rated Hawaii municipal bonds once we move there, which will generate a tax-free yield of 3% or $22,500 a year in tax-free income.
We plan to invest the other $750,000 in real estate crowdfunding to take advantage of much lower valuations and much higher cap rates in the heartland of America.
The heartland is seeing an influx of residents from expensive coastal city residents who realize they no longer need to be stuck paying $4,500/month for rent or $1,500,000 for a median-priced home.
Even Google has announced that it will be spending $13 billion on offices and data centers to employ thousands of new workers located in the heartland.
If Google, one of the richest companies in the world, is feeling the cost squeeze of paying its engineers $500,000 a year, then other Bay Area companies are feeling the squeeze as well.
Buying Heartland Real Estate Makes Sense
With a target 10% annual return due to much higher cap rates in heartland real estate, I expected the $750,000 invested in real estate crowdfunding to generate roughly $75,000 a year in gross income.
In other words, instead of generating only $40,000 a year in gross income a year from my existing SF and Lake Tahoe properties, I could generate an equivalent of roughly $105,000 a year in gross income from passive income.
A 6% blended return on the gross capital base with no maintenance or tenant issues sounds much better to me. I plan to do this by investing with real estate crowdfunding platforms Fundrise for their eREITs and RealtyMogul for their individual commercial property deals. For most people, investing in a diversified eREIT makes the most sense to earn income passively in a lower-risk way.
Both platforms were founded in 2012 and are the best in class in my opinion. I’ve spoken to the founders and have worked with them for years. Both are free to sign up and explore. You can learn more in our extensive Fundrise Review and RealtyMogul Review pages.
Honolulu Over San Francisco
The main reason why we want to relocate to Honolulu, Hawaii is due to family. My parents are in their 70s and I would love to spend as much time with them as possible in their remaining years.
Further, Honolulu has one of the highest population of children in America. It’s all about ohana there. Ideally, we’d be able to get into one of the excellent private grade schools Punahou or I’olani.
I dream of sitting around a large circular dining table with three generations having a merry good time once a week. I know that I will regret not spending more time with my parents while living. To enable our son to know his grandparents would truly be an additional blessing.
Honolulu Is Cheaper Than San Francisco
Although Honolulu is expensive, it is still roughly 30% cheaper than San Francisco when it comes to housing costs. Further, private schools in Honolulu “only” cost between $20,000 – $24,000 compared to $30,000 – $45,000 for equivalent schools in San Francisco if we decide to go this route.
As of 2021, the median price home in Honolulu is around $918,000. That’s still cheap compared to $1,700,000 for San Francisco. The tech IPO boom, the SPAC boom, and the crypto boom is going to keep SF real estate high for a while.
My parents want to move out of their old five bedroom, three bathroom house because it’s just the two of them. They find the house to be too large to clean and maintain.
My family of three would take over the house rent-free and spend about $3,000 a month paying for a fully-furnished two bedroom, two bathroom condominium downtown near all the shops and restaurants.
Although $3,000 a month sounds like a lot, it is still $2,000 less (-40%) than what we spend on housing here in San Francisco.
Improved Cash Flow In Honolulu
After tax, our $100,500 in gross income shrinks to about $80,000 a year or $6,667 a month. After paying for my parents’ housing expense, we’d still have $3,667 a month in after-tax income to spend on food, clothing, transportation, entertainment, and tuition. This should be more than enough to live a comfortable early retirement lifestyle in Honolulu.
If we really needed more income, we could take on part-time jobs, like I’m doing now as a high school tennis coach for four months a year. I only get paid $1,100 a month, but it’s a nice amount of extra income given our expenses are so low.
We could also sell more assets like Financial Samurai, this site I started in 2009. But probably not since Financial Samurai generates a healthy active income stream. It also provides me something intellectually to do every day. Besides, I know I will regret selling a cash cow business in a low interest rate environment.
San Francisco Is Great, But Time To Move On
Living in San Francisco for more than 20 years has been a wonderful experience. We got lucky buying property when we did. Unfortunately, the city is simply too family unfriendly and too expensive today. We long for the simplicity and year-around warmth and sunshine of Hawaii.
We’ve had our run in San Francisco. It’s time for us old folks to leave and make way for the next generation of hungry young capitalists. Here’s to a tech IPO bonanza!
If you are thinking of retiring in Hawaii, I honestly can’t think of a better state. Once you’re OK with no longer chasing the money, the Hawaiian culture will welcome you with open arms.
Related: It’s Time To Focus On Big City Living Again – Although I want to leave San Francisco, the opportunity for many young folks to come to San Francisco and other big cities is huge post pandemic. Make your fortune in the big cities and leave once you have enough.
About the Author: Sam worked in investing banking for 13 years and decided to start Financial Samurai, a personal finance site in 2009 to make sense of all the carnage during the financial crisis. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. He hopes to live a simple life near a beach in Hawaii with his family.