I like to leave things to fate. Believing in fate helps alleviate some stress from the unknown. When my tenants gave me their 30-day notice two weeks before I was to leave on a 15-day business trip to Europe, I initially cursed the heavens. After three years of renting, why did they have to choose the month I’d be away? Damn it!
With no leasing manager, finding new tenants while abroad would be difficult because I wouldn’t be able to show the place. Thus, I created a game plan that would let fate decide whether to sell the property or to continue renting it out.
Create Winning Scenarios
The first thing I did was review Financial Samurai reader Vicki’s decision matrix. Then I filled in the matrix with my own words. Reading about how to do something is useless if you don’t do it yourself!
I first filled out my thoughts going from “Simplify Life” to “Generate $36K+”. Then I zeroed in on Happiness as my number one objective. Everybody knows Financial Samurai is secretly a blog about happiness and not money right? After that, I reviewed each block and added some additional thoughts to gain a more complete picture.
Here are some takeaways from the exercise:
1) The idea of having a property manager sounds good, but knowing me, unless the property manager was the most attentive, caring, and responsive property manager on Earth, at some point I would probably get annoyed. This is because I live in San Francisco and can do all the work myself. Next, I’ve rented this property out for 11 years to five different sets of tenants and during this time, there’s never been one month of vacancy. I don’t want to turn into a micromanager!
2) Being a landlord really isn’t that bad once you’ve found the right tenants. The key is to find responsible tenants who pay on time, respect the neighbors, and don’t cause damage. I looked back at all my previous tenants and they were all great. They all just moved out too soon for my liking (2-3 years on average). I usually went ~ 6 months before hearing from a tenant about something. Every month rent payment was paid automatically to my checking account. Landlords are spoiled when they complain about the need to find new tenants because 95% of the time landlords don’t do any work!
3) Freedom is great, but because I don’t have a day job, I often have excess free time and sometimes get bored. I could easily allocate some of this free time to managing the property. What’s the big deal spending ~12 hours a year doing so compared with the 2,000+ hours a regular 9-to-5er puts in? I’ve discovered I’m getting soft in early retirement. I’ve reminded myself income from real estate is not passive. It’s semi-passive. Besides, owning this property gives me a lot of new writing material about landlording, prospective tenants, negotiation strategy, and local economics.
Setting Up The Win-Win Scenario
One thing you may notice under the “Sell” column is there is no joy talk of receiving a ~$1,000,000 check for selling this condo which I bought for $580,500 back in 2003. I’ve just noticed this myself, but don’t want to make any changes because I think the omission of the windfall is telling.
I view receiving a large lump sum to be a risk and a pain in the ass. The risk comes from the possibility of blowing the money on stupid stuff like a $200,000 Bentley Continental GT. The risk also comes from the possibility of reinvesting the proceeds and losing money. I’ve lost money in other investments plenty of times, which is why investing with a low-cost digital wealth manager is probably the best way to go for most people. Therefore, the larger the windfall, the more I worry. I think this type of thinking is 100% contrary to the jubilation most people might feel receiving a seven figure check.
For the millionth time: more money, more problems.
Here are two good scenarios I created to come to a decision:
1) Rent out my property if I can get a new tenant for $4,100 a month or more. The previous rent was $3,995.
2) Sell my property if I can get $1,065,000 or more. I’ve got $65,000 in there to help pay commissions and transfer taxes to clear $1,000,000 before taxes.
I would handle finding new tenants and my real estate friend would handle the pocket listing. A pocket listing is where a property is for sale that is not listed on the Multiple Listing Service real estate agents use to publicly market the property.
I gave my real estate friend full disclosure about my decision scenario, and he agreed to a 30 day listing agreement. After all, I had 30 days before my tenants moved out, so nothing could happen before then.
The Race Is On
In The Red Corner: Financial Samurai
To give my agent a chance, and to test the rental waters, I started my rental listing at $4,395, 10% higher than my previous rental price. For seven days, I had some showings, but no offers. Then I dropped my price to $4,295 for one week, had additional showings, but still no offers. Finally, as I was about to leave for Europe for 15 days, I recorded a video of the place, sent prospective renters the video while I was away and told them I could show the place when I returned. Still no offers. Being away really screwed my efforts.
When I dropped my price to $4,195, I noticed a small uptick in interest, but nothing meaningful. Several mid-20 year old techie dudes visited, but they seemed to prefer only the newest amenity buildings. Trust me, everybody looks the same and comes from the same background in tech.
After six days at $4,195, I began to wonder whether I had really cocked things up because my existing tenants were finally out. Remember, I’ve never had a month of vacancy in my 11 years as a landlord for this property. To get a large step up in interest, I seriously considered dropping the price to $3,999 because I knew that many people in San Francisco have a $4,000 cut off for renting a two bedroom apartment or $2,000 cut off per room. Still, I held strong at $4,195.
In The Blue Corner: Real Estate Agent
Meanwhile, my real estate agent got a professional photographer to take some wonderful pictures of my place (which I used for my rental property ads). He absorbed the cost in exchange for making a potential 5% commission on my place. For some reason it took him a week to get the pictures back and throw up a website of my property. It should have only taken him one day if he was on the ball. He then proceeded to blast out the listing to his network. We decided on $1.2M.
After a week went by with no showings, we dropped the price to $1.15M. $1.2M really is a stretch price for my property that might be achievable if it was properly staged, painted, and put on MLS for the world to see. However, at this stage I wasn’t interested in spending ~$7,000 for staging, $2,200 for painting, and maybe $10,000 to do a light renovation of the kitchen and one bathroom. I’d rather keep the $20,000 for myself.
Once the new blast e-mail went out announcing the new $1.15M price, we had about six showings over the course of two weeks. Remember, I’m willing to sell the condo for $1,065,000. One of the showings was a second showing for a ~50 single woman who loved the park view and location. She was totally willing to remodel the place and even considered converting it to a large one bedroom. Not smart, but her choice. There was hope for a good offer!
Perhaps it was because I didn’t convey a strong desire to sell the place, my agent was lukewarm to the task. For Memorial Day weekend, he said he couldn’t show the place because he was going to the Indianapolis 500. I thought about asking him to logically arrange for someone else to show the place, but instead told him, “Have fun!” I wanted to beat him!
The Winner Is Announced
Demand from renters really started heating up for some reason by the first weekend in June. Prior to this, all indicators pointed to a softening rental market due to a large supply of luxury condos hitting the market. To be fair to my real estate agent, I kept him abreast of the rental interest I was seeing, and asked him to circle back to buyers who did show interest earlier when my demand started ramping.
A couple days later, I told him I was in rental discussions with potentially awesome tenants who would commit at $4,195. They made roughly $180,000 a year and really seemed to love the place. For tenants in a competitive rental market, showing joy in the property really makes a difference to the owner.
My agent texted me, “That’s awesome! But wait! How about we put your listing on the Coming Soon feature the MLS listing has? It’s great because it gives your property maximum exposure and the Days On Market counter doesn’t start counting until you switch categories to a full listing?”
“Could be good!” I responded. “But it’s been 27 days, and I think destiny has called. I’ve got the ideal couple who will probably stay for 2-4 years. At $4,195 a month, that’s $200 a month more than what I was charging, and $50,360 a year in rent. It’s a bird in the hand, baby!”
I Always Knew What I Wanted
In my heart of hearts, I’ve always known I wanted to keep the property. You just don’t always get what you want. Paying $50,000+ in commissions and another $10,000 in estimated transfer taxes along with another $100,000 in taxes on long term profits seems like a real big waste of money.
Inflation is too powerful a force to combat. There’s nothing easier than being long property to ride the inflation monster into the sunset. I was just bummed for having to do work to find new tenants after three years of autopilot. I don’t care about huge windfalls or making a higher return. It’s about cash flow and allocating this portion of my net worth in as simple and forgettable manner possible.
It brings me happiness to see a young couple’s eyes light up when they first walk into my property. They start talking about their potentially wonderful future together. And if they like the property enough to fill out an application, that means they see value in the price I’m asking.
When you create a financial plan with two good outcomes, there’s no way you can lose. Even if I didn’t find a buyer or a renter, I could just keep the property empty like an overseas investor looking to park his illicit cash. By removing my property from the sale or rental market, I’m also helping other landlords and property sellers find their best price due to less competition.
I strongly believe everybody should hold onto their real estate assets for as long as possible. Think about how little work is actually required to maintain an asset that can take care of your retirement years.
Explore real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns. Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look.
Shop around for a mortgage: Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible.
Updated for 2019 and beyond.