Increasing Passive Income Through Leverage And Arbitrage

Consider increasing passive income through leverage and arbitrage. I did just that in 2014 when I bought a new home just five miles west of where I used to live in San Francisco. I took on a new mortgage to buy this home and I ended up renting out my previous home for $7,500 – $8,500.

Increasing passive income over time is important because your expenses will likely rise by at least the rate of inflation. Further, if your desires increase or your family size increases, your expenses will also go up. As the pioneer of the modern-day FIRE movement, do not for one second think your expenses will stay static for the reset of your life.

Reinvesting The Funds Of an Expiring CD

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.

Real Estate As A Passive Income Generator

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.

Leveraging Up And Arbitrating

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 (in 2014) and now $1.9 million in 2022. 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?

Geoarbitrage To Save Money

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.

The Risk Of Buying Real Estate Now

Buying property in 2014 is not as good as buying property in 2011-2013. Buying property in 2022 is not as good as buying property in 2014. 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.

Are We In A Housing Bubble?

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.

Real Estate Appraisal Opinions

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. 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.

House Prices Keeps Going Up

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.

Increasing Passive Income By Leveraging Up

The ideal mortgage amount is $750,000 (was $1 million) if you can generate a ~$200,000 income. The interest on a $750,000 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.

Sunset in San Francisco, Golden Gate Heights -- increasing passive income by buy-in in Golden Gate Heights
Priceless View Of The Sunset In Golden Gate Heights, San Francisco

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.

More Passive Income Despite More Debt

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.

Increasing Passive Income By Paying Down Expensive Debt

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.

My Passive Income Determination

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 also ended up saving a lot of money by geoarbitraging moving out west.

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.

More Passive Income Required With Kids

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. With the pandemic and now another war, there's no time like the present to live your best life.

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.

Below was my 2018 – 2019 passive investment income. Building passive investment income is the key to financial independence. It's even more important than your net worth.

Financial Samurai Passive Income Report 2018
You can click the chart to read about my passive income in detail

In mid-2017, I decided to finally deleverage by selling my SF rental house I owned since 2005 for $2.74M. I bought it for $1.525M in 2005, tried to sell it for $1.7M in 2012 and nobody wanted to buy it. I felt like an offer worth 30X annual gross rent was too attractive to passive up.

As a new father, I wanted to simplify life and found ways to reinvest $500,000 of the proceeds in the heartland via real estate crowdfunding. Valuations are much cheaper and the net rental yields are 3-5X higher. It feels so much better to earn real estate income passively versus manage tenants.

Record Passive Income In 2023

Below is my latest passive income investments from 2023. What I find surprising about this latest chart is how passive income compounds. Just five years earlier, I was saying that growing passive income to $200,000 was enough. But thanks to a bull market and consistent investing of my cash flow, my passive income has grown by another 80% to over $350,000.

In 2019, I bought another ocean-view home with cash. Then in 2020, I bought a forever home so I decided to rent out the home I bought in 2019. Although I didn't leverage up, the value of the properties have done well.

Financial Samurai passive income investments 2023

Big Decline In Passive Income In 2024

But life has a funny way of throwing curve balls. In October 2023, I decided to take advantage of weakness in the San Francisco housing market and buy another home. This time, it was a real forever home with a lot of land, plenty of bedrooms and bathrooms, and a place I could live in for the rest of my life.

Given I sold stocks to pay cash for the house, I put a severe dent in my passive income. For 2024, I expect my passive income to decrease to roughly $230,000.

It's still greater than the $200,000 I aimed for back in 2017-2018. However, $230,000 is no longer able to cover our family's living expenses. As a result, we are technically no longer financially independent.

As a result, once my daughter goes to school full-time in September 2024, I plan to fill the void by going back to work in a part-time capacity. The income will help cover the gap between our passive income and expenses.

2024 Passive Income Investments from Financial Samurai

Wealth Building Recommendations

Invest in real estate passively. 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 crowdfunding companies today.

I've personally invested $954,000 in private real estate funds to earn more passive income. Fundrise specifically invests in the Sunbelt, where rental yields are higher and valuations are lower. Their speciality is in single-family and multi-family homes.

So far, Fundrise manages over $3.5 billion in assets and has over 500,000 clients. Fundrise is my favorite real estate crowdfunding platform today. The firm is a long-time sponsor of Financial Samurai and Financial Samurai is a six-figure investor in the Flagship Fund.

Fundrise Due Diligence Funnel - Increasing passive income with real estate
Less than 5% of the real estate deals shown gets through the Fundrise funnel

Manage Your Finances In One Place

One of the best way to become financially independent is to get a handle on your finances by signing up with Empower. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize your money.

Before Empower, I had to log into eight different systems to track 25+ difference accounts to manage my finances. Now, I can just log into Personal Capital to see how all my accounts are doing, including my net worth. I can also see how much I’m spending and saving every month through their cash flow tool.

My favorite tool of theirs is the Retirement Planning Calculator. It pulls in your real data and runs a Monte Carlo simulation to give you deep insights into your financial future.

Empower is free, and less than one minute to sign up. Ever since I started using the tools in 2012, I've been able to maximize my own net worth and see it grow tremendously. Increasing passive income has been a fun journey.

For more nuanced personal finance content, join 65,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. To get my posts in your inbox as soon as they are published, sign up here

81 thoughts on “Increasing Passive Income Through Leverage And Arbitrage”

  1. Hi FS, congratulations on the great timing with your RE giving you 8700.00! I believe success in RE is due to excellent due diligence and a bit of luck on top of that. Failure is generally due to lack of thorough due diligence, which makes bad luck easy to happen.

    We have my husband’s first home in Latin America, where we met and used to live. When I met him he had still about 8 years to pay on it, now it is free and clear, rented out.

    We then bought a place to live when in the DC area (MD), bought at its highest value (in 2005) so not such a good deal, but we bought it as principal place of residence so we were OK with that. It hasn’t gone down (like it did in many places) or up since, but should pick up soon – fingers crossed. It has been rented all the time in those 11 years, except for two months. So, people are paying our mortgage, month after month.

    We now also have just bought a new unit in Australia where we’re living, but as an investment property purely and at the moment we are at -30.00 each month, with should become positive in a year.

    Since we have better savings capacity for a few years before my husband retires, we are going to try and buy a few more, as well as reduce debt by paying down more, on top of what the tenants pay.

    We hope to be FI in about 10 years, hopefully also with about 200.000 per year.

    What I like very much about RE, is that once it’s paid down, you have a “forever” income, generally going more or less to par with inflation on the medium to long term. So if you happen to live to 110, you’ll have neverending income to pay the exorbitant price of a good nursing home or even at-home good quality care, if needed.

    It means also that your kids inherit a tangible asset that keeps giving them cashflow from day one, and as you said somewhere, to persue the fine arts if they wish (although I am not thinking about giving them everything I’ve saved for, I don’t want them to be “lazy”!!! – I am thinking I would love to put some of our RE properties as a “forever” income for charities of my choice for instance).

    While I have been wondering if we should try stocks etc, it seems to me that it would be too much of time investment for me to learn about it, without as much of a return; on the other hadn I am learning more and more about RE, which will allow me to invest more wisely in RE. But that’s just me.

    Thanks again for your great site that provides a lot of food for thought!

      1. Thank you :)

        Woohoo, it must be such a great feeling to have paid one mortgage down!!!

        I’ll have a look a those two links, thanks very much!

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  13. 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!

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

  15. 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.

  16. 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.

  17. The Wallet Doctor

    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.

  18. 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?

    1. 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.

      1. 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.

      2. 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.

        1. They have more property and higher values to offset the costs.. otherwise those prices would not be affordable with higher tax rates. All states and the government is broke. they cant afford billions to fix roads, thus tolls will take over eventually like in TX

  19. 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.

  20. 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.

  21. 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!

  22. 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.

    1. 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!

    2. mrpriceisright

      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.

  23. Dermot Gilley

    “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?

    1. 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.

  24. 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!

    1. 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?

      1. $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.

          1. 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.

  25. 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 : )

    1. 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.

      1. 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”.

  26. 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!

    1. 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!

  27. Thomas @ i need money ASAP!

    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!

    1. 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!

  28. Sam,

    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?

    1. 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.

  29. 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.

    1. 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.

  30. 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 :-)

  31. 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).

    1. 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.

      1. The Medicare tax is simply the “net investment income tax” of 3.8%. It is a surtax that came in as part of Obamacare at a rate of 3.8% on net investment income for single taxpayers who make more than $200,000 per year in modified AGI ($250k for MFJ couples).

      2. I know I’m responding to an older post, but as a FYI the 2 of the last 5 years rule no longer applies. There is a phase-out of the capital gains exclusion that begins immediately after the property converts from a primary to a rental.

  32. 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.”

    1. 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.

      1. 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

  33. 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.

    1. 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!

      1. 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.

  34. 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.


    1. 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.

  35. Income property is an excellent source of passive income! If done well, the best way to accumulate wealth. Congratulations!

      1. 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

          1. 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

      2. 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).

  36. Done by Forty

    Fantastic point about maximizing arbitrage opportunities — personal finance bloggers don’t address that enough.

  37. 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??

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