Real estate is my absolute favorite investment class to build wealth. Not only do you own a tangible asset, real estate also provides shelter and income. When it comes time for you to sell the property, you can earn up to $250,000 / $500,000 in tax free profits as a single / married individual provided that you’ve lived in the property for two out of the last five years.
As a new father, my reason for owing real estate also includes hedging against a difficult future for my son.
Holding onto my rental property portfolio will ensure that I can give my son a leg up if he needs it one day. The job market is getting more and more competitive, and already elite graduates with desirable jobs are just scraping by in expensive cities like San Francisco where career opportunities are relatively abundant.
If say I can subsidize my son’s rent so that he can pursue a career path that he’s passionate about, or offer him the opportunity to manage a family rental asset, if all else fails, I know the headache will have been worth it. Even if it doesn’t come to that, being prepared helps relieve some of the anxiety of being a parent… I worry a lot about the future.
But, this will only remain true as long as I can maintain my sanity and be a good parent while holding onto my rental properties.
Current Real Estate Property Portfolio
I currently own two rental condos, one in San Francisco and one in Tahoe, but I recently decided to sell my $60,000 net income rental home in San Francisco. I’m sure one day it will be worth so much more that I’ll almost regret selling it for $2,740,000, or 30X gross annual rent, but right now quality time with my son is worth more.
I live a fairly stress-free life, and I came to realize that owning rental properties is my main source of stress.
If you’re young, risk tolerant and patient, strategically chosen rental properties can turn a fairly small investment and relatively little effort into huge income growth within a decade or two. But that’s not passive income. It comes at a cost.
Owning rental properties does indeed mean dealing with headaches, from leaky roofs to pain in the ass tenants to huge property taxes. For example, I had to pay $23,000 a year in property taxes for my old rental house. Some of my own tenant horror stories could make you never want to touch rental properties.
When I sold my San Francisco rental home, I knew I wanted my next investments to be as passive as possible. The older I get, the more important earning passive income will be to you as well.
So far I’ve reinvested $500,000 from the sale of the house into real estate crowdfunding, bringing my total investment to $810,000. Along with being free from bad tenants, real estate crowdfunding has allowed me to diversify my real estate investments into more than a dozen properties, at much cheaper valuations and higher net rental yields, instead of just one very expensive one.
Just beware that rents are falling in some cities more than others. In particular, notice how weak places like Chicago, Honolulu, Miami, Oakland, and Washington DC are. When rents are weak, weakening of property prices is not too far behind.
Focus on the heartland of America where valuations are cheaper and net rental yields are higher. It’s all about arbitraging opportunity by using your expensive coastal city dollars to buy inexpensive non-coastal city real estate. With real estate crowdfunding, it’s easier to do than ever before.
Fundrise is my favorite real estate crowdfunding platform open to all investors. They are pioneers in the eREIT space where you can earn 7%+ net rental yields without having to do any work. It’s free to check out and explore as they are open to all investors.
About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $200,000 a year in passive income with the help of real estate crowdfunding. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.
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