Are you wondering whether to sell or continue renting out your home? I had this same dilemma of sell or rent out my home back in 2016. In the end, I decided to keep my rental property to build more passive income.
Things are strange now with many people buying a home during the coronavirus pandemic. It’s almost kind of nuts how strong demand is due to record-low mortgage rates.
Maybe you’re thinking about selling your home because you think the market is going to crash. Or maybe you want to sell your home to upgrade your lifestyle since we’re all spending more time at home now.
Whatever the case may be, the question to sell or rent out my home is one that many people are wondering right now. Real estate is one of my favorite ways to generate passive income for financial freedom. Once you sell your home, you lose a good income source.
Let me share with you my own situation to sell or rent out my home as it may help you better decide as well.
The Sell Versus Continue Renting Dilemma I Faced
2016 was supposed to be the year where I’d finally achieve my passive income goal of $200,000. The goal was first established in 2012 when my passive income machine was generating about $80,000.
I figured, if I could find a way to generate $200,000 a year by 2015, life would be good and I’d never have to work in the salt mines again. In 2015, I came up $25,000 short. Now it looks like I’m going in reverse! What the hell is going on?!
As fate would have it, just a couple weeks before my business trip to Europe, my tenants gave me their 30-day notice on a rental that is generating $4,000/month.
After all expenses, the property nets around $3,000/month or $36,000 a year. This rental has been a champ with not a single month of vacancy since its 2005 deployment.
Now I’m faced with a decision. Do I try and find new tenants or sell the property in what appears to be a weakening real estate market. Maybe you will face this dilemma one day. Let’s discuss some considerations to make the best decision possible!
Sell Or Rent Out My Home?
The older I get, the more I want to simplify my life. When I was working full-time, I used to love real estate. During my darkest corporate hours, real estate was the main HOPE that would allow me to one day break free. I didn’t care about doing house calls when things broke.
I didn’t mind going to the yearly HOA meetings. Hosting open houses was fun because I could meet all sorts of people who shared fascinating details about their lives. I knew that every action brought me closer to financial freedom.
Since escaping my employer with a severance, however, I have slowly become less interested in landlording. Every text message from a tenant with a problem or every flaker at a open house bums me out.
Due to my severance that is still paying out today, the plan to live off my passive income did not materialize. In fact, since I left work pretty much all my passive income has either been saved or reinvested.
Then starting in 2014, I rented out my old house because I downsized to a fixer in a quieter neighborhood. With two rental properties to manage plus a vacation property, I became even less satisfied with landlording.
Although I have a lot of free time, landlording started feeling like a job, which is completely opposite of why I wanted to retire early! And what bums me out most is tenants agreeing to lease terms and then breaking the lease terms. Why can’t everybody just do what they promise?
Catalyst For Wanting To Sell
The final thing that’s really made me consider selling is the unexpected growth of my online business. I’m having so much fun being an entrepreneur, that I’m finding I don’t really want to bother with real estate anymore. I’ve always preferred having fun and making money on the side rather than making money and eking out some fun.
My layoff strategy guide alone makes around the same amount as my rental property. Further, the book requires no maintenance or ongoing tax on its value. It’s about as passive an income stream there is. I’ve got a pretty fun post in the pipeline which compares real estate and an internet business you won’t want to miss.
But the real reason why I thought about the sell or rent out my home question was because we were having our first child in 2017!
The last thing I wanted to do as a new father was manage tenants and maintenance issues. As a result, I ended up selling our home.
Always Do The Math When Deciding To Sell Or Rent
To determine whether to sell or rent your home, always do the math.
Now that I’ve shared my subjective feelings, I’d like to focus on objective numbers. At the end of the day, an asset’s value is based on the cash flow it can provide.
Not continuing to rent out the property means roughly $36,000 in lost income. Due to depreciation, the taxable income is actually much less. Not all is lost, however, because selling the property would yield proceeds that can be reinvested.
Nobody knows exactly what they will get for their property until they finally get some offers. But you can make educated guesses about a price range you will likely receive by comparing the comps that recently sold based on price/sqft and using cap rates.
Analyze The Comps
My property is 1,000 square feet. Recent comps have sold for $980 – $1,500/sqft in the Pacific Heights neighborhood. Therefore, the range is $980,000 – $1,500,000. Anything above $1,300/sqft is a prime property that has been remodeled.
The only thing that has been remodeled in my condo is a bathroom. Everything else is original since 1980. But, I’ve got an amazing dead on view of the park. Therefore, my educated guess is somewhere around $1,100 – $1,200 / sqft, or $1.1M – $1.2M.
Please don’t get hung up about the price of property here in San Francisco. It’s expensive here. Focus on the methodology.
Use A Realistic Cap Rate
Now turn into an investor and use a capitalization rate (cap rate) to value your property. Take your annual Net Operating Income (gross rents minus property taxes, maintenance, HOAs, etc) and divide it by a cap rate in your region. Think about a cap rate as the required rate of annual return on the property or the rate of return buyers in your area are willing to accept.
For example, if you accept a low cap rate of 2%, you believe the property is in a rock solid area and has a strong chance of appreciating. Therefore, income is a secondary consideration to appreciation. If you accept a high cap rate of 10%, it means there’s probably little chance of strong capital appreciation, so you want higher income now.
In San Francisco, the cap rate is currently around 3.8%. That’s 2% higher than the 10-year bond yield, also known as the risk free rate of return.
If I want to drill down even further, I need to calculate the cap rates in Pacific Heights. If SF’s cap rate is 3.8%, then Pacific Heights’ cap rate must be between 3% – 3.7% in my opinion.
Related: How To Properly Analyze And Evaluate A Rental Property
Find Out Where The Two Values Intersect
To determine whether to sell or rent a home, take your annual Net Operating Income and divide it by your area’s estimated cap rate. In my case, I would take $36,000 / 3% – 3.7% = $973,000 – $1,200,000. I can take the average and get $1,086,500.
Now I compare the cap rate calculation value to the comps and focus on the overlap. The realistic selling price is therefore around $1.1M. Anything more than $1.1M should be considered a win. Anything less requires more deliberation.
Identify The Special Features Of Your Property
Every property has its intangibles that might sway people to bid much higher than the numbers dictate. I place a premium on properties with views.
This property has fantastic park views. I would have happily paid at least $50,000 more for the property when I first stumbled across it for $580,000 back in 2003.
But some people like to face other buildings and would never pay a premium for having their eyeballs massaged after work everyday. You just need to find that one buyer who places a premium on what your property offers to get top dollar.
It’s very easy to get biased about our own properties. Selling this condo is like selling my baby since it was the first property I bought as a 25 year old.
Being delusional about your property’s shortfalls is hazardous when it’s finally time to negotiate a selling price. Remember to treat your assets as a means to an end. My end has always been happiness and freedom.
Future Income On Sale Proceeds
Let’s say this property sells for $1,120,000. After fees and taxes, I’m left with around $1,000,000 since there is no mortgage on the place. What can $1,000,000 generate based on what I want to invest in? Here are some reinvestment ideas after a home sale.
1) 5-year CD at 2%: $20,000 a year. Shortfall to existing income generation: $12,000.
2) California muni bonds at 2.5%: $25,000 a year tax free. Shortfall: $11,000. Don’t think California will default.
3) High Yield Dividend ETF (DVY): $36,000 a year in dividend income. No shortfall, but potentially lots of principal risk.
4) Venture Debt fund with target IRR of 16%: $120,000 a year for a total return of $840,000 over seven years if I assume a more modest 12% IRR. But there’s probably a 30% chance of losing $200,000 at the end of the fund.
5) Automatic investing: I could choose a very conservative risk tolerance and have a robo-advisor automatically invest a lump sum or new funds every month into a 50/50 equities and bond portfolio with a 2.5% yield to generate $25,000 a year in gross income.
6) Diversify into real estate crowdfunding. One of the best ways to make passive income is by investing in publicly traded REITs or less volatile private REITs offered by Fundrise. Fundrise offers a very diversified portfolio of eREITs or eFUNDs so investors can invest in real estate across the nation. It’s free to sign up and explore.
As a father of two kids now, investing in real estate crowdfunding has been a great alternative. I now earn real estate income 100% passively, which is what I want since time is so precious nowadays.
Another great platform if you want to invest in individual commercial real estate deals and are an accredited investor is CrowdStreet. CrowdStreet focuses on individual deals in 18-hour cities, where valuations are lower and cap rates are higher.
The Final Question To Ask Before Selling Or Renting Out Your Home
Deciding on whether to sell or rent out your home is tough.
I believe everybody should own property for as long as possible. The 5% commission rate and the taxes on profit are economic leaks. Given inflation is almost always up and to the right, your property should keep up over the long run. You want to build as much passive income as possible for financial freedom.
But if you just can’t take landlording anymore, don’t want to hire a property manager, and believe the timing is right, then selling is a good solution.
The final question you should ask yourself before selling is, “Will I be kicking myself 20 years from now for selling today?” If you’re over the age of 60 with a pension that provides for all your needs, who cares? Life expectancy is only about 84. You might gain a great deal by simplifying the remaining 24 years of your life.
If you’re still working towards your financial nut, don’t have any other income streams, don’t really like your job, and aren’t willing to start a side business, your property might be one of the few things keeping your hopes alive. It often takes several years of losses before finally breaking even. Be patient enough to let inflation make you whole.
The other thing to think about is what will your children in the future think of your decisions today? In 30 years from now, will they think you were smart or dumb for selling a home today?
If history is any guide, chances are high that in 30 years, our children will be impressed you bought real assets today. If you didn’t buy, then at least you held on.
Latest Passive Income Chart
Below is my latest passive income chart that enables my wife and I to be stay at home parents to our two little ones. We plan to continue building our portfolio so we can remain financially free.
I ultimately decided to keep my SF rental condo. It’s paid off and generates $4,200 a month. The condo faces a park in Pacific Heights and is a great passive income source.
However, in 2017, I did end up selling my SF rental house for 30X annual gross rent ($2,740,000) to simplify life. I didn’t want to deal with tenants who kept throwing parties and breaking things. As a first time father in 2017, I was happy to sell my home.
I reinvested $550,000 of the proceeds in real estate crowdfunding and the rest in stocks and municipal bonds. It feels so much better to passively earn income.
Recommendation
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.
Refinance your mortgage: Check out Credible, my favorite mortgage marketplace where prequalified lenders compete for your business. You can get competitive, real quotes in under three minutes for free. Mortgage rates are down to all-time lows! When banks compete, you win.
If you can refinance your mortgage and lower your carrying cost, it makes owning a home that much easier. I refinanced in 2019 to 2.625% for a 7/1 ARM and rented out the home in 2020. In 2020, I decided to take advantage of softness in higher-end property and buy a new home. I got a 7/1 jumbo ARM for under 2.35%.
You have a 2 bedroom condo in Pac Heights that’s making you a significant amount of money. Unless you’re withdrawing from the San Francisco market altogether, hold onto it. Your tax base is super low and you would literally have to pay double the property taxes on an equivalent unit should you change your mind after selling.
BTW, I thought you wanted to accumulate more SF real estate, based on your previous posts, no? Sounds like you’re going through a period of re-evaluation of your priorities. Take your time…a month or so of vacancy is not the end of the world.
Weird how things change when there is a trigger event isn’t it? Sure, I’d love to keep the condo if there was nothing to do. But once work is involved, it’s easy to have a change of heart.
Weird how things change when there is a trigger event isn’t it? Sure, I’d love to keep the condo that there was nothing to do. But once work is involved, it’s easy to have a change of heart. The more I think about it and read the comments, the more I’m at peace with holding onto it.
If I have to pay 20% tax on a $500,000 profit, I might as well just not even rented for two years and establish residency there to save on taxes right? I would forgo the same $100,000 in expenses As rent. Or am I missing something here?
While you clearly don’t enjoy the prospect of obtaining new tenants, it’s a short-term issue. I think the real problem is that you have too much cash locked up into an investment with poor returns. Why not take a HELOC and invest in Prosper loans or other relatively passive investment vehicles where you can make money on the arbitrage between artificially low rates on the money you borrow versus the rate of return you can secure from the alternative investment. This obviates the needless cost of paying a broker commission/taxes, etc.. You would make money on the rental as well as on the other investment, and could probably deduct the interest you pay from your taxable income.
I’ve pretty much found my enough number, and if the enough number can grow at about 4% a year, I’m getting 4% more than enough every year. This is why I’ve held on for the past several years now, but now I’m wondering whether to simplify.
Why not take some of that money and invest it into creating a few more digital assets?
The income generated is EXTREMELY high ROI due to high gross margin of each sale and potential for upsells.
I want to invest personally into real estate (and it’s what I got my degree in but got creamed in 2008 and had to pivot the last 8 years or so) but I can’t see why a simple “buy and hold” is a good idea in your market.
The risk of the property dropping by 50% sometime in the next 5 years is a LOT higher than it increasing by the same amount in the next few years. Lock in the gains, sit on some cash, and then if you want to buy again buy once the startup bubble deflates a bit and the market gets bit more rational.
I mean doubling your digital businesses would be a LOT easier than doubling your real estate cash flow over the next 3-5 years. Waiting 10+ years for inflation to bail you out of a purchase (or not selling at the peak) is too risky in my opinion.
With your talent and experience, 10 years of optionality by selling your property now while the market is in a peak cycle and then having access to the cash either to reinvest into your digital businesses/assets and also just sit on it to invest into hard assets once things deflate a bit would be a lot more “risk smart.”
Hope that makes sense.
Full Disclosure: I’ve been working in the digital product creation world for the last 8 years and it’s getting easier and easier once you have a successful product like yours to add a simple backend and 50% increase your income by solving a “cousin product” to the folks buying your product.
A potential real estate downturn is definitely one of the reasons why I’m considering selling. We’ve seen a huge runup indeed. I think we’ll see a 10-15% softening, and then a flat line for years before an upward resumption.
What products do you digitally create? The point I’ve alluded to in this post is that my digital business is more profitable and fun than my real estate business. It’s what I mostly want to focus on now.
The question is, how much is enough? $250,000 a year in operating profits? $500,000? $1M? It never ends, which is why I’m traveling right now for business to mix things up!
Totally dig it :)
I was speaking with a gentleman who lives near me in the Orlando area and he’s been investing in real estate since the late 1960’s down here and one thing he said throughout the cycles of ups and downs was “never underestimate the power of closing out a big gain.” He had made his 1st million in 1972 when our local government bought part of his orange grove to put a road through it. That was his “big win” that set him up to own various assets and a local bank here.
Cool story but I’ll never forget how he got “lucky” a few times and he said inflation would’ve taken him another 30 years to make that money he did on that one key sale.
So all good on the real estate either way but thats what inspired me to vote for selling it :)
As for digital products, we do mostly 3-4 week classes and then sell the recordings after class is over. I’ve done a lot of other digital products such as product launches with affiliates, higher end (3-5k) phone sales, and more mid-ticket items in the $297-$1k range for people wanting to start businesses. Not the hypey/sleazy stuff obviously but consistent businesses focused on replenishable items sold on Amazon and through people’s own websites (like how you sell your book).
We mostly talk about dropshipping and wholesaling and are going to be doing more with Amazon’s Pay Per Click marketing services over the next few months.
As for “enough money,” I don’t know if there’s a number. I think there’s an element of a “video game” that kicks in once you have your number. I’ve made a lot of errors in my 20’s related to buying cars (which is how I originally found your site a few months back when I saw your 1/10th of income car rule post) and not being as focused on systems.
I as well had a finance background but graduated in 2008 with a focus on real estate finance (mortgages and financing of real estate was what I wanted to do) but that ended up being awful timing.
So been on the product creation side and building my own things and all that. Lot of fun in my opinion.
One big thing I’ve taken from you from a “mindset” type perspective is the focus on optionality. That’s been key over the last 6 months and has really lightened my load so appreciate you for that. For me, that means the option to make more and build more assets…or not.
It’s been fun having that optionality to start and build up more assets in the ways you have as well (I started digital assets and haven’t had a typical corporate job/salary or properties).
Anyhow…think you have my email on the blog comment…would love to connect with you when you have some time and chat digital assets…it’s the least I can do for all the value you’ve shared here. No rush as I’ll be out of town this week til Sunday but would love to show you a few things and see how you’re promoting your book beyond mentioning it in posts.
If I can help you out, I’d be happy to :)
Take care buddy and either way…I appreciate you taking the time to write and share a lot of contrarian perspectives. They’ve helped me out a lot.
Option 1 – 1031 the property into an area with a higher CAP rate, and use the increased cash flow to pay a property manager, to lower your involvement in running the property. To get a higher CAP rate, you might need purchase something out of state. Some upfront time involved in researching the property, and purchasing it, but after that should be minimal effort on the part of the investor.
Option 2 – Sell, and invest in first mortgage notes. Currently, I invest with a hard money lender that lender that writes Interest Only Mortgages with 8% return to the investor. The hard money lender services the loan, and just sends you a check every month. Principal is secured by underlying equity in the property (unlike Lending Club that is unsecured debt).
I will offer up a strategy for you to consider, since you previously lived in the home and I assume you like it enough to live there again.
The current state of capital gains tax on housing is that if you have lived in your home for 2 of the last 5 years, you can take a $250k gain exclusion for single or $500k gain for married. It doesn’t matter if you live there the first 2 years of the past 5 or the last 2 years of the last five.
If you move into the property for 2 years prior to selling and you can potentially pay no capital gains. (downside note, you will have to pay depreciation recapture tax either way…)
This is not to say I vote for you to sell, just that if and when you are ready, make it a 2 year process in order to get maximum tax benefit from the proceeds. My vote is to keep renting it for 20-24 years, then live in it for 2 years, then sell it for the capital gains exclusion.
(disclaimer: verify this concept with your own tax advisor, just because it works for me, doesn’t mean you wont get audited later for doing your taxes wrong…)
It’s a good idea, although I think the rules have changed somewhat on the tax free amount.
I may just leave it empty, or have it be my primary residence as I travel and stuff for two years to get some of that tax free profit back.
Since you already own 2 rental properties plus a vacation home, it might not be a bad idea to take some money off the table given the market is at a high with the median home price for San Francisco crossing $1 million. The San Francisco case-shiller price index at 218.87 for Feb 2016 is pretty much the highest it has been in the past 10 years.
Since you have 2 “risk” free methods that can generate 24-25 thousand a year with the potential money, the question for me would be is $12,000 more worth the hassle of dealing with tenants. To me it wouldn’t be. But that’s up to you. The potential damage tenants could do would eat up that extra in a hurry.
I have a home worth $340K at the moment and have over 100K equity. Would it be wise to rent this out and take the equity and use it to buy another single family home? Or take that equity and get me a small cheap property and continue living in the home that I am currently in? Or shall I just take that equity and invest in the market? I have witnessed the trials of having to keep up and maintain rental property. Even with a property manager you have to manage them as well. Not all property managers are in the best interest of you, this goes especially for those of you that depend on them to take care of the work from faraway. When it comes down to Financial Samurai’s decision it is what you value the most. Having a home that you have had for years and going through the process of getting another tenant and receiving the rental income and other risks that come with it. Or selling it and moving on to other forms of investing that are less restrictive such as investing in the market.
I must admit, as a property owner myself who self manages, I also get that knee jerk reaction whenever a tenant vacates – I just want to sell the property, and as I lean towards those thoughts I’m filled with calm. Finding a new tenant, although pretty easy, sometimes I think I can’t hack it anymore. That said, when they are in, that wave of calm comes over me again and I’m glad I didn’t sell.
A suggestion. I have a girl that works part time for me (self employed, and paid hourly) for managing my properties and it works brilliantly. I only hear from her if there is a problem she can’t sort out. I also have a builder who takes care of any maintenance below an agreed £ amount without bothering me.
I voted sell. The market looks good and you don’t need the hassle which is all I see tenants as.
We had tenants many years ago. They rented for about 5 years and in that time my parents never raised the rent (because they felt sorry for how little the husband earned), all the while performing maintenance on the house and taking them shopping every month (the tenants didn’t have a car). It was the cheapest two bedroom & tbk in the city with a chaffeur service to boot.
The tenants paid only for the house (electricity and water was included), so they used to invite the neighbours to cook and use all the water they wanted. When they left, the house was pretty trashed and we had to strip walls and floors.
But we’re grateful for small favours (that they packed up and left) because the govt. has changed the laws and now if you have a tenant, you can’t kick them out even if they stop paying rent. It is up to the owner to find the tenant an affordable place to their liking!
Definitely not worth the effort.
Wow! That’s awesome they got chauffeur service. What city was this rental property?
Easy.
Sublet your apartment for a month or two until your trip is over. Then you can find a long term tenant.
I’d love to have your problem ;)
How would you suggest I find the tenant when I’m currently in Europe and won’t be back until end of month? I did record a video tour though.
This is a hard choice. The finances and the desired life outcome are not entirely clear. Approaching it rationally may not be possible. Have your other goals changed? Do you still need/want $200K of passive income a year? Or has your baseline shifted?
I don’t need the $200k passive income anymore. It was just a goal I had in 2012. The reason is my online income grew far beyond what I thought it would grow to. So 100% of the passive income has just been saved. Of course the online business could all go away one day more easily than rental income. Thoughts now?
Hi Sam
Where are you in Europe? I am in Madrid following 2 weeks in Russia.
Here’s my POV and what I did related to the decision you are considering.
Rentals are a hassle when tenants give notice but usually no hassle after the new great tenant moves in. That being said I sold a rental condo a few years ago — condos are way more hassle than single-family dwellings even with a great PM, usually don’t appreciate as much, I can’t stand dealing with the strata corporation and just ignore it, and condo tenants are not as good as SF house tenants.
I was so glad to put the proceeds into the stock market (income of which is funding my travels for half the year). I quite enjoy managing my own financial investments and I can do that wherever I am. Meanwhile, my house in Vancouver has appreciated astronomically (I will never sell it although it is tempting when I work the numbers they come out on the hold side).
I still rent 2 smaller units in my house and live in a third unit. This means I can walk away any time to travel as the tenants are there to look after everything. I am extremely picky about tenants — my PM finds them but I always meet them myself. I left one unit vacant for 2 months last year while I was travelling. The income loss was mitigated by lower income tax (expenses remain same).
Re other sources of income. I find most passions become chores after 5-6 years. You are still going strong, but I can see other great bloggers burning out. I loved my consulting work but after 6 years, I just wanted no commitments. Now my challenges are travel logistics and I meet the most amazing people.
I’m in Prague now, ready to go check out the castle!
Nice job on Vancouver, a city even hotter than SF it seems! What is he industry making things so expensive? Or is it all foreign money? What is the value of your Vancouver home now?
I’m not enthusiastic about the stock market currently. But I may just buy California muni bonds with the proceeds.
What I love is blogging. The upside is massive and it’s fun.
Don’t forget to check out the 600 year old astronomical clock!
I love when you post Sam and I literally have the conversation with my wife about this same topic what feels like moments ago.
Some of the items that are similar include renting out the property as our tenants have informed us they will be leaving when the lease comes due in a couple months. While our strategy is not to sell today it most likely will happen next year. Our biggest dilemma is we have an older property and plan to move 2,000 miles away, while the rental income will be above average I can’t imagine not getting a few calls on fixing this and that. With time the house will need more fixing, especially one from 1912, while the age is common in Chicago I’m sure fixing and patching these homes are as well.
We won’t walk away with nearly as much money, but since we also live in this rental the profits will be tax-free. We certainly have a 5-year window to see if we can manage a property/property manager from long distance, but I can certainly see making a move and pivoting putting that money in an alternate passive income location as you mentioned.
The entire time we have owned this home we have essentially used it as a cash cow to pay down another rental and that milestone is on track for this year. Once we get reach the milestone, serious talks will be had about simplifying. For your situation, I would suggest holding the property for life, if we stayed in Chicago we would do the same. Based on your tone I think having someone deal with the property management/landlord details would be a better approach moving foward, simplify but don’t sell.
Where you guys off to 2,000 miles away? Chicago is a great city too. Nice job using the cash flow from one to pay down another.
Miami, FL area, wife has all of her family there.
First of all – if you really are serious about lending money at 5.5% I am interested. I am looking to buy another rental in the next two years to grow my real estate portfolio slowly and would be interested in working with you (seriously).
Second of all – I really think the answer to your quandary is to get a property manager. Yes I see you are asking “but who manages the manager?” and I get what you are saying. Ultimately if you want to de-stress etc. you should just sell the property. No doubt you could invest the money in an index fund and probably do just as well (or better). You could also lend some to me for 5.5% with guaranteed repayment (just saying:))
But I don’t really think it would be too bad to manage a property manager; especially on a valuable property such as yours. The front-end process of shopping for manager may take some time as you negotiate the best terms and lowest fee (I am paying 8% gross rent to mine) and so forth. I do absolutely nothing with managing my manager. All that happens is I get the money direct deposited and a statement each month. Everything else is handled. Its like magic. I am obsessed with property managers –
My experience with property managers has been so good and my adventures at being the landlord myself have been so bad that I will never manage a property on my own again. And hopefully I’ll never have to clean up drug paraphernalia from my property again either!
Interesting Post! thanks
Sell it and bet half the money on black. Invest the rest in amazon!
I’ve had this same dilemma myself with my lone rental unit. About a year ago I was really leaning towards just getting rid of the thing after having a tenant turnover and a number of repairs cut into any profits I might have seen. In my case, I don’t even hardly cash flow more than $50 bucks a month if I’m lucky. But – I decided to stick with it as good long term play. At the end of the day, the tenants still pay my mortgage, the value should rise with inflation, and I can take advantage of depreciation.
Sell and deploy the cash on a multi-family outside the city with a higher cap rate. You could leverage up and buy a couple! Hire property management if you want it to be more passive!
congrats on your decision whatever it is!
Interesting post. A few thoughts, as a fellow landlord:
-lease expiries almost always make me want to sell. Then I get the apartment rented, the headache is reduced, and I’m happy I didn’t sell.
-to the people saying hire a property manager, just remember that you have to be happy with 80 percent. No property manager will ever take care of your property and the management the same way you will. It’s your investment, not theirs.
-don’t focus on the one month vacancy, focus on quality tenants (sounds like you already do). Retrospectively, I have been very happy that I was picky with tenants, even though it probably means a month or two of vacancy every 1-2 years. The headache it saves at the end of the lease (and during) is well worth it.
-if you saw your own apartment listed at 1.1 million, would you buy it at asking price? If not, lean towards selling. If so, lean towards keeping.
-vacancy can be a great time for renovations. Look at this as forced appreciation if you renovate.
-a 3.8 cap is crazy low. Is it sustainable? We built our units at a 13 cap minimum (secondary market). I would sell at a 6.5 cap. If you can sell at half the cap rate at which you bought, that is a massive windfall.
-the biggest issue I struggle with is what do I do with the cash if I sell? I would probably deploy to a bigger project, which can mean a bigger headache. Be careful what you wish for.
What would be the effect of traffic to this site if you were to sell the rental property? One of the things that makes your blog interesting is that you have so many different, interesting things going on in your financial life.
Have you ever thought about getting your real estate license so that you no longer have to pay commissions? What would it involve in terms of cost and time? If I owned as many properties as you do, getting my RE license is something I’d be thinking about. Plus, it would give you something new to blog about.
Looking forward to reading about the crowdsourcing real estate industry.
Good, interesting question, but nothing happens actually since 74% of my traffic is from organic search, and regular readers aren’t the ones who pay the bills. It’s those with a problem who search for that problem online who are more likely to take action on my site.
My real estate related posts live on forever. Many are evergreen, as I’ve purposefully used the strategy of telling a story and highlighting helping strategies to make a decision. This is the beauty of blogging. Once the post is out in the world, it’s like a tiny passive income engine that adds to the overall pie forever. Some posts I’ve written 5 years ago generate 50,000 pageviews a month still! And even at just 1 penny a pageview, that’s $500 every single month in passive revenue.
And if I sell my rental, I still have two more! Endless stuff to talk about.
Sam – I think you said in another post that you believe interest rates will remain low (lower?) for some time.
Wouldn’t the current yield of your rental widen the gap with bonds in the coming years?
If you don’t want to manage the property but want to keep the passive income, a property manager might be the way to go.
Selling and investing in RealtyShare instead might be an alternative worth evaluating too.
Yes, the yield gap should widen due to a increase in rent by 5% this year. I’m pretty sure I could do it. With the 10-year yield at 1.72% now….. I’m not sure how low it goes. Maybe 1.5%? If so, I’ll try and refinance another property and go through the pain.
Funny you mention RealtyShares, the CFO just contacted me about working with them who came from Motif, where I do some consulting work. Small world! I’ve got an article on the crowdsourcing real estate industry soon. Stay tuned. Good insights!
Sam,
You have a strong recurring theme of wanting to simplify your life, and embracing freedom across many of your posts this year. I’d suggest that an option you didn’t list for what to do with the proceeds from a sale, that would be most aligned with the goal of life simplification, would be to sell the rental and pay off the mortgage on your primary. None of the hassles of being a landlord, none of the hassles of dealing with refinance requirements that defy logic, no more escrow accounts, etc.
This is coming from someone who in two week will be closing on his 7th rental in 4 years, with the plan of buying another in August, and 11 more (19 total) by June 2019. But the property I am closing on in two weeks will have a cap rate of 13.5% (I have a tenant moving in the day after close). A cap rate of <4%, would not be worth the headache to me, as being a landlord is not just an investment, it is a side-hustle.
Of course if you wanted to roll the proceeds into a private money loan @5.5% I'd be all for that :)
I’m almost done with my mortgage refinance, thank goodness! It looks like I will pull through!
Bless you for being about to manage 7 rentals with a goal of 19. How old are you?
I can lend you money at 5.5% if you promise to pay me back!
I am 29, been around rental properties my whole life as my dad owned/managed 14 units all while growing up and still does so for 10 of them after selling a 4-unit building 3 yrs back. What I learned from helping him, and what I do differently is that all my units are upscale, high end of the local market, so I have less headaches than he does.
When I left the bay area and moved to Augusta, GA 4 years ago I bought 2 townhomes on the same street and lived in one and rented the other, and things have just gone from there. I’ve maintained a very low vacancy rate, but not without drama. Earlier this year I evicted a tenant who was breeding pit bulls in the property. Had $4k+ in damages, but had them out on a Sunday and had everything repaired and a new tenant in 6 days later the following Saturday at a $125/month higher rent to boot. Tenants were military so I got every cent recovered.
It takes a certain mindset to not be emotional about any of it. It’s a business, and its all just numbers.
I would do 5.5% private loans all day long; 80% LTV, deed of trust arrangement. The 19 goal comes from the limits of conventional financing, where you have 10 mortgages in your name. So I will have 8 next month, my primary + 7 rentals. Plan is to buy 2 more in my name, then start putting rentals in my wife’s name. Private loans at that rate would raise my target as I’d keep putting more and more in my name.
Yikes about the damage and stuff. I was fine managing as a 29yo too. I do wonder if things will change 10 years from now. My attitude certainly has bc I found new revenue streams that are much more rewarding. Keep at it until you can’t take it anymore!
Initially, I was going to tell you to just keep the property and find new tenants. It sounds like a great income producing investment, and I love me anything that produces income. The problem with that sort of advice is that it’s easy to tell some to man up and do the work, but not so easy to do it yourself. All we see is the numbers; only you experience the sacrifice and sweat it takes to achieve them.
So instead, I would say sell the property and use that money to invest in dividend stocks. Not a dividend ETF as I don’t care for funds, but a swath of dividend growth stocks across multiple industries. I don’t think there exists a better passive income investment out there. None of the companies you buy will call you in the middle of the night to fix something.
Alternatively, you can always go with hiring the property manager.
Sincerely,
ARB–Angry Retail Banker
Hey Sam,
Been lurking for a while, first time posting.
How does this fit within your https://www.financialsamurai.com/recommended-net-worth-allocation-mix-by-age-and-work-experience/ ? Are you moving closer to your target net worth allocation or farther away by selling this property? Maybe selling this property would help you achieve a more diversified net worth allocation if you still have a lot of money tied up in real estate.
Good article. I live in Southern CA. and sold my first place I bought almost 30 years ago when I was in my late 20’s in December of last year. It was time. I had no mortgage on it and it had been a solid rental for over 6 years without missing a month. (next to a major university)
I decided to test the market and if I didn’t get my asking price I would increase it a bit and rent it for a while longer. I netted around $230k on this condo after taxes, etc. and used it to pay down my principal residence. I’m about a month or two out from being mortgage free on my principal residence which also has an extra room I could rent out on another floor at $1,000/month if I want so income potential is there.
I have no regrets but I’m a bit older (in my 50’s) and have an eventual pension coming also.
Life is definitely simpler now.
Sam,
I vote to sell it and you can buy a place in Hawaii near your parents. Life is short and you always said that you want a place in Hawaii so go for it. Just keep one house in SF if you like.
I just checked the CA munis and you can get 3-3.125% bonds around PAR if you want work free passive income.
My parents have rentals and I can’t deal with tenants. Their 2 houses from the 70’s were 65-70K each and are worth now 900K to 1.35mil each but I am not jealous nor I feel that I lost an opportunity to make more money. Our IT jobs are stressful enough and we don’t want another job. Our net worth is all from brute forced savings. We save 85% of our income for the last 5 years. We are mortgage free for the last 14 years. We only invest in munis and only have one small house less than 1,000 Sq ft.
Our 4-5% munis generate 85K of tax free income every year. My parents rentals don’t even generate that much money and they have the hassle of dealing with issues.
I believe in simplify your life. Sounds like you don’t need that much passive income from rentals then why subjective yourself to unnecessary stress?
But part of you is worried about the future value and lost opportunity. If you don’t need the money then why worry about making more money? My father spent his whole life working very hard and accumulated assets but he got 2 types of cancer and died over 10 years ago. He NEVER got to enjoy retirement. In fact, His illness retired him and he died a painful death.
I say sell, move to Hawaii, have a couple of kids, enjoy the company of your parents/family and live a stress free life.
Howdy, good to know you’re seeing 3-3.12% CA muni bonds. Where are you getting 4-5% muni bond interest returns?
Sam,
I checked the Fidelity site last night for your state CA and I saw several 3-3.125% bonds around PAR.
I brought a lot of 4% munis around PAR last Jan thru March 2015.
The 5% muni bonds were purchased 4-6 years ago. many of them had a premium of $104-$108 and some at PAR. My YTW on average is around 4% for all of my bonds.
These days the 5% bonds for my state are around $110 to $120 which is too expensive for me so I wait. I am very patient muni bond shopper.
It is a little hard to relate to the rents and values in the Bay area which certainly goes into the equation. Said that, I don’t really understand the hardship in managing a few rental units. I own and manage a lot more than that and my life is pretty leisurely. Granted you are doing other things as well that generate income for you. But I wouldn’t exactly call those activities completely passive either. So it boils down to how you want to spend your time. If managing rental real estate now puts a bad taste in your mouth, it may be time to sell. The value of the property has certainly had a nice run up since 2003.
I think the real question is “do I want to be a landlord?”, which only you can answer. Otherwise, you’re asking us about market timing, which you know the answer to as well. Of course it’s a great time to realize your gains since you’ve basically seen a 40% return on your down payment every year for 13 years…plus the income you made in the meantime.
I don’t think that is the right question, because nobody wants to be a landlord if they had a choice. I’ve been a landlord because I enjoyed owning the property and generating income for my retirement. But given that I have not spend a penny of my passive income since I left In 2012, the property is actually not providing any benefit, only headache.
Great topic! I will give my insight based on the fact in six months I’ll be 80 and at age 40 I used to live and work in the Palo Alto-Los Altos area.
1) Nearly all of my colleagues in college teaching are multimillionaires today. They bought one house for around $40,000, as I did in late 1960, made the payments, struggled from pay check to pay check, and eventually bought at least one more house as a rental in the less expensive areas of Milpitas or Mountain View. Today, they not only have an incredible teacher’s pension for life with health care, but their two houses mushroomed to 2-3 million dollars each in value.
2) I, on the other hand, dropped out of teaching at mid-career to pursue my dream of forming a travel company. Sold our one house at $250,000 level (instead of a cool two million which was the eventual value), split the proceeds with my ex-wife as part of the divorce settlement, then moved to Oregon to live the dream. My company was moderately successful but there was only money to buy one house. I sold the company after 20 years and retired. My second wife and I then traveled for 15 years about the world and lived our second dream of “world travel.” Now, we are back home, have a small pension and live in a cozy apartment living primarily off social security…plus working part-time on a seasonal basis. The one thing I wish we had done is to buy and keep a second house that would have served as a rental as we travelled and lived our dreams. A property manger would have been a necessary part of the equation.
At some point, dreams become fulfilled and we all return home, older and wiser. But what kind of home? Even a small condo would have been great for us, completely paid off, and making money as a rental for 10-20-30 years. So, my advice to live the dream… simplify, simplify, simplify. But…keep at least one rental as your homestead so that on your return you have a retirement home. Our one house in the Bay area went from $37,000 to $2.5 million in 30 years. Who knows what homes will be worth in another 20-30 years?
This is wonderful insight. Thanks David! And happy 80th!
“At some point, dreams become fulfilled and we all return home, older and wiser.” – love this.
Could you have ever imagined your $37,000 home could one day be valued at $2.5M? If not, what do you think the max it would ever go to? I know inflation makes the real value appreciation not as great, but still, $2.5M is $2.5M!
I ask myself this question all the time and also conclude in the post, “Will I be kicking myself 20 years from now if I sell today?”
Will a $2.5M home really be worth $5M in another 20-3 years? Maybe!
I felt strongly that the condo I bought for $580,000 would be worth $1M one day due to the view. But I’m biased.
Wow, 80!
Thank you for sharing the insights, such experience is invaluable.
David,
If you don’t mind, I have a few follow up questions.
1. When you retired, what funds your travel?, Other than pension, do you have any other investment to support your retirement?
2. Since you have traveled for 15 years around the world, have you considered to actually settle in one of lower living cost places out of US, other than SF? The dollars from the pension can go further? What’s the reason to settle in the US now?
Thanks!
3.8% cap rate implies extreme overvaluation IMO. Even trophy hotel properties in NYC/SF/etc that attract not only Americans but Chinese, Brazilian and Russian Billionaires as buyers go for like 5% cap rates (and industry as a whole is around 8-9%). Add in private valuations at serious risk which means less massive big pay days in the area (potentially)….Personally, I’d sell and diversify the 1 million net into 3-4 different investment options you listed and maybe a couple others as well (international fund, gold/silver ETF, etc). Out my way you could by 7-8 rental townhomes outright and get 8-10% returns and let someone else manage it (assuming 0% property inflation and 10-12% vac/maintenance combined)
A 3.8% cap rate has actually been like this since I came to SF in 2001. I had the same hesitation when I bought in 2003. Yet, SF has remained resilient due to the tech boom.
But I agree with you, if I could snap my fingers and reallocate proceeds to 8-10% returns somewhere else, I probably would to diversify.
Yup its remained resilience due to the tech boom, specifically a whole lot of new millionaires, and interest from overseas buyers. Will that continue at the same pace pushing prices higher? Possibly – Given recent private valuation sketchiness and I believe a recession is imminent who knows? But you’re way, way in the money on the property.
To me, property like that is no different than a spec stock trade that works out really well. You know there is a chance it might continue to soar higher but I find its generally best not to get too greedy on a single investment – especially one that makes up an extremely large % of your NW. Normally I’d just say at least take some money off the table with a stock trade. Maybe you could find an interested party (person or investment group) to buy half the stake so you could partially cash out.
I don’t think prices will continue at this pace, no way. Prices will flatten and fall probably 10-15%, stay that way for 3-4 years, and we’ll see what happens again.
Finding someone interested in buying a portion could be good, but that involves dealing with more people, which I’m trying to minimize.
Hi Rob – where is out your way? I think real estate is well valued lots of places but have been wrong often enough to ignore what I think a little and keep looking.
North Carolina/South Carolina area
Sell the property for the $1.1 million (or better). It doesn’t sound like you really want to be a landlord. It will just continue to frustrate you.
If you’re comfortable with your income stream (combined passive and active), redeploy the proceeds into the venture debt fund.
Otherwise, buy the 5 year CD and consider redeploying back into real estate at maturity if you find that you still want to own rental property.
I can’t recall reading if you have a significant position in dividend stocks. If not, you could also start moving the proceeds in that direction. Although I would probably hold off for 12 to 18 months unless we see a significant market correction.