Following the easiest real estate investing strategy will make you a wealthy person over time. As a real estate investor since 2003, I want to now share this real estate investing strategy with you.
Ever since selling an SF rental property in 2017, I’ve been a happier man. Not having to deal with disrespectful tenants and maintenance issues while I was busy being a first-time dad has been a blessing.
The reinvested proceeds were split pretty evenly between the stock market, the bond market, and a portfolio of 17 real estate crowdfunded properties. Luckily, the performance of all three categories has done well so far.
But what about the future? In this uncertain time with job insecurity and volatility in the market, the focus on investing in real estate has never been higher. People want to own real assets they can count on. Investing in real estate, although not as sexy as investing in Tesla, will at least provide shelter and produce a rental income stream.
With my new passive income target goal of $350,000/year by 2023, I’m once again focusing on building a physical real estate portfolio. Mortgage rates are at record-lows. More time is being spent at home, which means the demand for real estate is going up. Further, there is opportunity to potentially buy real estate at a discount from a “doomer” who thinks the world is going to end.
Let me share the easiest real estate investing strategy that helped me build wealth in my 20s and 30s. I attribute a good reason why I was able to retire in 2012 at 34 with this strategy.
The Easiest Real Estate Investing Strategy
The easiest real estate investing strategy is this:
Buy a primary residence, enjoy it for several years, buy a new primary residence, and rent out the old one. Enact this strategy every five years. In 20 years, you’ll have a nice rental property portfolio that spits out a good amount of passive income. You’ll also have a nice primary residence.
You really only need about three rental properties to generate enough income to retire early or be free. Of course, you can buy more properties to try and make more income. It all depends on how much you want. I’ve found that managing more than four rental properties becomes a headache.
The other great thing about this real estate investing strategy is that because you lived in each property, you know everything about it. You can do things to improve the property while you’re there. You also know that if you enjoyed the property, there’s a high chance other people will too.
I had this three-property rental portfolio plus a primary strategy going for three years before I sold one. Now that my boy is in preschool, I’ve got the bandwidth to go back up to three again. Further, as you may have read in a previous article, I believe buying physical real estate in 2020 and 2021 is a good idea.
Luckily, an amazing opportunity to own another panoramic ocean view property in San Francisco has come up. It’s uncanny what the world brings once you start looking.
A Real Estate Opportunity To Pounce On
On my way to the grocery store, I drove by a house a block away with a truck outside. There were three workers busy removing old carpet and furniture. I stopped by to ask whether the owner was moving out. The worker said yes and they planned on doing some light remodeling before listing the house.
I asked for the real estate agent’s contact information to see if I could make a deal off market. It turns out, the listing agent was an out of town agent just like the listing agent of my current primary resident. Both were not familiar with SF or the neighborhood and both got the listing because they were a childhood family friend. Perfect!
Here are the house basics:
- 4 bedrooms
- 3 full bathrooms
- 1 ground floor studio with half bathroom
- A corner office with ocean views
- Ocean views on all three floors
- 2,600 square feet
- Garage
- Incredible 270-degree views of the ocean and city from the top floor
- Oversized lot
- 1,000 square foot backyard
- Golden Gate Heights neighborhood
- In need of remodeling
Based on my previous work using the FS20 real estate valuation methodology, I knew the comps in the neighborhood quite well.
For a fixer of this size and location, I estimated the house would be priced at around $800/sqft or $2,080,000. This is down from about $840/sqft or $2,184,000 earlier this year. If the house was fully remodeled, it would sell for up to $1,300/sqft or $3,380,000. This is also down about 5% from $1,365/sqft earllier in the year.
In other words, my first goal is to buy the property as much below $2,080,000 as possible. My second goal is to remodel the house and capture the spread between my purchase price + remodeling cost and $3,380,000. I could nicely remodel everything for $250,000 – $300,000 for potentially up to a $1 million paper profit.
Negotiating With The Real Estate Agent
I gave the real estate agent a call to inquire more. She held her cards close to her chest and told me to check back in a couple weeks as they are preparing the house for listing.
After much back and forth, I got her to reveal that she planned to list the house for $1.99 million or a reasonable $765/sqft. Drat! She’d done her homework! Any savvy buyer paying attention during the holidays will try to aggressively buy this property too.
Strategically, listing just under the $2 million mark is sound because it should bring in more potential buyers who have a $2 million cap. As a seller, you want to slightly underprice your property to create a potential bidding war.
Although my mouth was salivating over the phone, I remained calm. I had the potential to offer the seller their asking price and avoid a potential stressful bidding war.
Hook #1 – Double Commissions
I told the agent I was interested and asked whether we could work out a deal directly. This is when she really warmed up to me. To double end the commission would be a dream come true, especially since she was an out-of-town agent who had to drive 50 minutes each way to get to the listing.
You could see her mentally counting the extra $50,000 in commissions in her head.
Letting the selling agent represent you is generally not recommended unless you are an experienced buyer who also knows the neighborhood. Because I had gone through this exact same buying process in 2014 and have done more than anyone to study the neighborhood, I feel confident taking this route.
Hook #2 – Creating An Emotional Connection
As a seller in 2017 of a property I had owned for 12.5 years, I knew the importance of creating an emotional connection with the seller. Although I only had one offer, we did have an intense back and forth negotiation during the 45-day selling process. Hundreds of thousands of dollars were on the line.
When the seller wrote me a letter saying how he also grew up in Virginia, loved the red brick facade that reminded him of home, and also had a little boy, I lowered my largest canons. It made me feel good that someone took the time to write a letter. It made me feel great that the potential buyers had a little one to raise, as that was one of my intentions of owning the house all along.
I told the agent to tell the seller that we are a family of three who have been living in the neighborhood since 2014. We are looking for a larger house because our goal is to have another child and live in the property until our kids go off to college. We also promise to take great care of the property. Finally, we sent them pictures of all the landscaping and remodeling work we have done to our current house.
Finally, we told them our address, which was huge because the sellers knew the previous owners of our current house. They were childhood friends. The sellers didn’t want to sell to some random flipper.
Hook #3 – All Cash Offer
The final hook was saying we could pay all cash for the house. We’d also close within 21 days if they did not list on the MLS.
Even though the market has slowed, the chance to own a panoramic ocean view property in Golden Gate Heights, San Francisco rarely comes up. If it does come up, the view is either a peek-a-boo view from the side, the house’s layout isn’t ideal, or the house is well over $3 million. I have looked every month for the past five years.
Thanks to stock market, bond market, and real estate crowdfunding gains since I reinvested my proceeds in 2017, my “house fund money” has grown from $1.8 million to roughly $2.25 million.
In this example, we’re talking about a $450,000 paper gain in other investments and a $100,000 depreciation for a promising house. By just sitting tight for 2.5 years, I’ve been able to gain ~$550,000 in buying power before taxes and fees. Meanwhile, mortgage rates have gone down and my income has increased.
Affordability for real estate has gone up for hundreds of thousands of Americans. This growth in assets, coupled with softening real estate prices is one of the main reasons why real estate looks attractive in 2020 – 2021.
Your mission, if you choose to accept, is to calculate your paper profits over various time periods and estimate how much real estate prices have softened in your neighborhood as well. I think you’ll be pleasantly surprised with how much your real estate buying power has increased as well.
I know from my previous experience both as a seller and buyer that presenting an all-cash offer without any financing contingencies can save 1% – 5% off a listing price.
Make An Offer Or Keep Things Simple?
If I’m able to buy the property for $2 million, I’m pretty certain after six months of remodeling, I will make at least a $500,000 return on my investment. The six months will be a real big pain in my ass. However, as I said earlier, I’ve got an extra 6 – 8 hours a day to project manage thanks to preschool.
My simple profit calculation excluding taxes and fees is:
Cost: $2 million purchase price + $300,000 remodeling + 6 months = $2.3 million all in.
Profit: Live in the house for two years and then sell a newly remodeled house for $2.8 million, or $1,076/sqft. The $500,000 profit would be tax-free. I’m purposefully not baking in a $1,300/sqft selling price estimate because I won’t be doing ultra-high end remodeling. It’s too risky and time consuming.
But I don’t plan to sell the house and pay commissions and transfer fees. I plan to own it forever because I think panoramic ocean view properties in San Francisco is undervalued. Getting an ocean view home in San Francisco is the most lucrative real estate investment opportunity over the next 20 years.
In 20 years, I can see this house trading for $2,000/sqft, or $5,200,000. The price may sound absurd, but inflation and compound returns are absurd. I’m only estimating a 4.2% compound annual growth rate for the next 20 years to get from $2,300,000 (includes remodeling cost) to $5,200,000.
To be able to enjoy a better life and concurrently profit is a home run. I truly believe buying a property to live in until you’ve saved up enough to buy another primary residence is the easiest real estate investing strategy to build wealth.
Dealing With Remodeling
Remodeling the house would also be a less stressful experience this time around. This reason is we’d be living in our current house until the project is over. Further, given the house is only a block away, I can easily pop in when they have questions. Or stop over when I have to meet subcontractors.
Once the remodeling is done, my family could move into the new house and rent out the entire old house. We could partially rent out the house and keep one level as the Financial Samurai office. Or we can just keep the entire house as our company office and place for relatives to stay when visiting. I could probably get between $65,000 – $78,000 a year in rent for the entire old house.
Finally, owning the new house would be an affordable insurance policy in case my family is blessed with another child. We’re currently at our comfortable limit in our current house. When relatives come over, we can only take it for about five days before we all start getting a little jittery!
Real Estate Alternative
The alternative is to just keep all the investments just the way they are. Invest my $500,000 cash pile in REITs and real estate estate crowdfunding to keep things simple. Too bad I can’t live in and enjoy these investments.
In 2022, we do plan to apply to kindergarten in Honolulu. Once there, we plan to buy a house overlooking the ocean. Those properties cost 50% – 100% more, but maybe not if the luxury market in Honolulu remains weak.
I hope you enjoyed reading the easiest real estate investing strategy to build wealth over the long term. Not only will you build wealth for yourself, but for your kids and grandkids as well. Follow my easiest real estate investing strategy.
Loading ...Invest In Real Estate For Passive Income
In addition to following my easiest real estate investing strategy to build wealth over the long term, take a look at real estate crowdfunding.
CrowdStreet is a real estate marketplace that primarily focuses on secondary metro markets that are lower cost with higher cap rates and higher growth than the expensive coastal cities. These cities include Denver, Austin, Memphis, and Charleston.
Due to technology and the rise of the freelance economy, I think investing in lower cost growth cities will be a multi-decade trend. CrowdStreet is free to sign up and explore.
Can’t believe I just read of the all comments. So educational. It sounds like a very exciting opportunity. I would just caution about the ADU aspect. I know ADUs are more promoted nowadays with less headaches, but not sure how far you’ve checked into the feasibility of it for your location. Awhile back I had made an offer on a house where the agent said an ADU could be added (On the MLS). I went to the city to check and they said not possible due to requirement to add parking. They even pulled up the house on Google Earth and measured driveway widths, etc. I know of another couple that was about to break ground on their expansion and the city came back and put in an additional parking requirement after permits were approved. This is down the Peninsula.
I don’t think SF has a parking requirement for ADU, but you may want to verify with the city or an architect for other aspects.
I took a quick look at: https://sfdbi.org/adu and “Up to 25% of ground floor or basement level habitable space may be converted to an ADU.”
Not sure if that fits into where you plan your ADU.
You may also, if you haven’t already, take into account what the future construction costs may be since it will probably take time to get the permits, etc. I once spent like 8 hours at DBI being sent back and forth from one department to another. Also, it seems like there is still a shortage on construction labor, so prices are really high.
Best of luck.
Good thoughts on ADU building. The mayor has supposedly streamline the process, but we shall see.
Yes, buy it to live in. Properties with a view are rare, especially the kind of view you describe. We bought a home on Lake Huron 28 years ago, intending to stay only until the kids left home in 5 years. But life is so enjoyable and relaxing with a view like this, knowing that no other homes can be built to obstruct the view. Serious studies have been done of the difference in biochemical markers in the body that result from viewing water, even more so than viewing mountains or forests. There are definite health benefits to the view. As well, there are benefits of negative ions that come from wind traveling long distances without interruption as they do on an ocean or a large lake like Lake Huron. Air is more healthful. We found that, when we moved from a regular suburb to a home on the lake, our young teenagers became more relaxed, spent more time around the dinner table just talking, and spent much more time at home. You cannot put a dollar value on quality family time. No real estate venture or business deal is worth losing this opportunity. Living in that house will make a big difference to your family life. And, a word of advice, do not sell that house unless you are absolutely sure that you never want to live in a home with a good ocean view again. Properties like that are almost irreplaceable. They will increase in value more quickly than homes without a view. A significant amount of the capital gain is tax free. There comes a time in life when we need to make decisions that prioritize family values over profit. You cannot put a price on health, peace, contentment, joy. If you don’t have it, your money is worthless. And if, for any reason you do not enjoy living there, you will have a house which will sell much more easily, even in a down market.
Donna
Your comment on view is staying with me. My goal has always been a view, perhaps sell my house for a condo with 360 views of sea and mountains in due course. In any case, never living more than 15 minutes walk from the sea as I do now. Now reading your comment putting my feelings and instincts into words, it seems more urgent.
Wise words! My goal is to own my ocean view properties for as long as possible and have my grandkids tell me one day, “wow grandpa I can’t believe you bought those homes were so cheap!”
Hi
What did you use to buy the 2nd primary residence to rent out your first? A full 20% down payment or did you take out a home equity loan or HELOC?
Since this is a prior post you may not read this . . . but please consider a modified all-cash offer. In other words, to them it’s cash but to you it’s OPM (other people’s money). Get pre-approved and use a mortgage. Today’s rates make using leverage and OPM a must to increase your ROE. Use a strong down payment to avoid PMI; use a 15-year mortgage (best rate-term combo); and use the rest of your cash to do (invest in) something else.
Kurt can you elaborate on OPM? Is that a hard money loan then he finances the property after improvements are made? Thanks for any input.
OPM is just Other People’s Money . . . in this case a mortgage loan with cash provided by a mortgage company on initial purchase. If you pay with cash to close the deal and then put a mortgage on to get access to your cash the interest rate goes up. Never go all-in with cash when cheap debt is available and the asset has a high probability of appreciating over the long term. With mortgage at 3% and inflation at 2% (housing inflation probably higher than that in SF), then the mortgage interest is essentially free. Your return on equity (return on investment) is 5x on a 20% down payment mortgage than a 100% “down payment” all-cash transaction.
Hi Sam, long time reader, first time commenter, and I really love your blog, especially the real estate related posts.
I own a couple of small multi-families across the bay in Berkeley and just bought a single family with the potential for an ADU as we too are expanding in numbers.
The other commenters made a lot of insightful comments about the neighborhood, financial impact, that I can’t add more to. From my perspective, I think it’s your potential move to Honolulu and your being a bit burned out on landlordship which make me lean toward a no.
If you were staying, landlording within walking distance makes logistics so much easier, and especially if the house is a good deal, it really makes sense to buy a house that makes you happy. But if you do end up in Hawaii, you might end up having to manage your new house from a distance which can be done but presents a challenge and much of your funds would be tied up, allowing you less flexibility to grab a really good deal in Honolulu.
Either way, I think there isn’t necessarily a wrong decision, and we are all lucky to be able to have such choices in front of us. Wishing you the very best outcome!
Thanks for your feedback. My hope is that a property manager can properly manage the properties if I were to relocate to Honolulu. The alternative is, we just stay here, and go back to Hawaii for 3 to 4 months a year during school vacations.
The final alternative is to just leave the properties empty like foreign buyers do to park capital, or let my sister or a public school teacher live in them for way below market. It’s not the wisest financial decision, but at least it helps someone live a better life in expensive San Francisco.
Congrats on your purchase and expanding family!
Great read! Good luck to you, I am looking to trade up to a bigger primary mainly for the school district. Currently have a second home(weekend) and 1 sfh rental. Dilemma is to pay cash from sale of existing primary(800k equity) plus cash if needed or something in the 1.5 million range and get a mortgage for the balance. Not sure if it’s worth carrying it for 10 plus years for real estate appreciation. This is in the NY area.