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
- 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.
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.
70 thoughts on “The Easiest Real Estate Investing Strategy To Build Wealth”
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.
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!”
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.
I enjoyed your post. Talking about “panoramic ocean view properties in San Francisco as the most undervalued and lucrative real estate investment opportunity over the next 20 years” is such a breath of fresh air compared to delving into all the negative issues about California. You said two things in this post that I think would make great future blogs topics:
1. People should consider owning at least one property in a “Superstar City.” Your children will thank you in the future! What criteria defines a Superstar City and why will our children thank us for owning a property there in the future? Is it strictly financial? Or, are you also saying that it would be nice to give our kids the gift/enjoyment of a home in a great location that they would never be able to afford on their own?
2. Ridesharing has been a transformational game changer and it will benefit properties a little farther away. I’m fascinated by this topic. It not only benefits properties a little farther away, it enhances the quality of life for people who live farther away. I think it would be interesting to identify the Bay Area neighborhood/communities that are benefiting from this phenomenon in terms of property appreciation; less stress (financial and physical) on the part of the commuter; and greater quality of life enjoyed by the commuter/family.
Finally, I would urge you to be cautious in your move to Hawaii. I think you will greatly miss your ability to “be in the game” up close and personal, hunting for real estate gems and making observations within a city that could possibly regain its throne as a Superstar City if it would overhaul its politics.
The better thing to do is to spend $2M buying a commercial property generating 5-5.5% returns, and rent a house with the income.
Probably true. The problem is finding that house to rent because they want to sell this house. Finding commercial property to invest in for income is much much easier.
Check out: https://www.financialsamurai.com/real-estate-investing-rule-rent-luxury-buy-utility/
Hey Sam, really interesting post. You are in an enviable position, great job. Go for it!
I’m interested in the logic that keeping your old houses as rentals is a good way to build wealth. In Seattle (and SF too), rentals as an investment provide a relatively low return on equity even before you even factor in typical rental expenses, like vacancy and maintenance of 1-2% of the home’s value.
Most of the simulations that I run show around a 3% return, excluding appreciation. Now, I’m keeping this simple and not factoring in lower tax rates, depreciation, etc.
My current house for example, where I have a 60% equity to value ratio would bring me about $8-9K per year before taxes, even at 100% occupancy and $0 in maintenance. Add those costs in, and I’m lucky to break even. This is on an $825K property.
Is your logic that if you are holding property in a good market, that the appreciation will balance things out, or that over time, it’s a relatively low risk investment?
Every market is different. In Seattle, and other places like San Francisco, New York City, and a lot of the other international cities, Wealth Potential really is more on capital appreciation rather than rental income.
In San Francisco, for example, you aren’t making a rental income profit until about your three after putting 20% down.
People should consider owning at least one property in a “Superstar City.” Your children will thank you in the future!
Sam the Real Estate typcoon – sounds good!
Sam – I am curious why it is generally not recommended to have the sellers agent represent you. I struggle with this in my own dealings as a buyer because the buyers agent already has an incentive to sell the house at the highest price possible due to commissions.
As you are doing, getting the selling agent to represent the you as the buyer gives the agent an incentive to sell to YOU above all others.
I believe it was a post of yours that said always beware of people who make money off of transactions. With technology today, what real value do agents bring? This is also why I’m bullish on companies like Redfin. I think the real estate agent is a dying breed.
I think it’s tougher to be there real estate agent as well. Commissions must come down to the technology.
The reason why it might not be the best for the listing agent to represent you is due to the Fiduciary duties they have to get the best price possible for their Sellers.
But if you know the market well and you know what is considered good value, I think it’s worth giving a shot. You also need to know what to look for in the contract at each stage. Wealthier buyers often use lawyers to dissect contracts as well.
Sam: I did exactly what you’re proposing a year ago (with the exception of moving in). I purchased a $2.1M duplex in Golden Gate Heights (3.200 total square feet), all-cash, and beat out another offer possibly because I represented myself and waived any buyer’s agent commission. One drawback is that soon after purchasing the property, the city appraised the property at $2.5M and has since assessed me back taxes and raised my tax basis. One of the arguments that the Assessor’s Office has made is that I didn’t use a real estate agent and therefore the bargaining wasn’t at “arms-length,” i.e. they suspect the seller’s agent took my offer because he doubled his commission rather than getting the best offer for his client. Still a good deal but if I were to do it again, I might get a friend who’s an agent to represent me and agree to waive a couple of percentage points to the seller. The annual difference in the property tax can add up over time.
One other quick tip- if you’re interested in pulling out cash after you close, it’s not easy and you should expect to pay a higher mortgage rate than market average. I used Christian Low at B of A (Stonestown) and he was great. Six months after he helped me get a nonconforming commercial 30-year loan at 4%, they let me buy the interest rate down a 1/2 point for $750 flat- no paperwork, no appraisal.
Wow! I’ve never heard of Earth city appraising your property 35% higher after just purchasing it. Did you fight it? Sounds pretty shady by the city.
If you’ve been looking at houses every month for the past five years and this is the only one you’ve seen with all the features you desire at a price you’re willing to pay, I say GO FOR IT!
Remodelling will be much easier this time around since you will be living in your current primary residence rather in the new place while the work is being done. Being only a block away makes it easy to keep your eye on things.
As for the hassles of being a landlord of multiple properties, well, isn’t that what a property management company is for? I’m sure you would do all the necessary research to find a good one. ;)
Besides, having a family vacation casita a block away would be priceless. Your extended family members might extend their vacations indefinitely. LOL
Although I have no doubt remodeling will still be a very painful process. But the sweat equity is nice once it’s done. I always feel amazing after a remodeling is complete. A great sense of accomplishment.
I also would love it if my parents and in-laws stayed for longer. Life is short. I wanna maximize my time with them. Having their own separate place to stay close by is a wonderful solution.
I’m curious to see what you think about multi-family units. Have you given that any thought?
My thinking has been, at least as far as investments goes, to invest in multi-family properties rather than single-family homes. If I could go back in time, my first real estate purchase would have been a duplex or bigger. I’d have lived in one unit and rented the rest until I needed to upgrade for family growth.
My reasoning is that you can scale up to the point that you could hire a manager and still cover the costs of vacancies. With a single family unit it’s either 100% occupied or 0%, obviously. With multi-family units you can scale to a point that allows you to remain profitable at 80% occupancy, or whatever the number happens to be.
Of course, you could manage the properties yourself and pocket that extra ~8% revenue.
What do you think Sam?
Buying a multi family property, a two unit or four unit, is absolutely a good idea if you don’t need the space. I did write about buying a multi family property versus the single-family property I bought in 2005.
Financially, it would have been better to buy a two unit building in San Francisco instead.
Check out: https://www.financialsamurai.com/what-type-of-investment-property-should-i-buy-a-single-family-home-condo-or-multi-unit-property/
I love the “buy 4 places over 20 years approach”. This has been the basic model in my head, though I haven’t been able to put it in such clean terms or timelines. In my head it came out to something like “I’m going to buy a place… and then another… and then at some point another.” I currently own one and am looking to own a second in approximately a year.
I think you should definitely go for it! From what I’ve read, you have a very strong understanding of the market (putting you head and shoulders above most). I also think you’re completely correct in the assessment that “places with a view are likely to just keep going up.” As my uncle likes to say, “they’re not making any more land”. It’s pretty straightforward economics – there is a very fixed supply (sure, you can keep building up, but even that is limited) and ever increasing demand as population increases and more people can afford it.
That sounds quite exciting! Reminds me of one of my friends who put in an offer on a house down the same block from her parents. My friend, her husband and kids had all been co-habitating with her parents for a couple years after they moved back to SF from the east coast. They got lucky on their bid and got the house at a good price and then proceeded to remodel it for about 8 months before moving in. It was a lot of logistics to upgrade, but everything ended up working out great for them. Now they all have more space and she’s super fast walking distance from her parents so she still gets tons of free child-care for her kids and can also help out her parents with various things too.
I know the area and my inlaws live in Golden Gate Heights for 40years. My recommendation is no. 2mill fixers in the area is not worth it if you plan to live and then rent out after 5 years. The rental rates in that area is not has high or desirable because it’s up the hill and not close to public transit and as walkable compared to inner/central/outer sunset or west portal/Parkside. The streets are narrow and difficult to drive/up and down the mountain. The steps and sidewalks are narrow and steep. It would be hard as an future investment as rental.
As a primary house, it’s great area because of the view/seclusion and unique floor plans/exterior designs. The typical design is a hillside design with limited backyards and flat ground area. The rooms size has nice widths but not much depth. Great place to raise a family for the long term +10-20years.
For renovation budget, depends what you plan to do but if you do a full gut/renovation, it’s going to require seismic/foundation reinforcement. If you limit it to just kitchen/bathrooms, you wouldn’t trigger the code requirements but you limit your upsize valuation to 3mill. So to get to 3mill valuation you will need to spend 500K+ for both structural, MEP, interiors + exterior. Because with 3mill there are a lot of choices that would trump this area and it’s microclimate/accessibility. The view itself is not worth that much because most of the time it’s just fog from ocean beach.
If you want do do a fixer right, then the buy price should be ~1mill and then you can spend 500K to do proper full gut/renovation and carry old tech/outdated safety standards, comfort, design taste. 1.5mill will give you more upside to 2mill with the same amount of gains and rental potential. 2/3mill SFH as a rental is a liability without additional units/renters. You would have have 2-3 smaller midsize SFH to rent out then to have 1 3mill SFH rental.
At that point 2-3mill, just keep the money in the stock market and collect interest/dividends and be liquid.
My 2 cents, but I would pass unless you have another angle advantage (you are an architect/engineer/permit expediter or contractor). Otherwise you just exposing yourself more liability and more people that can clean you out.
I love this feedback, thank you. Where do you currently rent or own?
One of my hopes is that there is a continued belief that it is foggy all the time in Golden Gate Heights or the inner Sunset. This bias allows me too more aggressively negotiate on price and keep competitors away.
It’s not more foggy that anywhere else except for the Mission District. Far from it and I have lived here every day for over 5 1/2 years now. The views are spectacular, and watching the sunset is amazing.
Another reason why I like to buy property away from downtown is due to the proliferation of cheap ridesharing options. What are used to cost $25 to get downtown by taxi now only cost five dollars by Uber pool. Ridesharing has been a transformational game changer and it will benefit properties a little farther away.
I’m not looking mainly to profit, which is why I don’t wanna buy a $1 million fixer. I am looking for a slightly bigger house to improve the quality of my family’s life.
Check out: https://www.financialsamurai.com/invest-in-real-estate-for-capital-appreciation-rental-income-or-lifestyle/
I live in Parkside and bought a squat house from a busted developered underwater and torn it inside out and rebuilt it from scratch. I did the whole transaction on my own without realtor. Also i am in the construction industry and know what it takes to compete in real estate. I design and negotiated and ran my our construction and permits. Our family owns and manages about 6 SFH and apartments for 3 generations. Legacy assets and skills passed down. Small fishes but I advise many developers, investors and home owners. Everyone has an angle and it has to be more than just money on the buy side to compete.
My cents, sinking 2mill for a home you don’t plan to live in over 30 years. Just imagine the property taxes over 10, 20 and 30years. You would have to have significant outside cash flow to cover just the taxes. Rent isn’t going to cover it and I wouldn’t want to rent out 2mill properties high end renter. Just not worth the liabilities and risk one one source of income vs a stock market which could be diversified and liquidated at will.
Cool beans. This would be a home we plan to live in for a while. It is also a place for my parents/in-laws to move into if we complete the ADU process. And I believe panoramic ocean view properties are highly undervalued in SF.
We would rent out our existing primary residence, a smaller house / and / or keep it as our company office. Our existing house would be highly cash flow positive as a rental.
FYI, this new house is about half the price of what we can comfortably afford. Here was an experience in 2H2018 that I discussed at a much higher price point.
Some suggestions on your offer. To actually win and make a good offer, don’t come in with your first move with a low ball over all cash no contingency. For fixer, the risk is the cost of construction and how to finance construction after acquisition and duration of exit plan. The initial offer should be above asking and with contingency, so that you will be short listed at the top 5 offers but have an exit plan with contingency. Yes you will have to ante up into to see the true offers of your potential competitors. Otherwise, your offer can be downgraded at bottom or mid tier. You wouldn’t be able to counteroffer or see what your competitors are actually offering. If you went with just past sales, you are not going to be as accurate or “today’s offer for this specific property”. Your offer is just based on speculation and derivative analysis from data that everyone already knows. Your angle in has to be more up to date, which is what are the current offers today for this property. Only way to know is to offer more than asking.
Then after you are short listed, you can begin to collect more information on the range of the offer spreads. You should be within 5-10% of the high and low. the best is if you can get right in the middle of the bid spread.
Then you need to block and drive the rest of the short list away. Either by a better finance/close offer “all cash and no contingency”. Then block the low bids away with buyer’s inspection and disclosure. You need to pay a couple thousands to get a quality inspection and find every fault you can. Then over estimate the cost of construction to renegotiate your initial high offer down. Don’t use the seller’s disclosure and inspection report because it’s bias towards the seller. Saying there is less building construction risk. Use that combined with lower market sales data after renovation to show why the initial offer needs to be adjusted.
Example offer 2.3 or 2.5, get shortlisted with contingency. Get a buyers inspection report, readjust down to 2.0mill with inspection, block out the high bids. Then sit on it a bit and then do all cash at 1.9mill. But don’t show your final offer and hand and option on the initial offer.
The strategy you are using would be better for a post renovation home that was someone overspent vs market value, such as the one in Honolulu. In this cash you can low ball over because there is no construction risk only market value/buyers risk. Thus your money and all cash money is worth a lot.
In constraints, low ball over with fixer there is a lot of risk and the all money/cash over is not the only solution. You would need tackles 3 elements other than money. Thus is the reason why you need more than one angle to compete in the fixer market with other contractors/developers/flippers and realtors. Everyone else is also on the hunt except they have a couple of elements/skills/network that can mitigate 2/3 or 3/3 of the fixer’s risk. Using only cash to solve 1/3, you would just end up spending even more money. If you do end up winning, you have to wonder why you did, since you don’t have anymore in your arsenal in eliminate 2/3 remaining risk. So you could be playing yourself and into your own self ego and analysis that you can outsmart everyone else.
For your own family uses and you have the cash, I would say find something that was over renovated and undervalued and use your investment cash gains to negotiate and save your time/effort. Use your advantages in tech/investments/stocks/blogging/podcasting/etc to gain. Enjoy your fatherhood and family. Construction is a waste of time/money unless you are truly into it and get your hands dirty and put effort into architecture/design/engineering, permits, cost of construction, contracts, project management, scheduling, etc. It’s a professional career people spend 10 years developing. It would be the same thing as picking stocks can be done be people that invest in their 401K. It’s not the same skill sets or product or target audience/client.
I like the approach, although not that high of an initial offer. Will consider.
I kind of used this approach for the house I put in an offer on in 2004. I got a guy to do a thorough inspection after my offer was accepted and brought down my offer price.
The buyer of the house in 2017 used this approach to get me down about $30,000. But he offered $2.6 million initially, and then I countered at $2.8 million. Then he used the inspection to say there was ~$45-$50K of work. But I already knew this. We then agreed to $2.75M.
But I would have accepted $2.5M! :) Here is the whole recap. The details get fuzzier as time goes on, so I’m glad I write.
What are your views on you the market going forward?
“You need to pay a couple thousands to get a quality inspection and find every fault you can. Then over estimate the cost of construction to renegotiate your initial high offer down. Don’t use the seller’s disclosure and inspection report because it’s bias towards the seller. Saying there is less building construction risk. Use that combined with lower market sales data after renovation to show why the initial offer needs to be adjusted.”
Hmm plus you did write a letter to the seller insinuating you’d live there long term as a growing local neighborhood family. ;)
That’s why these “emotion based” letters are just plain silly.
Personally – If it get my price, I could care less if the new owner burns the place down for insurance $.
As a resident and owner of a property in Golden Gate Heights the past 3 years, and a guy that read about Golden Gate Heights on your blog 10 years ago, I really do understand the appeal.
Ocean vista, peaceful neighborhood, relatively pretty good parking, multiple parks, and just all around beautiful. I even love the intense fog. Makes it very eery.
My questions would be,
Does it actually have a usable back yard?
How much of a fixer upper are we talking about?
How many cars can fit in the garage, and do you plan to convert some garage space into living space?
Detached or semi detached or not?
If renting out, can you rent out each of the 3 floors as separate units?
And are you sure it will sell for 2.6 once renovated? I do notice some weakness in the 1.8M plus category of houses in Golden Gate Heights, even renovated ones.
For example, would the property be better than this one? I went to the open house out of curiosity, and it was very nice.
Or how does the property compare to these:
I’m sure you’ve already seen these, and are way more informed than I am, but just adding my 2 cents.
I’m not sure there will be strong demand for a fixer upper, so I’m wondering if waiting until they list, then coming in with a 1.8 or 1.9 all cash offer will be enough.
Yep, usable backyard that is flat. About 1000 ft.². And then I can build out a deck extension for another 300 ft.² if I wanted to.
One of the attractive things about this property is the ability to build ADU. Stage one of the remodeling cost will be about $100,000-$150,000. Stage two to build downstairs out and gain extra square footage would be another $150,000 – $200,000. I’m very excited about the expansion potential.
I also like that the house is on the west side of the street, where the views are much more amazing. The first house you list was good value, but on the east side of the street where houses block most of the view of the ocean.
This house will be nicer than the other two houses you listed, and more functional. I did want to put in an offer for $2.5 million for the second house, but it’s sold very quickly for full asking. The downstairs rooms were very dark, and there was no backyard at all. It’s a great house, but it had its challenges. The blind corner where it was situated is also a little bit dangerous for children.
I like the third house. It will also need some remodeling as well.
Do you own a property in Golden Gate Heights? If so, when did you buy and what is your price point?
I’ve got a lot of ideas and strategies for this house. It’s going to be fun!
Ah got it, sounds like this house checks virtually all the boxes!
From your first description of the vistas, I knew it would be 270 degrees west and north, which commands a premium. Else you wouldn’t be pleased about it.
And yep, I feel your excitement at building an ADU absolutely adds value, and you aren’t lowballing the cost, so thats accurate.
Also, I bought in Golden Gate Heights a couple years ago, and it was a “starter” home around ~1.37. Not panoramic views, but you can see the sunset into the ocean, which itself is really soothing. I can’t imagine how amazing panoramic views must be!
If you don’t mind me explaining, we had a few things going for us.
First was that a bunch of similar houses with similar price points and cost had offer dates earlier in the same week. Our houses offer date was Friday, and we suspect the competition, like us offered other houses during those earlier dates, and did not offer our property on Friday.
Secondly we kept tabs on how many disclosures were sent out, and once we learned only 5 were sent out, we forgot about the other houses and went in on this one.
Thirdly, similar to your situation, we offered 80% cash, 20% mortgage. So we won despite the lower bid amount.
I do have to say, our house is just a half block from the muni 6 line, which was a must. But I suspect your property is in a class where a bus route isn’t important.
Out of curiosity, would there be an added benefit of parking your money in real estate instead of stock should the market tank?
If you get that house for say, 1.9, I can’t imagine it would go down in value by more than 100k, or 5% . 2,600 sf houses with panoramic views, backyard, in Golden Gate Heights, simply DO NOT go down further than 1.8M no matter what, in my opinion
Yeah, being able to size the ocean AND the Bay is pretty unique. I’ll have to share some pictures of the views at least if I end up taking it down. The views alone are worth $2 million+ to me. Then you get a house along with it! lol
Sounds like you got a pretty good deal. Always nice to pay LESS than competing buyers because you’ve been able to put more cash up front.
I remember when the economy tanked in 2008-2009.. my house went down slowly, and not as much as the S&P 500. The thing is, I didn’t stress nearly as much as I did w/ my equity positions. I just enjoyed life in my house. Tried to sell it in 2012 for $1.7M with no offers, and only a low-baller at $1.5M. Then sold in 2017 for $2.75M thank goodness.
So going backwards by $750K and buying this 30% cheaper house, while my investments and income have grown is a conservative move. Folks need to understand the RELATIVE numbers when making decisions, not the absolute numbers.
If it could improve you and your family’s living standard and make money on the side then that’s a wonderful combo :) doesn’t hurt to submit an offer.
I am hoping that your entire portfolio is way more than 2.25m. Once you spend 2m on the house plus renovation, I sure hope you have money left over to eat :)
How long would it take to liquidate everything and get the 2m in your bank account to pay cash for the house?
How much of your entire portfolio do you have to play around with regarding real estate investments? Is it a good idea to put all your eggs into one basket?
I guess if you did sell in a few years you could recoup the money plus profits.
True, it might be tough to eat for a little bit. But I’ll survive with my new initiative of cooking at home. Besides, I could lose 10 lbs!
It takes three business days on average to liquidate holdings and settle the funds. When you make an offer, you don’t have to pay all the money upfront. It’s usually just 3% earnest money as a deposit, so in this case, $60,000 which I have in cash.
How are you? Tell me something about yourself and what is your view on real estate. Are you a buyer now or a seller? Do you own or rent?
Thanks for the reply, much appreciated.
I can definitely lose 10 pounds as well! I have a 1 year old daughter and seem to have gained a lot in the past year haha.
I am trying to learn all that I can these days about personal finance, investing , real estate etc.
My wife and I just recently bought a house in North Carolina this past November. Probably shouldn’t have bought but it is what it is.
We financed our mortgage with little down. However our PMI is only about $47 a month. And I just refinanced to a 5/1 ARM at 3.5 %. Was on a 30 year at 5.25%.
We bought house for $280k and make $125/ year.. we are not house poor which feels good.
I very much enjoy all your posts but in particular your real estate posts.
Thanks for all that you provide for the community, Sam.
I’m glad you and I are looking in different neighborhoods for another house haha. But on a more serious note I’m worried about CA politicians gettingbthe new rent control law to also include single family houses. The tenant association fully funded by the government is a strong force to pick up a fight with :(
Hey Sam, you should get your RE license now that you have a little extra time on your hands. If you decide to buy another property later, you can negotiate with the listing agent to have some of your commission applied to reduce the purchase price. With prices in the $2 million range, you could effectively earn an extra $50k on the deal. If you end up getting the house for a cheaper price, you get the benefit of the lower property tax assessment, too. :D
Or if you still wanted to grease the wheels with the listing agent–very smart move, btw–you could offer to take a smaller commission, but still get some of the money back (or a price reduction).
It’s a good idea. But after this property, I don’t think I’ll be buying another property for 3-5 years. No more money! haha.
So I have to weigh the benefit of allowing the agent to double earn versus my time and the money to earn.
“Ever since selling an SF rental property in 2017, I’ve been a happier man”
You have answered your own question!
Stay with real estate crowdfunded properties if you have the preferential flavor toward RE investing and do have the mental aptitude to take on big dip in concert with the stocks market.
I have to do this since there is no other gentler way of sticking it – DOING THE SAME THING AND EXPECT A DIFFERENT RESULT is a classic definition of ….!
Thank you for writing this. Always enjoying reading your article. I voted for option 1. I’m having similar questions for myself. I reside on the bay area, on the peninsula. Would love to grab coffee/tea one day if you are keen.
“Would you buy the SF ocean-view property one block away?”
I can’t vote on this given the options available.
Sorry, Sam, but I would go with something like:
“No. I feel that I do not wish to invest in the San Francisco area as, after a decade of amazing growth in prices, I cannot shake this feeling that the situation is not completely unlike the Tokyo Real Estate Bubble.
Further, I do not wish to live in California because, no offense intended, I believe California has a number of deep problems and seems to show few signs of being willing to even address them, much less devise and implement realistic solutions.
And finally, I do not wish to live in San Francisco, specifically, until the problems with the homeless have been largely alleviated, or at least turned a corner, and the city no longer requires permanent employees for the purpose of cleaning up their feces, but I see no reason for optimism on that point at this time.”
That sounds harsh but I only know what I read. I haven’t actually visited SF in several decades.
No problem. Things change over several decades. But it’s easy to get stuck in the past and think how things were are the way they will always be.
It’s like hiring an internet and always seeing him as an intern even if he becomes a CEO. Or like having a child, and always seeing her as your little girl despite changing the world.
Interestingly enough I reread your article from earlier this year on Honolulu real estate and checked Zillow and saw that 4534 Aukai never sold, was withdrawn from the market. As you said then, and say now in this article, best to know your market. I’m following the HNL market and there seems to be a lot of delusional sellers out there. Those that are priced to meet the market conditions are moving, those who believe their value has appreciated in the past years, well good luck with that.
I voted yes, and randomly chose the reason. I thought all reasons were equally good. Good luck!
If I were you I’d move forward with it. It seems like you really enjoy real-estate buying, renting, selling etc. Since you enjoy it and have the time to do it, the choice is simple.
“One of the most straightforward ways to build wealth is to buy a primary residence, enjoy it for several years, buy a new primary residence, and rent out the old one.”
Being moved every 2-4 years, this was a fairly common practice for military members in the mid to late 1900s. What made it doable was assumable loans without qualification checks.
The fact that, real estate was booming so fast that everyone could make money, even just by buying and selling every years, was part of that as well.
I take for granted that you know the property and the neighborhood because of your research and you live in the area. Since it’s a desirable property and expected to be that way for the long term, I would buy it. Despite others’ concerns about remote management or construction hassles, the likely gains are worth it. If the market really tanks, then it only matters if you can afford to hold onto it or how much you would lose if you had to give it up. I would finance it instead of using all cash. Start with the stead state in mind: How much rent will the property bring in? Then calculate the amount of debt that the property can handle comfortably. That debt preserves some of your own capital to lower your risk and opportunity cost of using your own money. For the purchase and remodeling, I would also finance with construction financing, private lenders, partners – something – again, to preserve your own capital and investments. After the remodel, get a cash-out refi at the steady state loan amount to pay everybody back. Better to keep your own capital for opportunities and to solve problems than to concentrate so much of your own capital in one illiquid deal. If there is still a lot of equity left after the remodel, I would add a HELOC for still more liquidity.
I voted wait but not necessarily because I can predict a crash. More because I suspect if you do end up moving to Hawaii having real estate in San Fran might be suboptimal. If you can guarentee you’d be comfortable being far away from your properties then go for it. But if you bought and then changed your mind to sell when you move it probably won’t end well.
Then again if you planned to move more like five years from now I wouldn’t hesitate either. It’s the timing that would bug me.
Good point. My thought process is to hire a property manager to manage all SF properties while we are away. One of my biggest regrets was not buying a 2/2 condo in Manhattan in 2000. I think NYC and SF are going to mainstay international cities.
Also, I’m not buying a high end house. This house is in the affordable range for many dual-income workers in SF with 10 years of experience + maybe help from Bank of Mom and Dad. I passed on the $4M+ house in 2018.
Good luck closing the deal. It sounds like a great house. SF is such a strong market. I don’t think you can go wrong if you find the right deal. Would you really pay all cash? The interest rate is so low now. It’s almost free money the rate you can get. I guess you can refinance if you want to take some money out. Nice job connecting with the seller.
Probably. But, I can also offer a no-financing contingency, which is like paying all cash from the seller’s perspective.
Normally I’d remind you of those disrespectful and damage doing tenants you were fed up with last time.But you are talking about a higher rent district with higher quality renters for the most part.
For me, I’m worn out and need a break from that kind of stress. Seems that you
are young enough, smart enough, and heeled enough to take on the adventure.
It will probably work but we should keep in mind what sounds good on paper is not always the same when humans are put into the equation.
Just remember those three lifetime rentals and the problems that can incur may not be as attractive when you reach a certain age. Then there’s the taxes when you sellout if it doesn’t workout…… Everyone’s dream is different.
Total agree. Having terrible tenants is terrible.
So one very intriguing idea is to just keep our existing property as the Financial Samurai office and forgo the rental income from outside parties.
Related: One Way To Allow Your Business To Last Forever (build a conglomerate)
I do know someone who has done just that ( using former home as office) near Northbeach and walks to work!
It would be a dream come true to walk a block away to work, have some separation space, and an obvious business expense. To then use the property 20 years from now to house my loved ones could be good.
I enjoy your column and feel like I’ve learned a lot. My question is what if the real estate bubble bursts? How would that change, if at all, your game plan?
Then I lose money, but get to at least enjoy the house and live my life. I also have a $450,000 “buffer” from the paper profits from my other investments, so that equals 20%+.
I bought my other house in 2005 and owned it through the financial crisis for the next 12.5 years. It went up in value, down in value, and then I sold in 2017. Looking back, things weren’t that stressful, despite having a $1.2 million mortgage. We just kept on living and refinancing our mortgage.
In this case, I have the ability to pay cash now. I think there’s a 30% chance we see another 10% decline from here. But Spring is coming, and I feel there is going to be a wave of buyers taking advantage of opportunity.
It is a no brainer. Ocean front property is rare and will appreciate more plus you can always rent it if you move and use a heloc to buy your next house in HW. Good luck on an accepted offer!
Sam, first time commenter after reading casually for a couple of years. I’m a fan of FS.
Buy it, do upgrades, and use a HELOC for that Iolani or Punahou tuition in Hawaii if needed.
Welcome to the islands, congratulations on the great find.
Sounds like you have done your research and as long as there are no surprises looks like a great potential investment for you. The fact that it is conveniently located from your current home is a huge bonus.
I am curious why you feel that this home will appreciate quite a bit yet feel the Honolulu market will not. If your game plan is to move to Hawaii perhaps you might be better off locking in a home there at today’s prices and interest rate as you can’t predict the potential increased cost if you do wait 3 years.
Good question. Different economies and different segments of the market.
SF economy is stronger than Honolulu’s economy because Honolulu’s economy is smaller and more dependent on offshore capital.
The homes I’m looking at in Honolulu are currently 50% to 100% expensive because they are higher end homes and larger lots. The luxury market in Honolulu has been weak since ~2015-2016. My hope is that it remains weak until 2022 when it’s time for us to aggressively look. But we’re not set on owning one of those nice houses in Honolulu. I also passed up on a house in Fall 2018 that was asking around $4.5M in SF.
The <$2 million market in SF is still relatively strong b/c that is close to the median price ($1.6M) where most dual income couples in their 30s can buy on their own.