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. It hasn’t taken brains to make money in 2019. Only discipline.
But what about the future?
Although I have a new aggressive passive income target goal of $350,000/year, I also don’t want to just save and invest everything. It’s important I also use some of my money to pay for a better quality of life.
If only I could find a way to make money and enjoy life better. Stocks and bonds don’t provide any utility. Nor does private equity or venture debt.
The best way I know how to potentially get both is by owning an amazing primary residence that also appreciates in value. My itch to own more real estate is back, baby!
The Easiest Real Estate Investing Strategy
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. Enact this strategy every five years, and in 20 years, you’ll have a nice three-property rental portfolio plus a primary residence. Then you can retire by 50 and live the good life!
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 felt that 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 and 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 and 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, but 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 the most undervalued and 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.
Remodeling the house would also be a less stressful experience this time around because 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 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, partially rent out the house and keep one level as the Financial Samurai office, or 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!
Time is of the essence.
I’m curious to know whether or not you think it’s worthwhile for me to pursue this house. Not only do I think the macro picture is looking more attractive for buying underperforming real estate, but I’ve also found the ideal house that fits my family’s needs.
The alternative is to just keep all the investments just the way they are and 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 and buy a house overlooking the ocean or a property one block from the beach if he gets in. Those properties cost 50% – 100% more, but maybe not if the luxury market in Honolulu remains weak.
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