I’m about to make the biggest financial decision of my life and I need your input.
Remember how I was saying in a previous post that I thought there would be a two or three-year slowdown in SF real estate starting in 4Q2015 before its off to the races after Airbnb or Uber IPO? Well, I was wrong! 2016 was a relatively mild year with low single digit returns partly due to an influx of new condo construction saturating the market. However, 2017 has turned out to be very strong with the median single family home price surging to $1.5M, an all-time high!
I’ve been very fortunate to ride this SF real estate bonanza since 2003. But after a recent bad tenant experience, I’ve been more open than ever to selling.
What I realized after Googling “should I sell my rental property” is that I’ve been thinking about doing just that since 2013 when one of my own posts showed up on the front page: Should I Sell My Rental Property And Simplify Life? At the time, I was going through another annoying situation with a condo neighbor. It’s always a trip when your own stuff pops up in search that you forgot you wrote.
As fate would have it, just two weeks after my tenants vacated, I received an offer that might be too good to pass up. Given it’s a good idea never to make big decisions when emotions are high, I thought I’d lay the situation out to gain some objective feedback. Let me first provide some background.
Housing Situation
* Bought a single family home in an established SF neighborhood for $1.52M in early 2005. Put down $304,000 (20%), which was everything I had at the time.
* Four years left on an $810,000, 5/1 ARM at only 2.375%. It would be a shame to let this rate go after fighting so hard for it.
* Have a written offer for $2.742M (+80% higher than the purchase price). The original offer was $2.6M, but I countered at $2.79M. After a couple back and forths we agreed to $2.742M plus a $10K credit I’d provide at closing.
* The buyer hasn’t released financing contingency yet, but said his bank is set to fund on June 19 or June 20. This gives me an out to cancel the deal before then if I find something better (buyer or renter) given I didn’t give him a financing contingency extension. I accepted his offer after he removed his inspection contingency.
* Was renting the home for $9,000 a month. After one month of searching, I haven’t found the ideal tenant for the price. I really don’t want to rent to 4-5 guys again. Hence, there’s a chance I may have to lower my asking price to find a more headache-free tenant.
* The 100X rule says that I should buy a $9,000/month rental property for $900,000 or less or conversely sell a property once it starts trading for much more than 100X monthly rent. At $9,000/month, the property currently trades at 303X monthly rent (25.25X annual rent). At $8,500/month, the property trades at a 321X monthly rent (26.75X annual rent).
* With my mortgage, it cash flows about $48,000 a year after all expenses or roughly $67,200 if you include the principal pay down. If the mortgage is paid off, then the property will cash flow about $7,200/month because the property tax is $21,888 / year and forever rising. I planned to pay off the mortgage within 10 years.
Why I’m Reluctant To Sell
* Commissions. I got the rate down to 4.5% from the traditional 5% – 6%. But that’s still $123,000 in commissions. The longer I wait to sell, the lower commission rates will go.
* Property Transfer Tax = ~$25,000. What a waste of money to enrich our bloated city budget for doing nothing.
* Long term capital gains tax = At least $100,000 even after the $250K/$500K exclusion.
* A property for my child to live in. Once you’ve got your housing expense covered, you can afford to live comfortably in even the most expensive cities. I can’t imagine what rent will cost in SF in 23 years.
* Step up basis. When I die, my child inherits the property at the market value not my purchase price. If he decides to sell the property immediately, he’ll pay zero taxes.
* Proposition 13 means I’ll have an artificially low property tax rate the higher the market goes.
* Capital appreciation. I believe San Francisco is one of the cheapest international cities in the world. Uber, Airbnb, Pinterest, Dropbox will all go public in the next 3-5 years, unleashing billions of liquidity into the SF Bay Area ecosystem. I’m surprised Pinterest was able to recently raise $150 million at a $12 billion valuation. I thought the company was going backwards.
* I’ve got demand at $9,000/month from 4-5 guys and $10,500 if I dare rent to six guys.
Why I’m OK Selling
* My original plan of living off my passive and semi-passive income streams in retirement is no longer necessary because I found a way to make a livable online income stream. If I didn’t have an online income stream, I would never sell. Related: Ranking The Best Passive Income Streams
* I was willing to sell the property in 2012 for $1.7M, but no buyers were to be found. When I bought my current house in 2014, I was willing to sell my old house for $2.2M but I decided to take some extra risk and hold on. Before I got my offer for $2.742M, I told myself I would strongly consider selling for $2.6M.
* I’ll still be long a single family home and a condo in SF after I sell.
* If there is a tech correction / recession, it’ll be nice sitting on a lot of cash.
* I’ll be following my Debt Optimization Framework. When you’re done with the working world, it’s a good idea to minimize debt to minimize the risk of having to go back to work.
* I’ve got a bird in the hand, which may never return if I let go.
* The $250K/$500K tax-free profit exclusion will go away next year.
* Supposedly I can 1031 exchange any profits over the $250K/$500K exclusion, meaning that I can pay zero taxes. I’ll have to double check, but so far all my research says this is true. Please let me know if you think otherwise.
* I won’t have to eventually spend $10K – $15K replacing the roof, $10K changing some windows, $8K painting the back of the house, $8K on a new furnace, and $15K for staging if I were to list my home on the MLS.
* I know exactly how I’ll reinvest the proceeds. Each investment should earn more than the current ~2.2% net rental yield (cap rate).
- $300,000 will go into Fundrise. If I can earn a 10% IRR over the next 5 years, then I’ll 100% match the rental income lost from the sale with much less capital required. My earlier investments have started to pay dividends, which I’ll write about in my 2Q2017 investment update.
- $300,000 will be invested in various national REITs for higher income.
- $500,000 will be invested in various tax-free California municipal bonds.
- $100,000 will be used to pay down my 4.25% vacation property mortgage. I should pay down more, but I just hate feeding a mistake.
- $100,000 will be invested in various equity structured notes with downside protection.
- $50,000 will be used to speculate in individual equity names.
- $300,000 will just sit in the bank as I patiently wait for a stock market or real estate market correction that may never come.
- $150,000 will be earmarked for long-term capital gains tax if I don’t do a 1031 exchange.
What Would You Do?
Graph by Paragon Real Estate Group. We are way past the previous peak in SF. Nationally, prices are more reasonable.
When I bought the house in 2005 for $1.52M, I felt strongly the house could easily be worth $2M in a short period of time. As a result, I invested everything I had and lived very frugally for years after.
If you want to experience financial fear, get a $1.2M mortgage at the age of 28 on top of a $460K mortgage you already took out two years prior for a condo with nothing left in savings! It takes iron balls to take this type of risk. Ah, to be young, stupid, and full of courage again.
Unfortunately, the financial crisis hit several years later, delaying my beliefs and giving me all sorts of ulcers. There was definitely a point between 2008-2010 when I thought I’d have to start all over again. It was a very humbling time period, but I kept the faith, partly thanks to this site and many of you.
When you sidestep a bomb in 2008 – 2010 and then dodge a bullet in 2012 after not being able to find a buyer, you begin to wonder when will your luck run out. I took a similarly sized risk in 2014 by buying my current single family home with close to a $1M mortgage while already having a $900K mortgage on the home I’m considering selling today. When you don’t have a steady paycheck, this is a risky move! But due to this decision, I’ve experienced double appreciation with leverage.
They say you can never lose if you lock in a gain. At the same time, I feel strongly San Francisco home prices will be much higher 10 – 20 years from now. What would you do? Gut it out as a landlord, hire a property manager despite the already low yield, do a 1031 exchange, or sell and reinvest the proceeds in various higher yielding, lower maintenance assets?
I feel I’ve reached a clearing price where I’m somewhat ambivalent with either outcome. But I know I’m missing something since it’s hard to be completely emotionally detached from a home I spent 10 years of my life in. Heck, Financial Samurai was born in this house!
Update: I ended up selling my SF rental house for $2,740,000 and reinvesting all the proceeds in 100% passive investments. I am so much happier not having to maintain this house now that I’m a father. Truly, managing rental properties is a young person’s game!
Loading ...Wealth Building Recommendations
Explore real estate crowdfunding: If you’re looking to buy property as an investment or reinvest your house sale proceeds, take a look at Fundrise, one of the largest real estate crowdfunding platforms today. They allow everyone to invest in mid-market commercial real estate deals across the country that were once only available to institutions or super high net worth individuals. They are the pioneers of eREIT funds and they are creating an Opportunity Fund to take advantage of tax-efficient Opportunity Zones. Thanks to technology, it’s now much easier to take advantage of lower valuation, higher net rental yield properties across America.
Less than 5% of the real estate deals shown gets through the Fundrise funnel
Shop around for a better mortgage rate: Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible from them or your existing bank. When banks compete, you win. Interest rates have come back down.
Updated for 2019 and beyond.
Why is a source of stress bad? It keeps you mentally active and thinking.
Please do not sell.
Learn and grow from keeping it.
Try to remember when you were younger, with more energy and vigor. You did put everything you had in mortgage. Why chicken out now?
Sooner or later, 10-20-30-40 years from now, you’d be rewarded for this so-called-stress.
My 2 cents.
Thanks for sharing your opinion. How many rental properties do you have and how did you deal with the stress? Thanks
We have 6 rentals. We have found that once we set up processes to follow, stress was considerably reduced. We know exactly what to do and when. No thinking or re-thinking. Just follow the process. We screen tenants well and make sure to get previous landlord references – very important. With new tenants, we visit the property a few months after they move in. You will usually know by then if you have a problem tenant. We have at least one visit a year after that. We do smoke detector and water leak checks (safety and maintenance) – gets us into every room. We also take care of any minor maintenance issues then. If there is any significant tenant caused damage, we deduct from security deposit for repair costs with 30 days to replenish. Of course, all of this depends on your lease and your state’s landlord tenant law. We also incorporate uniform standards and guidelines for housekeeping similar to that used by the state housing authority. We don’t usually need to do inspections and corrections, but it’s all there and the process is explained if needed. The tenants are well aware of our expectations. Train you tenants from the start, or they will train you.
I follow Jom Rickards and Josh Crumb for their gold analysis. Have you considered converting some of your dollars to physical gold to protect your purchasing power?
Your initial purchase price of $1.52m would have been worth approx. 3551 oz. of gold in March of 2005 ($428/oz. as of March 31 2005). That same amount of gold would be worth $4.44m today ($1250/oz.).
You’ve used you’re financial leverage to acquire an appreciating asset and now would be a good time to store some of that fiat currency to sound money, gold. House price has virtually not changed much since the 80s if you paid in gold. As long as the central bank continues to increase the money supply, the dollars purchasing power will decline and the price of gold will increase over the long term.
Love the analysis Sam, both sides have their pros and cons but I’d like to factor in your point about SF being a cheap place to live internationally.
The Median Family Income is $77k in SF, but to make the analysis look more palatable let’s round it up to the Average Household Income to $105k. That puts the median price divided by the mean price (overly generous) at a staggering 14.3 — not cheap, by any stretch of the imagination, anywhere.
Moreover, the argument that prices should be going up due to a “housing shortage” doesn’t seem to hold water. Sure if there are a shortage of homes and people can afford them then yes, housing should go up. But there is currently a shortage because there isn’t enough low to middle income housing, these people could never afford to buy your home in multiple lifetimes… but somehow their desire to own a home drives up the high end property market? To quote Shakespeare “Something is rotten in the state of Denmark.”
Given how the market outlook with inflation (there wouldn’t be any if it weren’t for energy and housing prices), interest rates going up and the lack of a major cash influx outside of Uber and Airbnb (and who knows when they will ever go public, and seriously who else is getting an influx of cash? In today’s marketplace only companies who can be total monopolies get major funding — where is the anti-trust law enforcement when you actually need them), it’s just hard to justify not selling (what I believe to be) at or near the peak.
Hi Ryan, thanks for sharing her thoughts. It’s true, valuations in San Francisco and other coastal city markets are much more expensive. The same goes for growth stocks versus dividend paying stocks. You pay up for capital appreciation which may continue or it may reverse itself. That is the camo one takes one being a higher price: Growth.
You’ll enjoy my next post on this topic.
I think it boils down to cash flow/ liquidity requirements vs holding an asset/ other opportunities
1. Cash: Do you need the cash? Why do you need the cash?
2. IRR: Can you generate better yields than what you have now.
I know very generic views. But I’d also say count your blessings, many people would love to have your difficult decision.
1) Don’t need the cash now. But in 2-4 years when I move back to Hawaii, I would like to have the cash to buy a nice home there. It’s easier to sell on the way up, than on the way down where vultures come out w/ lowball offers.
2) Yes. At a ~2.4% net yield, the hurdle rate is low. Hard to say what property prices will do after the Airbnb and Uber IPO in the next couple of years (probably up). But I don’t see prices rising by more than 4-5% a year.
I’m definitely counting my blessings often. Especially the one where I didn’t sell in 2012!
I agree with a previous comment….keep this asset in your family (hopefully in perpetuity). I lived in Asia also and my time there made an impact on my view of housing. I live in Vancouver and there appears many parallels between the SF and YVR housing markets…the least being rapid price increases over last 5 years. Sadly our median incomes are not as beefy as our SF friends. We own a detached home in Vancouver suburb and then part owner in farmland outside the city. We purchased a duplex a couple years ago, 5 minutes from our downtown core in a gentrifying area with the explicit purpose of securing future housing for our young girls. There are definitely better investments out there, but we are future use-buying. Vancouver is locked in by the ocean and the mountains…nowhere to build. The girls may or may not live there in the future (and we may or may not provide housing for them…based on their work ethic and attitude), but it will be there for them when or if the time comes. Added benefit….this is insurance they are not living with me forever! Good luck with your decision.
What happens to SF property if a natural disaster like an Earthquake occur? It happened in Christchurch New Zealand several years ago, people can’t sell for half of what they paid previously. Businesses have still not recovered and young people left in droves, rental is dirt cheap now. Property is never a guarantee of rising prices! If you’re ok with that risk and you didn’t overpay initially by all means hold it but nobody knows what can happen 30-50 years down the track.
Is it really that tough in Christchurch? If you have an article about this situation, I’d love to read it.
Yes, SF is near a fault line. And yes, there was a big earthquake in 1989, almost 30 years ago. I spoke to my neighbors (70+) who owned and were present during the quake. They said nothing happened to their buildings, just a little rattling.
There were areas in the Marina that didn’t do well, but they’ve ALL been retrofitted since as required by the law.
You have done a great job with the money side of the equation-it seems pretty balanced and either way is not terrible. Have you considered the time implications? If you don’t have to do the upkeep/manage tenants, what will you do with your extra time? A big part of FIRE for me is having the time to do things I enjoy (enjoy even more than work, which I never hated…but still). I personally would sell if it is the least enjoyable of your income-producing assets.
Hi Sam,
I am actually having the same problem with a house I own. My solution is if I have to ask if I should sell I am not ready. So don’t sell!!! You will regret it big time!
I can feel the anxiety in your writing. :)
Best from LA
Gary
Interesting analysis!
But I like to weigh the pros and cons for everything, even the much smaller decisions.
(1) The capital gains exclusion is only available to your primary residence, not to rental properties.
(2) The 1031 exchange requires finding another qualifying property within 180 days.
(3) Query whether the transfer tax apply if you conveyed the property to a SPV and conveyed your interest in the SPV, rather than the underlying property.
I have additional thoughts if they are of interest.
Thanks for the interesting post. I voted sell. If you don’t need the income, which you confirmed based on online income, then the issues of being a multiple units landlord combined with the attractive offer that meets your terms seem to tilt to sell. the god news is if the deal doesn’t pan out, you are still in a good position cash flow wise (by lowering the rent), so this isn’t a fire sale.
Talk to your wife. She knows you better than we, and as the the closest people usually see us more accurately than we see ourselves she probably has many insights. This is based on the appearance that you are past worrying about money for survival and are currently trying to optimise for happiness.
She notices that the only time I’m stressed is when I have a property issue to deal with. I am seldom ever stressed anymore. So she is tilting me towards selling to have a happier life. Because you know how the saying goes:
Happy husband, household nirvana awaits.
I just made that up.
Hey Sam! I’m a long time reader, but first time commenter. Thanks for putting together this great blog!
I voted to sell the property, but after thinking it over for a while I have a follow up question. Do you plan on buying a third property in SF again if you sell? If so and you sell, you’ll have to make the difficult decision of timing the market bottom as well. You are going through the painstaking decision of trying to top the market right now and it’ll be just as hard in a few years to buy the dip at the right time. If you are confident that the SF property market will be higher in 20 years, just stay long your great property because making two timing decisions is unlikely to put you in a better place.
I only plan to buy another property in SF IF I feel there is a smoking good deal like I felt in the Golden Gate Heights neighborhood in early 2014. Now prices are up literally 30% – 35% in 3 years and I’m getting outbid (I bid on two properties this year). So I’ve got to find my new GGH neighborhood.
To sell, and then buy within a short period of time isn’t very efficient due to transaction costs.
So if I sell, I’d use the proceeds to buy a home in Honolulu, where I ultimately want to end up raising my child and taking care of my parents.
Hi Sam!
I think the choice is also defined by alternatives. So if you sell, where will you put the proceeds?
I made the choice recently to sell my flat to take advantage of capital gains tax exemption. My choice was also affected by experiencing a slowdown of growth in the equity in the flat.
I decided to move the equity to stocks because:
– Buy/Hold/Sell costs: The costs to acquire, maintain and sell stocks is much lower than property.
– Leverage: can be much more easily and cheaply added/removed via margin/options/futures
– Liquid: If you require funds, you can quickly sell part of your portfolio. With a property you either sell the entire property, or attempt to renegotiate the loan. Again, costly and slow.
– Tax advantage: I live in a country (UK) that provides a yearly capital gains tax exemption. You can take advantage of this with stocks, but the allowance would be too small for a property.
Sorry my post is so long. It is the right answer to consider before selling anything significant.
But here is your answer from my post:
* I know exactly how I’ll reinvest the proceeds. Each investment should earn more than the current ~2.2% net rental yield (cap rate).
* $300,000 will go into RealtyShares, making my total investment $560,000. If I can earn a 10% IRR over the next 5 years, then I’ll 100% match the rental income lost from the sale with much less capital required. My earlier investments have started to pay dividends, which I’ll write about in my 2Q2017 investment update.
* $300,000 will be invested in various national REITs for higher income.
* $500,000 will be invested in various tax-free California municipal bonds.
* $100,000 will be used to pay down my 4.25% vacation property mortgage. I should pay down more, but I just hate feeding a mistake.
* $100,000 will be invested in various equity structured notes with downside protection. $50,000 will be used to speculate in individual equity names.
* $300,000 will just sit in the bank as I patiently wait for a stock market or real estate market correction that may never come.
* $150,000 will be earmarked for long-term capital gains tax if I don’t do a 1031 exchange.
Cheers
Interesting decision.
I think the first consideration needs to be your current return on equity. If the return on existing equity is poor, that is a good indicator that selling now would be a good move. I like your allocation of fu da in the event of a sale, and I’d like to agree that in 1-3 years you can re enter the real estate market with another good buy. I’d also suggest investing in first deeds of trusts if you do sell. There are some great lending opportunities in real estate just beyond banks conventional underwriting. Typical yields are 6-8.5, safe LTV, responsible borrowers and very good asset qualit
However…you are fortunate to own a good asset in one of the most desirable areas in the US and one of the most expensive markets to enter into. I don’t see value dropping off considerably…building new supply is very difficult. My vote was to hire a manager.
Management is a $50-$100/hour job. There are numerous professional, competent managers in the sf market. Hire one, manage them and let your tenant continue to pay down your mortgage at the ridiculously low rate. You’ll getyour time back….I’ve done this with a group of properties in the north bay and don’t regret hiring management for a second.
Good luck. Nick
I hear you on the property manager. I found one for a fixed cost of only $125/month. That’s damn good value on $8,500 or more/ month in rent. I’m really leaning towards canceling the deal and going that way.
There’s an old adage about “you get what you pay for”.
$125/month seems way too cheap. They likely cannot provide you sufficient service at that rate, and something will suffer….mostly likely they won’t re responsive when it’s needed. Even at 5% that’s $425/month. You no longer will need to manage venders, and the general unease that comes when you start to enjoy your Friday evening before it’s interrupted by an “emergency”. In my opinion, the cost far out ways the peace of mind and getting my time back. I find I am way more present at home with my kids and family than when I was managing this stuff myself.
That is a good saying. Yes, the leasing agent/property manager isn’t very responsive on text. $125/month sounds too good to be true. But maybe I can get their “premium service” for $225/month! lol
They will probably run interference at least
Deferred sales trust?
Sam,
You would be silly to sell that property in SF….I agree that prices are only going to continue going up. Keep the property and rent it out again. Just because your last experience with renters was crummy does not mean your next renters won’t be awesome. Put your big boy pants on, stop crying about your first world problem and get that place rented…! BTW, Love the website…
One other consideration. If you can find a significantly better tenant that is likely to create far fewer headaches – e.g., a young family – and it only costs you $500/mo in lost rent, isn’t that worth the peace of mind?
My uncle just passed away and I think his life serves as a lesson to sam. He owned 2 buildings in Manhattan and sold them for 1 million in the mid 90s. 1 million was an astronomical amount of money back then. 5 years later it traded for 5m, 20 ywars later they are worth 20 million. He bought a condo and some stocks and his estate is wort about 1 to 2million now. Ask any old real estate professional, and they all say the same thing, they have regretted every sale they made in the past. Sam, don’t sell, and your kids’ kids will thank you. I’m sure his kids would love the extra 20 million now!
That’s amazing. Is it possible though that he earned only has 0% to 100% return on his condo and stocks over the next 20+ years? The stock market is up a lot since then. But I do believe his buildings in NYC are worth a fortune now!
“Ask any old real estate professional, and they all say the same thing, they have regretted every sale they made in the past.”
My mom’s house sold $160k in the 1960’s, now worth $7m. Around a 7.5% IRR excluding leverage.
Now my dominant money script is that I CAN’T sell real estate. When my wife gets mad at me, she says “I’m going to sell all your real estate when you die!” :)
Omg, hilarious!!! Funny thing is, our wives will likely outlive us Since women live longer than men!
depends on where you live. my neighbor bought his home in the Chicago suburbs in 1999 for 1,050,000. Today he is entertaining offers in the 750k-800k range.
What happened? I thought the Chicago economy was pretty strong? Was 1999 a particularly frothy year where he bought at a peak?
I remember the stock market, specifically Internet stocks were trading like crazy in 1999, but not so much real estate.
Interesting. I did not know the $250K/$500K capital gains exclusion was going away next year. I can’t find anything that says this is true. Do you have a source?
I looked into doing a 1031 exchange when I was renting properties. I never did one, but I do remember there are very specific steps that have to be followed. I think one of those was that the new property has to be identified before the sale of the property is final. If I recall, multiple properties could be identified as potential new properties, so you aren’t locked into a specific, but you have to have some idea of a property you will be rolling your investment into. So if you decide to go this route, be sure to check this out thoroughly.
It’s not for everybody, it’s just for me because you have to live in your house for two out of the past five years. Next year I will have only lived in the house for one year out of the past five years. So I can just go back and live in the house today.
Check with your tax guy. I think it is progressive now. You might be able to take only 3/5 of the exclusion.
1031 has to be a similar (rental) property of equal or higher value and costs $5k for the escrow. Could totally do that but then you are stuck with another rental, commissions, and all you did was ding yourself again.
The 3/5 years rule applies to the 250-500k protection.
Of course neither of these protect you from the nefarious 4.5% which is much worse.
Sounds like the tenants are your worst problem which is fixable. BUT given that you have several properties I’d for sure pivot to considering a potential contraction in the market. I think this cycle is mature.
Housing affordability ratio is at the same level as 2008 when the bubble burst and we’ve been bumping along there miraculously for 3 years. Everyone along with you thought 2016 was it but it is STILL growing probably due to Trump exuberance. If we get new money minted with a bunch of IPOs MAYBE that allows this to continue, but I’m pretty concerned about the downside.
For shizzle if I were you I’d cash out and hedge. Seems like 61% of ppl agree!
I only have one property so I’m all in or all out, and I’m about to try to get all out.
Actually, 78% of the people agree! You forgot to add the percentage of people who agree to sell and do a 1031 exchange.
If you only own one property and live in it, I wouldn’t so. You’ve got a live somewhere, and even if the market goes down 20%, your life doesn’t change because your payments are the same. It’s all man when you feel your job is at risk or your income is at risk when you should consider liquefying.
Since only about 500 or so properties trade at any given time in San Francisco, thousands of new multi millionaires will really make a difference in the property market in my opinion.
I currently have a contract on two properties (8 units) for $450k – not in SF, obviously. Gross rents are $8,200/mo. Goes without saying that expenses are substantially higher to operate than a single family but it should still have a cap rate around 10-11%, including management fees. Everyone has their own idea of “normal” from the unique real estate market in which they exist so it’s crazy to me to consider holding on to an asset earning 2.2%, even worse that someone would buy it. That being said, single family and 2-3 unit buildings in wealthy urban areas are often terrible from a cash-flow perspective because the typical buyer is an occupant and doesn’t care about ROI. The only reason to hold the property is if you can bull doze it some day soon and build more units or other more intensive use. Otherwise, almost every investment that could be made will have a better return; seeing real estate prices rise and depositing that rent check does FEEL more satisfying but the most boring option is typically the best. I’m not familiar with your site/writing and stumbled on this article but you seem like a circumspect and rational fellow. Your solicitation reminds me of a quote I have above my desk: “Advice is what we ask for when we already know the answer but wish we didn’t.”
Merrill Lynch (I’m not a Merrill shill – trust me) has an interesting product – a loan management account (LMA). The LMA is an overlay on an account that will allow you to leave the underlying investments alone while being able to use a line of credit against the assets. Could be any assets from cash to securities to a note, etc. Could be worth considering as a place to park your proceeds to earn something while still giving you the flexibility and access to cash if some other deal arises. It’s a good product for real estate investors who want to be diversified without committing to permanently sideline funds that could have been used to seize a buying opportunity. I’m sure other brokerages have similar products but ML is the only one I am familiar with personally.
I understand your dilemma.
I think it makes sense to sell.
But (and that’s a big butted but!) you obviously don’t need either the income, nor gains.
Exchanging an appreciating asset for a cash flowing one has tax implications at your income level. I don’t know that it’s worth it. Especially if you don’t plan on retiring.
In 30 years we both know prices will be 10x higher. Your future kids will be priced out unless you help them. (Nothing wrong with that).
I would encourage you to hire a property manager and keep it.
I’m not sure of the property will be worth $27.5 million in 30 years. But if you really believe that is true, then I should deathly not sell!
How much was it worth 30 years ago?
Do you think the person who sold it ever thought it would be worth this much today?
Great question. I only see a 1996 sales price for $600,000. So that’s a 355% appreciation after 21 years. Not bad! But not 10X higher after 30 years… maybe 5X higher.
But DAMN! 5X higher than $2,732,500 = $13,662,500 if the pace continues. I don’t think the pace will, but maybe.
After doing this quick exercise (thanks for suggesting it), I have no doubts the house will be a $5M house in 20 years time = 83% gain = 3.5% a year increase on average. Doable, but takes maintenance and taxes.
I had a discussion with the Chief Economist of a major tech company several months ago.
She thinks housing in major cities in the US will eventually become similar to housing in major cities in Asia – unaffordable, and this will cause it to become a multi-generational asset.
I would assume this is more likely to happen in areas like SF and Manhattan which face geographical constraints against growth.
While it’s likely to be extremely volatile, I think 5-6% average annual growth rate over 20 years is quite possible for SF real estate.
As a landlord of rental properties in the midwest, and a SoCal resident, I can’t imagine trading in my California property for a minority interest in someone else’s deal in the midwest.
I wouldn’t either in that situation!!
Definitely not an easy decision. Some of the numbers make sense to sell, and the fundamentals behind your other ideas make sense too. Never easy to sell something your attached to emotionally, and the idea of using it to help out your kids makes it even tougher to pull the trigger.
I think you could probably find good tenants again decreasing some of the headache. But if you can take the money and re-invest it into better opportunities you are doing yourself a disservice if you don’t.
Really looking forward to the decision you make Sam. Thanks for sharing this with everyone.
Your son will most likely will want to do his own thing when he’s older and may not even be interested in the house.
What do your folks and wife think? Make sure the decision is beneficial to your family.
This is a diversification question, imo.
My personal rule of thumb is no more than 10% in any real estate deal and only 1/3rd of NW in real estate (excluding primary residence and privately-held businesses).
If I had $30-50m+ net worth, I would keep it. If I had less, I would sell it and scatter the proceeds amongst 10-20 syndicate real estate deals earning 8-15% or so in different areas.
Also, I don’t believe in owning real estate and managing it personally. I feel that the time is unproductive and better handled by a manager, even at 8-10% of gross rent. If a deal doesn’t cash flow properly after paying the manager, I won’t do it.
If it was me, I would sell simply because I’m highly allergic to tenants. Especially since I’ve seen pics of the property. That place is way too nice to risk tenants destroying it.
But I voted other. I think you should remove your kid’s future from the list because that’s way too far in to the future and focus on your own.
I think what you should really consider is that rental income, although a pain, is cold hard cash. From what I read in the post and comments, it seems that the market is at or almost at the tipping point. (There’s a lot of financial terminology that’s way over my head :) ) So if the market tanks, will your investments survive? Will you be able to continue your FIRE lifestyle without this rental income?
If so, sell, take the tax breaks and simplify life. If not, keep it and gut it out with tenants. After all, having a steady income during a financial crisis will help you sleep at night.
A wise man once told me how paying off a house equals peace of mind. If I’m not mistaken, I remember writing it on an index card back in September 2016.
Involuntary renting equals lack of peace of mind.
Sam, I would sell the property. This month I sold a similar property on a much smaller scale in Chicagoland that I had purchased in 2014 for 275k.
I put 66k in the property for downpayment + repairs(it was financed on a 15 year fixed) and sold on June 7th for 363k. The property was purchased solely for investment and was rented for the past 3 years to the same guy and his son who were there for the school district. I ended up clearing 180k on the settlement and am in the process of doing a 1031 exchange. I will be purchasing more rental property in Texas but this time with a property manager.
The house that I sold will be torn down. It’s in a wealthy suburb where all the 1960s houses are being torn down and the new homes built are selling for 1.2 to 1.5 million. I have no regrets on selling because I believe Texas at its current valuation with a property manager in place will yield 6 to 6.3 percent non leveraged. And with leverage it goes to 9 to 10 percent when you factor in principal paydown. I am not as debt averse as others on this site but I do appreciate how getting out of 800k of debt feels great.
I think the reason to sell is because of the poor yield on your potential 2.74 million and if you were to lose your property tax exemption for whatever reason you return would be that much worse. If you decide to hold you are betting on appreciation. The problem with that is you will never see the appreciation unless you sell it. It’s kind of a funny paradox. And in terms of the 1031 exchange I am using Assett Preservation which seems to be run well and isn’t too pricey as a qualified intermediary. Realize you should have it set up prior to close for everything to work which sounds like it could be next week.
It’s a good problem to have.
Congrats on your sale!
May I ask how you cleared $180K on the property if you bought it for $275,000 and sold it for $363,000? That difference is $88,000 before fees and transfer tax. Are you talking about the three years of rental income + original downpayment + the profits?
Hi Sam,
To answer your question, essentially yes. The property was on a 15yr fixed mortgage which meant there was a whole lot of principal paydown but no cash flow on a month to month basis (the rent payment was 30 dollars less than the taxes/insurance/mortgage). It was like a zero coupon bond. When I sold the place, the mortgage had been paid down from at the start 226k down to 172k over 3 years. So 363-172 is 191k. But 10k went to tax proration and other closing costs. I didn’t pay any real estate commission as I used a flat fee realtor no service but get your listing on the MLS Realtor. That cost me $600.
Look into what duplex properties are selling for in your area. I can’t imagine any less than $4,000,000. Senate Bill 1069 that passed earlier this year was an absolute gift to single family landlords in high cost of living areas. You can currently divide your existing single family home into two units, up to a 50/50 split. I would absolutely add that 700 square feet, and distribute the square footage in a way that is going to maximize your rental return. Your problem right now is that you have a bunch of bedrooms to be filled and limited prospects that need to rent a single family home of that size. By splitting the property in half, you are going to vastly increase the rent per square foot, and open up your new smaller units to a much larger pool of renters (like established families, couples, etc.) Instead of one $9,000 a month rental you could end up with two $7,500 per month rentals. You are going to see a massive increase in value as well, because smaller units are valued at a higher ppsf than larger single family homes in the same location. One day your child can live in one unit and rent the other, a very responsible outcome. This second unit is known as an accessory dwelling unit, and the state law supersedes any local zoning restrictions. You do not have to add any off street parking if the property is within a half mile of mass transit (virtually all of SF), and the city has to issue a ministerial permit for its construction, meaning no special commission or committee reviews. The city also cannot charge special utility hookup fees and you can run the entire property off of one gas/electric/water meter which saves a fortune on remodel costs. Renters will pay a premium to live in these units because they are located in less dense more desirable single family zoned neighborhood.
Don’t let a buyer come in and arbitrage this opportunity from you. At a minimum you should look into 1031 this property into multiple single family homes in SF that are good candidates for conversion into ADU duplexes. Once the City catches on they will amend their municipal code to place more restrictions on the current State law. There is maybe a 6 month opportunity to obtain permits to convert these properties before the new restrictions kick in. The beach communities in my area of Socal are exploding with ADU contruction right now, the attraction of creating legal rentals that can be rented short term is too good to pass up.
303x monthly rent = I’d sell and laugh all the way to the bank (before you reinvest passively).
I remember when 70x monthly rent was a general rule of thumb, followed by 100x and 120x and then I lost track. SF is obviously one of two extreme outliers in North America, but I don’t see the current appreciation rate as sustainable.
Sam,
You had a good run on the property and made a good profit, sell! Remember the rules “Buy low, sell high”?! Don’t be greedy – bulls and bears make money, Pigs get slaughtered!
I believe Property Booms and Busts occur every 7-10 years. The Bust should be
coming, you’re still young(what 40’s?) and if you still have the itch, atleast you’ll
have the dough ready for it.
Regarding the cycles… yes 7-10 years, so we have 2-5 years left in the boom. Hmmm. I’m 40 this year. I no longer have the itch.
Even when I started this site in 2009, I wrote in my About page that I was no longer motivated to make a lot more money. I just wanted to be absolutely free.
I think I should sell. 78% of the voters say sell!
Since when does Sam shy away from a little hard work. And by hard work I mean just a few calls a year max from a property manager.
You say yourself san fran is a cheap city compared globally. You are going to kick yourself for selling for peanuts today. I promise!!
I hope you don’t sell. But if you do… I look forward to seeing your regret post in 10 years.
;)
Definitely. Who doesn’t love a good schadenfreude. Taking Joy in the misery and suffering of others is a national past time! :)
Tell me about yourself and your rental property situation. How long have you owned and how has your yield and tenant situation been? Where are you looking to buy more?
If time is money and you want hassle free $, sell and invest proceeds as per your plan. If you are happy being a landlord and think you have a great asset, god bless you! if you want more creative change, here’s another idea, you take a longer haul on properties. How about you sell (great! Cash is king), but find other properties to buy (section 1031), at least you defer the tax piece. Looks like a massive house is complicated to rent, buy 2-3 condos (1 or 2 bedrooms?) that you can rent to couples.
No need to handle 4-5 guys and couple stay longer. Have had great tenants for past 10 years (got lucky though!).
In any case, great problem to have in life. Well done!
I’d love to have a great tenant who stays for 10 years in a row. That would be a dream come true! I can only get that if I get a family. 4-5 guys is impossible sadly. The most they’ll stay is perhaps 2 years, and then I got to do this whole thing over again.
I suggest going with your gut :-)
You are already a landlord because you rent out your condos, but my impression is that doesn’t seem to bother you for those properties. Could you keep one of the condos for your child/ren?
I myself wouldn’t want to be a landlord unless I was making a good income stream…but there is still the unknown aspect of what type of tenants you will end up with. No matter what, renters do not take as good of care of a property as an owner.
In Seattle, it’s becoming increasingly difficult to be a landlord because of the new rules and regulations about first-come-first serve, capping rental deposits, payment plans for deposits, etc. etc. It’s becoming very high risk for the landlord in general and I’m not sure if thats the same thing in SF. There’s a new coalition within the City specifically for tenants rights and already as it is tenants have more rights than landlords. It just opens up a huge pile of risk on the landlord.
Thanks for your delightful posts!
Haha, nice play on my title. Condo landlording is easy b/c my condo is only a 2/2. It’s attractive to a huge pool of people. And frankly, having a 2/2 condo in Pac Heights should be good enough for anybody for the first 10 years post college. Hence, one of the reasons why I’m OK letting go of this harder to manage rental house.
Landlord rules are very stringent here in SF as well. I really, really try to vet carefully and build a good relationship to save myself future hassle.
Thanks for sharing your thoughts!
Sam you should sell. My belief, from being a big elon musk and ray kurzweil fan, is that there’s a reasonable chance that real estate prices might flatten in the next 10-15 years. Especially on the higher end. Because of the rise in the 5th mode of transportation (hyperloop) and because of automated vehicles making commutes a moot issue. The biggest factor that makes some of these HCOL areas expensive is because of the jobs. But again, if the commute because a non-factor, then house prices, especially in the hottest areas, will come down. I am pretty sure of this. Might not happen tomorrow. But will happen within the next 10-15 years for sure. Something to chew on.
Tim, this is an excellent observation that I don’t think is getting enough attention – how tech disruption (especially transportation) will affect the long-term growth and feasibility of owning real estate as an investment.
I personally own a 4-unit apartment building in DC that cashflows nicely (~$8k / mo against ~$4k / mo expenses), but have contemplated when / if I should exit because of the potential disruption in our pretty near future (my opinion in 5-10 years), and dump the profit into non-long term real estate investments.
Not only would this make the property itself worth less, but also there will be less appeal to living in the city and therefore depress rents too.
Sam (and Tim), it would be great to get a discussion and maybe a post around this topic!
Transportation disruption is actually definitely one of the reasons why I bought on the western side of San Francisco. It used to cost $28 to take a taxi downtown. No it can cost as little as four dollars with UberPool.
As a result, locations further away from downtown have seen a massive uptick in demand.
See: https://www.financialsamurai.com/how-to-get-rich-practice-predicting-the-future/
And the other posts linked in that post.
My current house in Golden Gate Heights is in the Red hot center zone for demand right now where prices are appreciating the fastest.
I would sell it and bank it. 100% freedom and 0% stress. My pal refuses to sell for $1mm a home he bought for $500,000 only 4 yrs ago. The main reason was he would miss the neighborhood community, shops, restaurants, kids’ schools, amenities in his great location, and be forced to downgrade to a more rural location.
You don’t control the government who could write policy, the builders who build new condo buildings. Do you think they will turn in ur favor or not in the coming 2-3 years? You should drive the township regularly then and the instant when you see new construction of apartment homes you rush a sale.
I don’t get why you don’t have MULTIPLE potential renters all come the same day in 30 min intervals to examine ur home before YOU DECIDE who to rent it out to. I do this. You can actually control the renters. Look at the neighborhood. What type are the majority of people, is often the identical people who will end up renting. Wrong people = lots of work. Right people before they buy their own home = almost no work.
“I don’t get why you don’t have MULTIPLE potential renters all come the same day in 30 min intervals to examine ur home before YOU DECIDE who to rent it out to.”
It’s because the demand pool for $9,000/month is not that big. They are out there, but they are pickier and go through relocation agents and leasing agents.
I do this w/ my 2/2 condo I rent out for $4,200/month. A much larger pool… maybe 10X larger actually, so much easier to pick and choose.
Your friend has good reasons for holding on. I wouldn’t sell if this was my only residence in SF.
There are merits to both, but if you house is worth 300x monthly rent, it sounds like real estate is a renter’s market! Why would anyone want to buy a house in SF when rent is so much cheaper in comparison!
If the answer to that is future asset appreciation, then the right financial move is to buy a property in the midwest as you have said many times, and rent in SF assuming emotions is completely taken out of the equation when it comes to home purchasing, which we all know is difficult.
Charleston. This is exactly right. I’ve got a post coming on this topic.
Perfect, eagerly waiting for the new post. Keep up the good work.
Hi Sam, do you currently use the depreciation on your rental property to offset income taxes?
And would selling therefore adversely affect your tax situation and also result in higher capital gains due to the depreciation recapture?
Depreciation always happens whether you need it or not. Depreciation recapture will lower your cost basis, thereby increasing your taxable gains. But, that would be offset by the tax savings you had on the rental income. I don’t have much recapture b/c I haven’t rented it out for that long. .
Sam, I’ve been reading your blog for the past few years. You opened my eyes to financial independence, and I’m grateful that you’ve taught me so many things along the way.
You are sitting on a fantastic offer that will significantly simplify your life. Selling this property will mean less stress and worry, less time managing your property, and less time checking up on your tenants. This is extremely valuable because you get to spend more time with your family. We’ve all got a finite amount of time. Sell your property, decrease stress, and spend more time with your family.
Good luck.
Hi Dave,
You’re right in that time gets MORE valuable the older you get b/c you have less of it. Pretty logical stuff.
Thanks!
You asked if you forgot something in your analysis. I believe you forgot the non-financial aspects such as reduced stress and time commitment. Getting rid of the property would free up a lot more of your attention, which you could dedicate to other endeavors whether they be family, personal, or entrepreneurial.
You also missed a big non-financial/financial collision in your analysis. Maybe I’m being a complainypants here, but did you really just say you’re going to let your kid live in the property, and (from my interpretation of your writing) let them live in it rent free? This lack of rent for an unspecified amount of time should be included in your analysis. And what if your child wanted to buy the property from you? Would you be willing to give it to them for cheap, and possibly a loss on your end?
After all your posts about how you hate/despise privileged millennial children…I guess I’m just confused by your reasoning on this issue. I’m trying to figure out if you are being hypocritical when your own children are the millennials who could benefit from riding on their parents’ success.
Sara, excellent observation about being a crutch for our children. Nobody else pointed this out. I have an upcoming post dedicated to this topic about how NOT to be a crutch to our children and my thoughts on secretly being the bank of last reserve for the people we love the most.
My plan is for my child/children to pay me market rent instead of a stranger. I’ll teach him with a real life example of how to be a good tenant, how to build relationships, the pros and cons of renting, the pros and cons of owning, and taking responsibility as a master tenant and managing other housemates.
I find it much more effective SHOWING people the way with real examples instead of just telling.
I am interested in the dichotomy of having your child live in the income house and pay you rent. On one side, it doesn’t seem much different from what many parents do in letting their children live at home. Granted in your scenario they get and maintain their own separate space, and they are paying full rent, but your kid will still have that family support system. I definitely agree that a real-life example would be very educational.
On the other hand, I could see major tensions developing. Namely those potential tensions such as raising the rent in high-demand markets, intimately knowing each other’s financial situations, and the overall lack of independence (at least in my opinion) in addition to having to “manage” potential friends in the housemates (who would know the familial relationship with the landlord).
Then there is the serious intermingling of family finances. If your child loses their job, you lose a tenant/income. Conversely, if you needed additional income and raised rent, your child would have less present income (although from your plan it sounds like this would only benefit their future inheritance). Wouldn’t you ultimately be relying on each other as “banks”?
I hope Financial Samurai is around when all this happens as I am extremely interested in hearing how all of this plays out. Both in the financial and non-financial categories. I’m also really looking forward to reading that post about being a bank for loved ones!
I feel strongly that I will never need my child’s market rate rental money if he were to ever lose his job. I know this because I don’t need the rental income now, and have considered keeping the house empty and using it as a pitstop and parking spot.
There is no doubt I will probably treat my son well as a tenant, as I treat all tenants. But I get excited thinking about getting to visit him sometimes, thereby enjoying the property as well and seeing what he’s up to. These are dreams of a father/parent.
I don’t think having my child pay close to market rent by himself and with housemates the same as living at home in my house and not paying rent.
I love creating financial buffers for my financial buffers. I know I will always be there for my son whenever you falls.
It is awesome that you will be there for your son. I am just playing devil’s advocate. I love these kind of thought experiments and analyses.
First, I did not say rent free. The reason I say having him “rent” the house is like having him live at home is because some parents charge their children a discounted rent while they are living at home (which is what I intended to be interpreted from my earlier statement). And this is usually accompanied by having them buy their own supplies or contribute their fair share to the household budget. The parents have full reign of the house, and they may have a set of rules that need to be followed.
Your son will be growing up learning about your real estate empire (if you intend to keep it, of course). I’m sure you will teach him and take him to these houses. I wouldn’t doubt if he continued to feel like the house was still your property even while he was renting it. He would buy his own supplies and have his own budget, but you would ultimately be the ruler of the house. He would still need to go to you if he wanted to make changes to the house, and the tenant policy would essentially be the set of rules he has to adhere to.
I see no difference with an adult child living at home (and paying discounted rent) versus your plan except that he might have some housemates, especially considering that you intend to visit him regularly.
Cool. Tell me about yourself and your philosophies on raising your child (children). I’m always curious to know do you want to share so much of my own voice. It would be great if readers shared their own. How old are your kids?
I’m actually looking for guest posts on readers on this topic if you are interested!
I am flattered you suggested I write a guest post. However, I feel obligated to inform you that I am not a parent, but the child in this situation. I am living with my single mother while I pay off over $100,000 in student debt in three years. I am not a blogger, but I would be willing to share my point of view as the child if you are interested. In the same token, I would understand if you are miffed by this situation. Please know that I did not intend to insult you. I was honest when I said I enjoy discussing thought experiments.
I have been reading your new posts and archives for approximately a year and this was the first post I had the courage to comment on. However this works out, know that I will continue to be a fan of your site and read your posts. I look forward to hearing from you. Have a great Wednesday!
Hello Sam,
Think about an economic crisis, when it comes all the investments will take a hit and you will have that directly translated into a huge loss for the moment. While having a house, it will still depreciate but you won’t fell as bad for that. Considering that in the past 5 years you had such a huge growth, keeping this asset will seem a way better investment for a period of another 10 years at least. Even if you don’t keep tenants… but it’s going to get even better in case you keep them.
Yes, it will require some extra work, but you have always gone for extra hustle…
What do you think about this approach?
It’s hard to use past results to extrapolate future results.
I’m 90% certain the next five years won’t be as fast as the past five years.
In the worst case scenario, in the next financial crisis what will hurt more for you, to see a money loss or to have the house depreciate with the market. After all, I think it’s a matter of the risk level you are willing to take, either way you’ll be fine.
Please give us another post on what you plan :)
It’s a no-brained, sell then put proceeds in the various allocations you mentioned.
I recommend you NOT to sell for two reasons.
1. You will forever lose on property gains and future leverage on the house. If you don’t sell, you can always refinance, continue to rent, keep as vacation home, etc. If you decide to sell later, you’ll still capitalize on the gains. Having previously bad tenants may have steered you towards the selling route, but it sounds like you’re not ready to give up the property. In this case, just rent it out and hire a property manager. You might make a little less, but the ideal tenant will come and the property will still be yours to keep. No one can predict the future, but I think you already know where the future is headed in the bay. I believe you’ll have less regret holding even if the market slightly dips.
2. 2.5% commissions are way too high in the bay area. I’m actually more shocked that the listing agent is not taking less…It’s a competitive market out there for seller’s agents and they really should take less. From my experience, it’s it’s not hard to sell a house for a good price using an agent who will do a listing for 1-1.5%. These agents who rebate commission, of course, are generally less famous, but still work hard and will do anything to make a deal and take credit. Of course your agent will tell you he/she is the best and get you the most money. :) It’s usually harder to decline a 2.5% commission to a buyer’s agent, since they will initially be less financially motivated to bring a buyer to see the house. Some spend months finding a house for their buyer before offer is accepted or buyers move on completely.
Indeed. May I ask about your landlord history and what solutions you’ve used to deal with tenants? thx
I just passed on selling to a private buyer. It was very tempting. In the end I felt the property would increase in value as the area in South Berkeley that I purchased the property is rapidly gentrifying. I also wasn’t sure what to do with the proceeds. I tend to think 1031 exchanges have limited value. They just defer your gain and your buying in to the market you’re selling so good luck finding any sort of value in any most metropolitan areas. Your depreciation goes with you also. If you do sell, bite the bullet and cash out; don’t exchange. Good luck!
Sell. Take the profits and buy yourself something nice, like Pez! Or just save it. Next dip is coming soon?
Sam, you acknowledge yourself in this post that you leveraged up, took some risk and rode the wave of the SF Bay area RE market. Well done, but also consider that there was some if not a lot of luck involved. It takes very little for a leveraged bet to blow up in your face and you can be forced to sell in the most dire circumstance regardless of your outlook on the future. You didn’t do that and are now sitting on a big gain. My concern with you is that you are an aggressive risk taker, and the risk you are willing to take escalates with more success (which again can be a result of genius, luck or both). Just recently you were talking about more property in SF and a few months ago you were considering a very large purchase in Honolulu! Now you are considering selling your current properties? You are all over the place my friend. This are houses, not ETFs! I am learning a lot for you, but I am also learning that you love risk, perhaps a little much to your detriment, but what do I know.
Yes, mostly luck going double long two single family homes in 2014, some guts, and a little bit of predicting the future.
Where I currently reside on the west side of SF is red hot now b/c everybody is looking for a relatively affordable single family home now (<$2M). The $2.5M+ range is not very affordable to most people. I'm not sure I'd pay $2.74M for my house either, partly b/c I'm so happy living in my current house where I paid half that amount in 2014. I like cozier, smaller homes where I actually regularly use most of the rooms. I'm all over the place b/c I LOVE to consider all options. There is a price for everything. Remember, these are thought exercises to make focused, optimal decisions. I got outbid on two SF properties w/ ocean views this year, so I looked at the other side of the equation to sell. I'm still planning on taking down a sweet Honolulu home within 5 years. That hasn't changed. The question is when to optimize the sale to use the proceeds to buy such a home.
I say sell it Sam. The expiration of you tax exemption next year is big at your tax rates. Lock in that gain and never check the zest image again
Yes, losing the exemption will suck. Then I will have to commit to renting for a long time b/c if I then turned around and sold after losing my exception, that would be stupid.
The profit overage is based off 15% – 20% LTCG, so not on marginal income tax rates.
Sam,
What a good problem to have. After reading all of your options I voted for sell. I think based on your own numbers of where you wanted to sell plus the investments you would be making from the proceeds then you have nearly the same income and then some.
I understand you are giving up the potential future gains but the risk involved there doesn’t seem to be worth it based off of your situation and life goals. Also the property potential in another area like Hawaii gives you the potential home appreciation.
I think this sale will allow you to diversify into multiple income streams while also still being heavily tied to real estate with those investments. Seems like it would take a good bit of stress from you with this home now and in the future when you will have a family.
Good luck with the decision, I can’t wait to hear the rest of this story
I would sell and diversify…I like 1031 but i self manage so makes sense for me and i like the depreciation writeoffs staying in Real estate. What happened if you have an earthquake and still owned everything in San Fran :) $25k a yr for prop tax is pretty mind blowing.
Actually, “only” $21,888 a year in property tax for this home, but it WILL go up another 1.9% for the next year. It is painful, and feels excessive. The people are always voting for MORE spending, and I’ve had enough. City is too inefficiently run.
If there was an earthquake then I’d turn into vulture-mode and buy from panic sellers.
I can see why it’s a tough decision for you. Either selling or keeping the rental property might lead to more headaches and regrets in the future. If I were you, I’d sell the property and use the money to pay off my primary residence and the vacation home. I will then invest the rest in RealtyShares or other passive income streams. For me, it’d give me a peace of mind knowing that I’d always have a roof over my head even if the market crashed.
Sam, I own a handful of restaurants. In the past, I would get really pissed off when customers would leave their trash at the table or leave a huge mess behind. It was really short-sighted thinking. I’ve come to learn, I made money off of that customer, I’ll clean up the mess if it will make them spend money there.
I think the application applies to your situation too.
Although, getting out of debt is always a good thing. Purely ignoring the financial discussion of debt, it eliminates risk. So, if you were to sell and pay off other debt completely, that could be a good thing too.
I hope that helps…
Per my “what to do with proceeds” I’ve earmarked $100,000 to paying down a 4.25% mortgage. And of course, if I sell, I pay off a $810,000 mortgage, albeit at only a 2.375% rate.
I voted to sell and do a 1031 exchange. I know you like some of the crowdsource real estate lending platforms to diversify your RE investments, but it seems like you’re still heavily weighted in residential, and in the greater SF MSA residential in particular (and Tahoe…).
What about using the sale proceeds into commercial properties with NNN leases? I work in the seniors housing industry and you can capture some amazing spreads by combining your cash with a HUD-insured loan in assisted living properties under triple net leases. Favorable demographics, too. That’s just an example because it’s in my field, but a mid- or long-term NNN commercial lease could give you some asset type diversification, save you significant time/headache, and yield strong passive returns and capital gains. Just my two cents. Good luck with your decision.
Deepfriars
I can easily go commercial heartland real estate via crowdfunding.
I’ll definitely look at triple net commercial buildings. They only provide about 4% annual returns. But better than the current sub 2.5%%.
Good time to sell. I see a purchase market at work all the time.
I would say Sam that you are better off selling. My opinion is based on the increasing likelihood of a recession over the next few years…the US economy is getting close to hitting full capacity
https://fred.stlouisfed.org/series/UNRATE
You could be right. But if I hold, then I will make a determination to hold for 20+ years or forever until my son can manage it. But in all likelihood, he won’t want to.
As a rental, the cash flow is stable. Two year recession, then off to the races again. It’s been like this for 50 years.
Typo: Should have read I have not heard of section 121 exclusion ( 250/500 exclusion on primary residence if you’ve lived there 2-5 years ) being repealed. I don’t think you qualify for this based on it won’t a rental prop.
Don’t forget your will recapture depreciation allowed or allowable if there is an outright sale of rental prop. See your CPA first
What is the zoning like for your property? A lot of single family properties here in DC are trading at double because a developer can come in and make a former single family rowhouse into 5 units. Houses as built are circa 2700 sqft but zoning allows up to 5000 sqft, so they utilize the existing structure to cut costs and then sell the finished product (which is basically Home Depot finishes) at $650/sqft. So you could potentially use your equity and get a construction loan with no money down, have a GC do everything at $200/sqft build cost, then sell the units and keep one, or keep them all and rent the new product to different tenants.
I could expand 700 sqft, but at a cost of closer to $500/sqft = $350,000. Then I could probably sell for $700,000 more, so a doubling of profits. Based on my legit square footage (not counting ~250 sqft downstairs), My house will sell for $1,320/sqft as is.
But I just finished doing a two year remodel and don’t want to deal with contractors on big projects again.
Hi. This post helps me understand the dilemma I faced myself. What makes a really hard decision hard is that often there is no best apparent decision — until you look back in retrospect.
#1. I am a CFP with a taxbackground. If I didn’t mis read – I don’t understand you think you qualify for both the section 121 exclusion of :250-500 which means it is your primary residence(non income producing prop) two out of the past 5 year plus eligible for a 1031 exchange. (Which is the exchange of like kind (income producing ) property). In my experience you can not do both.
#2. I faced a similar dilemma selling my primary residence in So Cal in November. I purchased for $650,000 in 2002 and just when my son entered The expensive UC system and my house was worth 1.35 million, the credit crisis struck reducing my house back to its original purchase price.
I held on by having an interest only loan that I got as low as 3 percent. I vowed that if it ever got back to 1.35 I would put a sign on the lawn which I did in November.
I delayed the close til January 2017 hoping capital gains would drop but it doesn’t appear so.
My regret is watching houses in my neighborhood sell for more than 10 percent more in the second quarter due to scarcity. I spend a lot of time in the rear view mirror.
However, the day before the last correction the market was still going strong and I will never forget how it felt maintaining the mortgage in light of a bad stock market which is how I get paid, a banking crisis and a huge cash drain–college.
I think you need to consult your tax guy to see what your net net is here I have not heard to the section 131 exclusion being repeal. A commission free sale goes along way toward paying your capital gains and recaptured depreciation when/if you considered it a rental.
I will always wonder if I did the right thing until the next deal or next correction comes along
Regarding the combo, check out this response I got from the BiggerPockets forum:
@Sam I saw a few mentions of the 1031 and 121 issues and I wanted to offer some clarity here.
Firstly, let me say that I agree that your first move is to determine your priorities. You have an amazingly valuable property here that could continue cashflow easily with minimal contact from you if you hired a good PM (or had your son do it as a learning exercise). Assuming you want the simplest option, keeping it and letting it appreciate while getting, frankly, some amazing monthly income, is the obvious answer. If you’re more focused on increasing monthly income or getting a higher ROI in other markets in exchange for a lower rate of appreciation, that is another option, though more complicated. So, the following advice is given under the assumption that you elect to sell in order to expand your cash flow portfolio:
So, as you know, you need to have lived in the property as your primary residence for at least 24 months our of the past five years. They do not need to be concurrent months, in case that makes a difference to you. If you meet this requirement, then you can take the $250k/$500k (if married filing jointly) tax free under Sec 121. So sounds like that option is already on the table for you, great!
However, it looks like you stand to take away MUCH more than that (congrats!). In addition to CG taxes, any amount of depreciation you could have deducted on your taxes (whether you actually took the deduction or not is irrelevant) is recaptured under Sec 1250 at 25%, so your tax bill on this sale would be…. hefty. So let’s look at the best way to parlay your gains into something else without giving uncle sam his cut just yet. As @Arianne L. pointed out, you can combine the Sec 121 exclusion AND the 1031 exchange if you meet some criteria.
You’ve already met the criteria for the 121, so now we focus on the 1031. In order for a property to eligible for exchange, you have to be holding it with the intention of maintaining a long-term investment. Since this was a home that you converted into a rental, with the possible intention of passing it along to your son, I think you safely meet that criteria. There is no specific time limit for how long you have to hold the property, though the general rule of thumb is one year or more. So, for example, if you purchased a house to flip and sold it six months later, that’s not a 1031 eligible property because there was never the intention to hold it long-term. So I’d say as long as the prop has been rented for at least a year, but not MORE than three years (because then you wouldn’t have lived in it for 2 years within the past five), then you can qualify for both the Sec 121 exclusion and a 1031 exchange. If you’ve rented it for more than three years, then you’d still qualify for the 1031, but you couldn’t take the $500k tax free under Sec 121 unless you had to move due to employment changes or other IRS-acceptable reasons.
Ok so, to defer all taxation on a 1031 exchange, you have to roll over the total value of your property into a new investment proper, or multiple props. This means that if you sell at $2.75m and take $500k tax free, you must roll the remaining $2.25m into new investment props. Any amount of profit you take (outside of the Sec 121 excluded amount) is considered boot and is taxable. That means you can’t sell the prop, take $750k in cash ($500k under Sec 121 + $250k) and then replace that additional $250k with a bigger mortgage on the replacement prop. You can put in more equity to the new properties and have less debt, but you can’t have more debt and less equity, because that would result in you taking cash from the sale, which would be a taxable event. (Let me know if that wasn’t very clear, people often get very confused about this rule).
Since you’ll have so much value to play with and are looking for cashflow investments, it’s most likely you’ll reinvest into multiple properties, or into a large MFR. 1031s have a lot of rules about replacement property identification and timing (which I’m happy to go into if you need a primer, but I’ll leave for now) so you’ll need to be well versed and have a good Qualified Intermediary in place long before you go to market if you elect to go this route.
Given the value of your currently property, you have a million options for reinvestment, so you’ll need plenty of research and vetting time before you pull the trigger on selling it. Take your time and be really honest with yourself about your priorities. The property is flowing nicely and will likely continue to appreciate, so if maximizing ROI at any cost isn’t your highest priority, all the legwork involved in the 1031 process may not be worth it to you right now. However, if you decide to go that way, know that the 1031 is a powerful tool. Using this process you can expand your portfolio, and continue to use the 1031 exchange if and when you want to sell your new investment props, leap frogging this current property into who knows how many cash flow properties over the next few decades, and eventually leave the whole lot to your son. Upon your passing, the tax basis of any properties left to your heirs gets ‘stepped up’ to the market value at the time of your death. Basically, if you die and leave a property to your son, and he sells it right away, he’ll essentially pay no taxes because his tax basis will be equal to the market value at that time, leaving him zero taxable gain. It’s called the ‘1031 until you die’ strategy and it’s hugely powerful when done right. Of course, I’m not getting into estate taxes and the use of trusts here, but given the value of this prop those considerations would need to be taken into account if you elected to use this strategy, just fyi.
Since “stepped up basis” and “depreciation recapture” have been mentioned in the comments, consider: If you choose to hold on to this property for the rest of your life, the beneficiaries’ income tax basis would become the value on your date of death, and your beneficiaries would be forgiven any accumulated depreciation recapture. So they could then start taking depreciation based upon the date of death value of improvements to the property.
(disclaimer: consult your tax adviser)
Also Vickie, what did you do with the proceeds and do you rent now?
My situation may be a little different b/c after I sell, I still own my primary residence and a 2/2 condo.
I’m not sure my house can trade at $3M within the next two years. Seems kind of ridiculous… but $2.85M in a year, yes, no problem. In the ballpark.
I so appreciated seeing how you looked at the options in your situation. I wish i would have had that opportunity. We are different in the fact that you fortunately have other properties.
Because my house sold in a day, I didn’t have a lot of planning time. Plus I was unclear what I wanted to do or where i wanted to live.
After a lifetime of being the most frugal practical person I am doing something that goes against everything I believe in. I decided to do a short-term (under one year) rental in the same city as my son and survey my options. I can now write a blog on why you probably shouldn’t want to live near adult kids after a 10 year hiatus.
I wanted to be free of the responsibilities of my 60 year old home and live more like a millennial and now. i. do. That means I pay $4,000+ rent a month in downtown Denver. That’s about $1000 a month more than my prior interest only $ mortgage, ptax, ins, utilities and once a week housekeeper which seems insane. Housing prices here look a lot like Los Angeles. It wasn’t an economic decision, it was a temp lifestyle choice
Renting my house out there wasn’t an option bc cash flow wasn’t the goal. Getting my cash out was.
I have my proceeds invested in a little different allocation than you discussed yesterday but along the same line.
If I want to come back to CA, i have 2 years to transfer my low ptax basis w Prop 60 because of my age but i think i’ll be in another town by the sea where the water is a lot warmer, property values are lower and where the regulatory and tax climate is not so unfavorable to earners. I did go from 13.5 state income tax to about 4.5 percent here.
So far my only regret was couldn’t have foreseen the very strong start to 2017. Please let us know what you decide to do. I’ll be reading, hoping to get the inspiration for my next move. Mahalo
“I can now write a blog on why you probably shouldn’t want to live near adult kids after a 10 year hiatus.”
I’d love to read this post and the whys! Want to share a hint? :) I love this kind of parent / child / money topic stuff.
Yes, this surprising uptick in 2017 caught me off guard. Three houses in my current neighborhood all sold for 20% – 25% over asking. And then in the more expensive neighborhood where my rental house is, there’s no inventory so people are just hungry for whatever.
I’m not sure what’s up since there is rising condo supply, waning China money demand, a Fed that wants to continue raising rates even though mortgages continue to stay low, softening rents. Maybe this is the last hurrah? Who knows.
Sam, great position to be in! I’m also in a similiar situation in SF, sitting on 1m in profits. I’m sitting tight for now. A few thoughts:
1) Lumber futures usually a good predictor of housing prices shifted out 12 months. It predicts we have another year of housing starts to go.
2) Forget the next tech IPO’s. Its all about ICO’s via cryptocurrencies (see Bancor today). This is where a ton of liquidity will come from in the next few years. Though this is global and not just limited to SF (likely beneficiary is Singapore).
3) 1031 exchanges require you to identify 3 properties within 45 days, after which it expires and it becomes taxed as a regular sale.
However you are FI Financial Samurai, so you should do what you feel good about. Good luck!
Interesting thoughts on lumber futures. Good for the national housing market, but perhaps irrelevant for SF Bay Area real estate since it’s tough to build here.
Interesting about the bubble in cryptocurrencies. What a run! Let’s hope it doesn’t implode.
Do you own other properties besides the $1M+ in gains one?
It sounds like you already know the answer…SELL!! SELL!! SELL!! Go with your gut and get out of the stress.
The easiest way for you to know what is right for you is going to be when you look at those poll results. If your readers agree with what you really want, even if you don’t quite know it, you’ll feel happy. If they end up picking the ‘wrong’ option, you’ll find yourself feeling disappointed in the results.
The good news is that there really isn’t a ‘bad’ choice here. There is just good and possibly maybe better. This is a good problem to have! I look forward to hearing which way you decide to go.
Me? I would sell. I doubt that is useful information for you though, because in this respect I don’t think we are alike at all – I really dislike the idea of being a landlord, and clearly you do not.
I’m surprised the poll is currently 80% sell, and not closer to 50% sell. That does make me feel better if I do sell. I haven’t found any new surprises yet on the downside of selling.
In fact, I found some upside in selling by doing a COMBO Section 121 + 1031 Exchange.
Sam,
I voted for keeping the place and continuing to manage it yourself. When I read your article about the most recent tenant problems I was thinking: Maybe Sam is done with hustling. Hustling should have an end date which I think should coincide with when goals are met. The only thing is your ultimate goal of owning a Hawaiian home hasn’t been achieved yet. This SF property may be the key to doing a little location arbitrage down the road. Unless SF ceases to exist, which is not likely to happen unless something like the San Andreas Fault opens up, the city’s property values will continue to increase because of all the great minds and ambitions at the start-ups that continue to build wealth for those living in the city. Let’s say that you reinvest the proceeds from the sale but will those investments provide a higher rate of return overall? Your biggest annoyances are high property taxes, real estate agent commissions, and tenant hassles. High property taxes are just a part of living/owning a home in one of the greatest cities in the world and the appreciation in value/rents should more than make up for the taxes. Don’t sell and you won’t have to pay the realtor commissions now and as someone else mentioned, it probably wouldn’t be too difficult to find your own buyer in the future and leave a real estate agent out of the picture. Yes, no one likes to deal with tenant hassles but if you were to calculate the number of days you actually have to deal with tenants it’s probably such a miniscule amount of time and it’s just a part of the hustle. Are you done hustling?
Yes, I’m done with hustling as a landlord. If the property was smaller and cheaper, I could manage. But the pool is smaller for this type of house, and it’s often 4-5 housemates at a time. My limit is managing two rental properties.
I’m not done with hustling with my online business. I believe I can make multiples times more, much more quickly.
Hi Sam, you gave me great advice to accumulate cash and not buy so much stock near the top of the market. I’m Mike C and now have a good stock portfolio plus cash.
My advice on this would be to sell the house and enjoy life more without being a landlord. The price is good.
My husband and I just bought our third rental property at the end of last year and we’ve decided that unless one of us is going to be a full-time property manager, we’re okay with never purchasing another rental property ever again. And if we did purchase another rental property, it would have to be in cash. It was extremely stressful paying the overhead costs of our newest rental property for the 7 months it took us to remodel the unit and find a tenant.
Sam,
From u r post, I understand it would be Sell now/ Hold onto for 20 more years and gift to ur kids,
But all these 20 years, u will have to get prepared with all Headaches of managing roof, any repairs, tenants, etc. even after managing thru Property mgr. 20 years would be too long in current scenario. No one knows what happens at that time and which city will have worth and which city ur kids will be. Either u hold for 20 yr’s/sell now, as u have clarity what to do with ur money now, I think it makes sense to sell now rather than inviting urself all troubles of managing.
But,If this is a Mutli-Unit apartment complex, and each unit can be rented out sepearately, then i think hold might make sense.
Thinking about my kid’s housing situation 20+ years in the future is rational, but irrational at the same time since who knows. But I do like Prop 13 and the Step Up basis rule.
I don’t want my kid to tell me in 20 years, “Dad, why did you sell this house for only $2.74M? It’s worth $5M now and it’s so rare for anybody to own a single family house in this neighborhood as a result. If you held, we’d be sitting so pretty!”
I’ll just tell him Golden Gate Heights is the best neighborhood. :)
Sam-My gut says sell, but I do have one question…
What have you learned in managing a rental property with multiple tenants in the last years that might make this next go more simple?
Never give a deposit back even after a thorough walkthrough inspection. Something will always come up, so take the full amount of time allotted by the law.
Be patient finding tenants. Don’t just choose the one that pays the most rent, or that is willing to pay your ask. A stable unit is much better than multiple roomies.
I am a hard core “buy and hold” type of guy. There is nothing like the power of cash flow, debt pay down and appreciation working for you all at once over a 30+ years!
However, I think it is clear as day that the SF market is at absurd levels. If you were to sell now, I am confident you would be getting out at or very near the very top of the market.
Maybe you should consider doing a 1031 exchange and rolling your profits into another income generating property elsewhere that is not quite as hot?
As someone living in the Bay Area (up and down the Peninsula) for the past 25 years, every year is the top of the market… :P SFH prices may dip during a recession, but rarely much more than a few percentage points. Worst case is that they stay flat.. when it goes up, they go up fast.
Actually worst case was about a 15% – 20% fall during the last financial crisis. You can see that dip in the first chart above as well.
So a 15% – 20% fall = a $400,000 – $550,000 decline. That’s relatively significant if it happens, but when you are deep in the money, it doesn’t hurt as bad.
That’s true.. but it was also a pretty nasty crisis directly affecting the housing market. Also, I’d be interested in what numbers make up that graph. Sometimes housing graphs include condos which got hammered. I seem to remember houses over 1.5M at that time, not really falling, since people who could afford those houses chose to not sell for less, or the buyers had no trouble getting into the market at the high prices. Also I’ve seen in this area, houses in areas that don’t have HOAs hold value a lot better.
The prices are getting somewhat crazy, especially now that rents have softened by 5% – 10%. Condo prices are adjusting, but not yet with single family homes.
I’m pretty sure this home will be closer to $3.3M, 10 years from now.
I would probably opt to sell. The only wretch that I feel with my own portfolio is not being able to leave them to my kids. That said, I’d be confident with your financial experience that you’re able to reinvest with a lot less hassle.
When I started my ambition was to own 100 rentals. I got to 20, and I’ve never held onto anything since! Buy and sell, take my money and get the hell outta dodge!
Just wondering why haven’t you sold your vacation property yet? Every time you write about it you say it was a mistake, shouldn’t have bought it…Just because the value of it dropped alot and only rebounded to break-even. If you don’t use it that much why not rent a place on Airbnb or even a hotel room when you go there to ski.
Your other real estate has appreciated enough anyways, you are in the black overall. It feels like there’s some weird emotional attachment you have for it.
Because it causes me no stress. It’s run by a property management company who not only maintains the property, but also rents out the condo and covers all my costs and then some by +$500/month.
My rental house is run by me, so stress is involved. Hence the desire to outsource to a property manager. But then the returns become pathetic at 2.2%/yr net rental income.
A friend of mine was able to buy a home directly from someone without a realtor–theirs was much lower cost, around $250k in a more suburban area of Austin so still a good buy, and it did save them quite a bit! I understand needing someone to help you sell but too bad you have to pay the realtor who is representing the buyer! That seems like a scam all around.
I am in the hold and rent category and hiring a management company. In a city like San Fran, you will always be able to demand high rents as the jobs keep coming in. It’s just a matter of finding a reputable management company who can keep a lot of the stress at bay. My sister rents out her townhome in a tony burb of Atlanta (near Agnes Scott college) and she initially tried without a management company and wanted to pull out her hair. She decided to try renting again with a management company and she now still comes out ahead as far as paying the bills and home expenses and doesn’t have a lot of stress, especially now that she lives in Belgium. Plus, the management company is like your selling realtor, they were able to get her better tenants who could pay more than her trying to rent it herself. *Note, she is not a good candidate to sell her house as she bought it at height of ’08 crisis (with no money down, eek!) so she’s better off renting than selling.
If you ever are successful at moving to Hawaii, a good management company could make managing your assets that much less stressful.
But I’m no expert on the scenario, just my humble opinion.
Personally I would sell. You have an offer in hand without having to list it on the market. You would walk away with a cool profit and get yourself out of having to deal with multiple tenants splitting a lease. If it were easy to find a family to rent then I might think differently but you always put yourself in a riskier situation when you are renting to multiple parties.
I put myself in the same situation as you when I maxed out my debt/income ratio to buy the house I have now. With a little over a year in ownership it has already increased in value a cool 125%.
The one thing I may always wonder is what if I spent $30K – $50K gussying up the place and doing a full marketing to the world. Perhaps I could have gotten more from one buyer who just had to have this property.
But, I am SUPER DILIGENT on following all comps and talking to everyone and doing my due diligence. Further, I already tried the sell the home before in 2012 so I know what the pain points are. I think i MIGHT have been able to get $2.8-$2.85 in the open market, but that’s really only about $50K – $70K more due to the extra money I would need to spend.
Hope your property continues to do well!
This is a tough one, but your dilemma allows me to forgive myself a bit. 1.5 years ago, my job needed me to move from South Florida. They made all the closing costs when I bought my short sale there, and 2 years later, they were willing to pay all the closing costs as I sold. I considered renting, but I then I decided to sell. I made a fair amount of money (more then 100x the rental place), but I don’t have a place in FL anymore. Sometimes I wish I had rented it out, but wasn’t going to make that much. Watching what you are facing here is making me feel better that i sold (and I didn’t have any income taxes either). Good luck with whatever choice you make.
“made all” should have been “paid all” and “rental place” should have been “rental price”
Can you elaborate on why my dilemma makes you feel better about selling? Is it because I’m leaning towards selling as well?
I feel better about selling because (1) you are leaning to sell (2) you don’t have some of the advantages to sell that I had and have others I didn’t have, (3) you were renting for way more than I could have (4) thus solidifying my decision to sell. I bought my house for $420k as a short sale, great school, great neighborhood, pool with solar powered heater, 10 miles from beach. Employer paid all buying closing costs. When I had to move, I considered renting so I could keep the house, market value about $3000 / month, given my P+I+Ins+Tax = $2500. To sell, real estate agent had me thinking $470k, and company would pay all closing costs and add $6500 if an offer came within 2 months. I decided to sell. We got 7 offers, all low balls. Went forward with 2 buyers, both of whom pulled out due to repair issues in the house that I wasn’t aware of. I finally did lower the price and got an offer for $451 just within the 2 month period, who didn’t care much about repairs, so I got the extra $6500. Had I rented, I’d be paying all those repair costs, and while prices have gone up a bit, I’d be paying all those closing costs to sell if/when I did. Though I’d have that house. You have the advantage of more rent, and better handle on repairs, I had the advantage of company paying closing costs. I think if you were in my situation, you’d definitely sell, so makes me feel better then.
Sell and take the cash Sam. Doesn’t this conversation sound familiar?
Don’t remember. Remind me?
Take money off the table when you can. You have a good offer and you still owe $800k on it. You’ve made over $1 million in profit if you sell. Housing in big Canadian markets are slowly turning now. I don’t know how the SF market is or how high it will rise. But if it tanks will you regret not selling now?
Hey Sam,
Sounds like a nice offer, just wondering how it came about. Did you have it listed for sale and for rent or ?
It sounds like you got a bad taste in your mouth with the rental and the poor tenants, I mean like anything it’s easier to sell when something bad happens (this convo happened a couple times in the last few months for us, so experience speaking).
The mostly tax free profit is a big sell for me on your decision. It’s also not like you are getting out of real estate all together with the 700K going right back in, just in more of a hands off approach.
Sounds like you are making a lifestyle decision rather than a real estate decision and that makes sense to me at least. Good luck sir and how’s the tennis coaching?
I signed a listing agreement with an agent I liked after interviewing 5 who all came by to check out the house, give me a plan of attack, and let me know the realistic expectation on price.
My second favorites said $2.3M sale price if I put in $20K of work. They also said I might be able to get $2.5M if I put in $50K into the property. I went with the agent who strongly believed I could get $2.6M or hire, and that is what she found within one week. I put in $3,000 to refinish the floors and fix some stuff, and spent about 8 hours painting two rooms.
I then also spent 3 weeks marketing the property on Craigslist, and then last weekend hired a leasing agent while totally being upfront that I might sell. He was fine with trying, so that’s where we are.
Coaching is great! Season is over. We had the most wins in school history!
You’ve answered your own question with two keep points.
* The 100X rule says that I should buy a $9,000/month rental property for $900,000 or less or conversely SELL a property once it starts trading for much more than 100X monthly rent. At $9,000/month, the property currently trades at 303X monthly rent (25.25X annual rent). At $8,500/month, the property trades at a 321X monthly rent (26.75X annual rent). – See more at: https://www.financialsamurai.com/the-moment-of-truth-has-arrived-gut-it-out-as-a-landlord-or-sell/#sthash.wqeC9bGo.dpuf
AND
The Case Shiller Home price index.
Could timing be better? Maybe. Is timing REALLY GOOD right now, YES! Are the big IPOs you mentioned recession proof? Don’t think so.
Do you like being a landlord. Seems to be marginal. Why spend ANY more time at something you don’t get completely enjoy?
Sam, why keep chasing more money? If making 250k per year is the maximum number for happiness then who cares if you are missing out on tons of future gains and rental income? Make the money the easy way and invest it as you laid out and don’t stress about tenants.
I understand about wanting to provide for your kid but no guarantee they will live anywhere close. If they are anything like you they will probably be determined to pave their on way actually.
Keeping the property isn’t really on the chasing more money end b/c the return (~2.2% – 2.5%) is really low.
It sounds like your heart is really in the “sell” column.
Why not take a larger portion of the proceeds and pay down a larger chunk (or all) of that 4.25% mortgage? This would reduce the need to continue building the California Muni Bond portfolio to cover mortgage payments that you would no longer have. The passive income can be replicated (as you said) through Realtyshares/REITs while sticking with your “invest in the heartland” strategy. If you’re going to make a move to simplify your life, go all the way and get rid of a couple mortgages along with the property management side of it.
Because the vacation property was a poor investment, and my goal is to throw money at it in a way where I don’t FEEL the extra principal pay down. It’s my way of dealing with the situation.
You convinced me you should sell. You don’t want the rental headache for this property (sounds awkward to rent at the price you want), you aren’t depending on the rental income, and you have a great plan to deploy the profits for passive income, which you’ll have fun doing. Sell = Less stress, more fun, time back, diversification, likely long term upside(s).
Sam, do what makes you happy.
The way you’ve framed this post suggests mentally you’re already set to sell. You accepted an offer, you already know how you’ll invest the money, etc.
Financially unless you know the bottom is going to fall out of the market, or you have a much better yielding place to invest the funds, then you’re almost always better off retaining an income generating asset than selling one.
Question is how does this fit in with your future plans? Do you need the funds to fund the good life in Hawaii? If so then maybe locking in an attractive sale price is the right outcome.
One final observation, writing X times a week on a (very) successful blog isn’t “passive” income in the same way a (well) managed property is. Those posts don’t write/research themselves and probably can’t be viably outsourced in the same way property management can be.
Good luck with whatever you decide, and ‘attaboy for achieving the great investment success to date.
If I’m going to buy my dream home in Honolulu, I will need these funds. The homes I’m looking at are $3M and above.
You’re right that blogging isn’t passive income. But earning income through my severance negotiation book 100% is. It continues to sell 30 – 50 copies a month without me having to do anything. A lot of articles are super passive generation engines. It just depends on how many of these engines you want to put out in the world.
I could literally not post for a month and I’d make the same amount from a month ago. But since this is really fun and educational, I don’t mind continuing.
I wrote this post from 12:15am – 2:30am.
I say hold it, leverage up and cash out refi at the highest LTV possible while still cash flowing comfortably (including the cost of property management). Take the cash and use it as a 20 or 25% down payment on an apartment building/complex, and hire professional management. Your job is then to manage the managers, not annoying tenants. Rising rents will force appreciation on the apartment building, plus the leverage will magnify your returns. If you don’t want the hassle of being a landlord, outsource the management. The benefits of leverage, loan paydown, appreciation, and ability to depreciate the asset to get basically tax free cash flow is too enticing to me to sell the asset.
You make a good point here, however, most mortgage lenders/mortgage brokers will not offer a very high LTV cash out refinance on an investment property due to the risk. Don’t get me wrong, some of them will let you tap your equity pretty far, but your rates and terms will not be as attractive as Sam’s current ARM.
If your plan was to tap the equity on the SFR unit by doing a cash out refinance and purchase a 5+ unit property that was an even bigger cash cow, sure that makes sense, but just know you will typically enter the commercial lending world due to the amount of units.
Lots to ponder here. If you’re going to regret selling the property in 5 years, hang on to it.
Agreed. Many banks will go up to 75 or 80% LTV on rental properties. The rates are a point or two higher, but the returns are amplified by the leverage which more than offset the slightly higher interest rate. I recently did a cash out refinance on a multifamily investment property @ 75% LTV and 3.625% with a 5/1 ARM. If he wants to keep the underlying mortgage, there are some banks (they are hard to find) that do home equity loans or HELOCs on rental properties.
True that you’re getting into the realm of commercial lending with apartment buildings… but that has it’s advantages too. For example, in the commercial realm, many banks allow you to do a secured line of credit on rental properties and use that as a down payment on an apartment building. But all of this goes back to the bigger questions of what’s the priority here – making the optimal financial decision, or making the optimal personal decision? Only Sam can answer that, but I say leverage up (wisely) and build a real estate empire!
Maybe in the heartland, but not in the coastal real estate markets at this point in the cycle.
Given you’re focused solely on making money, I believe I can make more money with less work/maintenance elsewhere.
I always wondered why there was this belief from entrepreneurs that owning real estate is a bad way to make money. Now I kinda get what they are saying if you finally hit your entrepreneurial stride.
I’d sell and take advantage of the tax-free profits. You can follow your allocation plan of the proceeds, have it be A LOT more passive in nature and for your kids their inheritance can be the proceeds from these passive investments or buy them a property they would like. The peace of mind of not having to deal with tenants seems like it outweighs the cost of selling.
Sam – Love your analysis! You’re way more analytical than me and I’m pretty damn analytical.
However, I see you put a dollar value on everything except the value of simplifying your life. Can you put a dollar value on that?
Yes. I’m willing to pay $100,000 a year to experience zero negative stress!
You will need it because having children IS stressful.
You wont have time to deal with tenants when you have to care for your kids.
Take the money and SELL
Take the money and run. Lucky you were in SF. Take a while and take a breath.
Again, why are set on paying commissions in such a hot market? Why would you not fire your real estate agent and just work with a title company or real estate attorney. I’ll be happy to hear how your real estate agent can justify a commission of 1.5% of the sales price. I also think you can save on the buyer’s agent commission as well by finding a wealthy buyer who would agree to not use an agent for a reduced price on the home.
Probably too late at this point in the negotiations but I think that’s what would be making me kick myself the most.
Because the title company and lawyer won’t help me find a buyer. Their job is specific to the expertise they provide.
In retrospect, I should’ve tried to find a buyer by just blasting an ad on the web. And then hire a lawyer to do the paperwork. But I didn’t.
So are you saying I should not so because of the sales commission despite the price? I’m open to alternatives now.
Trust Me when I say but I feel sick Paying this commission. It’s a total monopoly that needs to be shaken up.
It’s debatable that real estate agents help sellers find buyers. I’m willing to bet 9 out of 10 buyers look on the internet for homes way before they contact a real estate agent. The only reason why I contacted real estate agents when buying homes is because they were the listing agent and the only number to call when I found properties that held my interest. In other words, real estate agents effectively have a lock on the listing, which is good for them. This is why most, if not all of them, want as many listings as possible. Once someone gives them a call, all they have to do for the most part is provide a unlock key code. Sure, they may help give you a starting point of a price to list your home but at the end of the day, the appraisal sets your home’s value, not the listing agent, especially when a buyer is using a mortgage. All that to say, sellers don’t need real estate agents.
Seller’s agents are convenient, not required. The thing is, some sellers may not want to field all the calls and set up all the appointments for prospective buyers. That can be a waste of a seller’s time. But in your case, someone who doesn’t mind driving for Uber and who is able to make yourself more available, and someone who wants to save over $100,000 in commissions, it’s definitely worth putting up a free listing on Zillow (if free in your market). That listing will be shared among several real estate listing sites after a few days.
As far as negotiating the selling price, if you find a buyer who is not working with a real estate agent (someone who calls you from your listing), and they happen to offer you 2.7 Million when all is said and done, that’s a huge savings on commissions. Or, if the buyer insists on using an agent, unless it’s law in California, simply insist that the buyer pays his agent’s commission. All is negotiable. There is no reason why you need to pay any commissions in such a hot seller’s market.
Last house I sold, the buyer used his agent to draft up the contract that explicitly stated that buyer pays buyer’s agent commission. He signed it. I signed it. I sent a copy to my title company and the title company did their job (coordinated with the bank and drafted the paperwork) while I coordinated the appointments for the home appraiser. It really was that easy. I’ll never use a real estate agent to sell any of my houses again.
I’m going to reiterate that buyers and sellers only need a title company or real estate attorney. They do not need real estate agents.
As a buyer, it doesn’t hurt to use an agent. As a seller, it hurts like hell. Buyer’s have nothing to lose if the seller ends up paying all the commissions. Why not have someone show you around unfamiliar neighborhoods.
Good luck!
P.S. I believe a 1031X only works if you exchange one property (the one you’re selling) for another that is equal in value and that is purchased within a certain time frame after you sell your existing home. If you’re not buying another home, then the 1031X isn’t of value to you.
I’m in a similar situation in reverse. Im looking at a 1 million vacation home in a place called Suncadia. It’s just an hours drive from Seattle but feels a world away. Im also in a place financially that I refuse to deal with any renter headaches.
The management fee is a stiff 50 percent of rent. However, they basically do everything. The remaining 50 percent would go to cover taxes, utilities, insurance and upkeep.
The upside is the appreciation. The last few years it has been close to 10 percent. My thinking is if I can own a asset that increases at least 5 percent annually as well as basically getting 180 days a year that I can use this asset as a vacation spot free of charge it’s a win win. Even if I never use it I still get the appreciation.
My vote is hire a property manager. Even if you don”t make a penny on rent you still get the appreciation. Plus, you get to drive by that house and say, “I own that!”
Thanks, Bill
That’s an interesting way to look at it, keep the property while making zero money to the hopes of continued appreciation. I’ve strongly considered just keep it empty and using the house as an expensive parking spot in the north end, and a bathroom pitstop. It feels good having nobody in the house for the past month!
Another way to accomplish this is to cut the rent in half. Imagine the amount of applicants you would get for a house discounting rent by 50%. Lock the tenant up for a 3 to 5 year period. Have them pre-pay 6 months or so in advance to eliminate collecting rent headaches. Make the tenant responsible for ALL repairs. I gotta believe you could find a very responsible tenant who would bend over backwards to keep such a sweetheart deal.
I’m not sure exactly how it would work but if you could find a non-profit to rent the house you may be able to deduct the discounted portion of rent as a donation. In addition you would be renting to a corporation which in theory is more stable than an individual.
Very timely article for me.
Thanks, Bill
That’s a good idea to get massive demand and then hopefully pick the best tenant possible. I’ll think about it.
I’d love to rent out the home at a discount to people who have occupations that are doing good for society e.g. teachers.
Sam, it looks like you are on the side of selling just based on the number of factors you listed for selling (10) vs not selling (8).
There’s value in harvesting the fruit when it’s most ripe (based on current information).
Good luck!
Ah, didn’t do that on purpose. Let me add two more not selling factors!
(Sidebar – spouse and quitting your old job both seem bigger financial decisions than this one…)
1031 may be the best pure financial decision – both for tax savings and for diversification. It’d also force you to write the definitive guide for us!
Selling outright and putting proceeds as listed would be safer, though less titillating. I’m therefore willing to bet big money you don’t go that route.
Very nice problem to have – good luck!
Big money? I like it. I’d do a 1031 Exchange if I found the money property in Honolulu, but haven’t found one yet.
I may write more about the 1031 Exchange program. I’ve talked to lawyers and friends who’ve done it. Pretty straightforward with some basic guidelines actually and sniff tests. cc @Andi
Sam,
As previously mentioned, either option sounds good. However, if you decided to sell it’d be interesting to have a follow-up article outlining the 1031 sale and how it would work (i.e. taking out $150k subject to capital gains and why, purchase like kind property in Honolulu as an “investment” with the long term objective of eventually making it your primary residence). You’re clearly well versed in the 1031 exchange and I’d be interested to hear your insights on the most efficient strategy to start and execute on 1031s.
I would sell. The 1031 Exchange works but there is risk in that you may have to exchange into a commercial property. I would take the gain and run. Sooner or later, tax rates will go up. I think sooner. If I were you, I’d consider opening bank accounts in foreign countries e.g. Canada, Aussie, Swiss, and others. Make sure they are out of the country so not subject to export controls e.g. Argentina or Venezuela. The idea is balance risk that the US Dollar tanks (it will – just when is the real question). Having access to foreign currency in such a scenario would be a major benefit.
Also, CA is a nutty place to be a landlord. Finally, if you want to be a landlord, make sure you are comfortable with confrontation when needed. If not, don’t be one. You will get taken.
“Also, CA is a nutty place to be a landlord.”
This is a great point. Sam, how would you feel if you’re $2.7M asset was squatted on? I’m in the sell camp. You still hold 3 other properties – this is an opportunity to diversify, and to lock in a win. To me, it’s a no brainer. Sell.
How would I feel? Bad and pissed off. But it sure would be some interesting stuff to write about! Remember, I’m a super optimist.
Sam,
You now have enough money to last you and your family a life time so why deal with tenant issues? I would sell to get 500K tax free and take the money to buy muni bonds for all tax free passive income. That would be another step closer for you to move to Hawaii. It is tough to pass up an opportunity to make one million. Having a stress free life is priceless. Your children may not even want to live in SF. Let your children fend for themselves and dont be a financial crutch to them. I have too many cousins that depend on their parents for money, for a house and for their inheitances.
Since you are the Financial Samurai, I suspect you cant hang up your rental income hat. You will take the money and buy another propetry. It will also give you so something to write about.
Whatever decision (no sell, sell for 500K tax free or sell for 1031) you make will be a win-win for you because you are so driven.
Adam
Yes Adam, stress sucks, especially when it can be EASILY eliminated by selling.
I’m going to write a post about how NOT to be a crutch to our children and loved ones. Should be interesting.
Just went through this myself – albeit on a much smaller scale in terms of price! The temptation to sell was too much and I went ahead with it. I wish I knew more about the 1031 exchange that you can do / as I’ll be paying a hefty gains tax. I was grateful I had a renter who wanted to buy and we worked on a finding a price together. We had their mortgage pro draw up the papers (and I verified with a realtor friend). Saved us quite a bit in commissions. Congrats on this sizable offer though and waiting it out. I like the bird in hand.
Aaron, congratulations to you for not having to pay the high commission price! The commission amount is really digging a hole in my eyeball. But at the same time, the agent is the one who found me my buyer. I just can’t get over the fact that I have to pay the buyers agent at 2.5% commission for negotiating against me.
Congrats on your sale!
I think managing tenants, especially 5 or 6 tenants all living together is a major headache I wouldn’t want, especially when the rent is such a low percent of the home value. You’re generating $9K per month in rent on a $2.7M property. If you were in my area that 2.7M would represent conservatively 27 100,000 homes rented at $800 per month, or $21,600 in monthly rental income. Not that you would want those headaches either. For what you can get in rent selling seems like the best option.
You could 1031 to another property in SF that isn’t valued so highly if you want to keep another house for your kid when he gets older. Sell for $2.7 Million, then buy a lower valued home in SF, get a $1.5M home and take the remainder to invest elsewhere (or get 2 1.2M homes). You would lock in your gains, and still have future upside in another property that would appeal to a much greater renter pool based on lower rental rates. Just my 2 cents.
What a great problem to have! Gaining over $1 million from property appreciation in just over 10 years.
I know no other nightmare than trying to manage 27 homes! ha.
For a 1031 exchange to work, it has to be like kind and valued at same or higher. So I was thinking of using the money to buy a really nice rental home in Hawaii, rent it out for 2-3 years and then move into it as a primary. But, that would be taking on more debt and having the same tenant hassle. I haven’t been able to find something sweet, although I have 180 days.
The luxury market in Honolulu is soft! Properties I saw three years ago are still on the market and getting price chops. Could be perfect for someone like me who wants to relocate to Hawaii. But I bet prices will continue to weaken there. Too much inventory, and NO strong domestic economy like in the SFBA that can afford those prices.
Related: It’s Always Good To Dream About Living The Dream
Sam, WHY do you think some of the properties in Hawaii ARE so soft? I’m stunned at how low some of property prices are there. If you’re willing (and can) live away from the city, you can get a big house, acreage, and clear ocean views for 2M (some areas even less). I would pretty much expect all the properties in Hawaii to be about 10x’s what they sell for… it’s paradise there.
Domestic economy not strong enough to sustain prices above the $1.7M range. The $3M+ range is VERY WEAK. At the luxury level, it’s all supported by mainlanders and international buyers.
I have to make a bet on whether Hawaii becomes the destination for Chinese hot money like it was for Japan in the 1980s and early 1990s. I’d love to be able to buy and see that wave of change after.
I have a similar dilemma and have been researching the 1031 rules. I have a rental house in the Bay Area that I manage myself. I have found that it is better to have a family/responsible tenant and rent the house at a fair (but low-ish end of market) rate. So if you keep renting, I recommend renting to a family even if the rent you are getting is slightly lower than 5-6 guys would pay. I may sell and do a 1031 exchange for something that we might want to move into one day (after kids are out of the house and we sell our primary residence). On the 1031 rules–They are complicated. You don’t really have 180 days! From what I understand, you only have 45 days to designate the property (or properties) that you are going to exchange for and then you have a total of 180 days to complete the transaction. These dates are firm! There is the option of a Reverse 1031 exchange, where you buy the replacement property first, so you can avoid the 45 day issue–but those exchanges can be expensive. AND you have to be able to purchase the replacement property before closing on the first one. So that doesn’t work for most people. You CAN combine the 250/500k with the 1031 exchange, but only if you have lived in the house for at least 2 out of the last 5 years. I think you should either just keep the rental house until you know that you want to move to Hawaii, and do the 1031 exchange then, or sell it now and do a 1031 exchange for something in Hawaii now only if you are sure you want to be there full time in a few years.
I’d love to rent to a stable family. But at a lower rate, that means it makes my current offer MORE attractive. A 2.2-2.4% cap rate is really bad when the 10-year Treasury bond is yielding 2.25% risk free.
I’ve already identified 3 properties in Honolulu for a 1031 exchange. So easy w/ sites like Zillow. Check out this sweet pad!
It sounds like there are a lot of unknowns in the future for you and the city. I hate playing the what if game, but what if there’s a recession that lasts for years and those expected IPO’s never happen? You seem to be in a place in your life where you can ease off the gas a bit and simplify your life.
I will say that a multi-billion dollar IPO from a Bay Area company is a 99% certainty. SFBA real estate is a rare market where the catalysts are very clear.
When you visualize your perfect life, and which kind of stress (tenants, maintenance etc) you choose to keep in your life, I bet the answer (sell) becomes more clear.
Perfect life is not having to deal with inconsiderate people, ever. I’ve always done my best to go above and beyond to provide good service and attention. It annoys the hell out of me when the same courtesy is not extended.
Related: The Downside of Financial Independence
Some tenants will always be tough, and value a rented possession less than you do your own home. That’s business I think Sam.
I don’t expect more than what’s agreed upon the lease. I just expect tenants to follow the lease, nothing more, nothing less. It’s when the much less happens that bum me out.
That said, as a veteran remodeler, I know that everything is fixable with time and money.
I would say hold onto your property. You don’t want to get rid of your cash cows – and I’m 100% sure your future children will appreciate a place to live in the future.
In 20 years, the House will most certainly be worth more – though you do have to go through years of tenants and property taxes to reach that.
I strongly believe that there will be a disruption in the real estate market in the next 5-10 years, driving commissions extremely low. So, I think that holding onto it is probably the best idea.
Besides, there’s no more land in San Francisco! The only place to build is up.
Speaking of property taxes, I will have to pay about $500,000 in property taxes over the next 20 years. That kinda makes me feel a little ill. How about you?
However, you get to deduct those taxes against the rental income. So it isn’t all negative. You also get depreciation. Not sure when you moved out, but you have to meet the “resided in” rule to get the $500k exemption (assuming you get that since you’re married). You should really look at the 1031 exchange. You can take the proceeds, reinvest in a multi-unit apartment in a Midwest college town, and defer the gains until you die. The rules are tricky though, so ask your tax advisor. All said, I’d say sell it and put the money to use on other things that require little work. Being a landlord has serious pitfalls, not the least of which is the chance that San Francisco (and California) will make it harder and harder for you to deal with crap tenants.
500K in property taxes would make me feel sick as well. If that was my primary residence, I’d downside and move to something smaller to lower my tax burden.
However, for real estate assets, property taxes are simply the cost of doing business. The property will produce far more income than the property taxes will take away.
To be honest though, there’s no gaurentee that your children will want to stay in san francisco – and you would be selling your property (as is) at a sky high valuation (in my opinion). I wouldn’t fault you for selling.
Regardless, If I was in your shoes I would hold onto the property at long as its cash flow positive. You can always increase your returns by doing a cash out refinance (although I don’t think this is something you would do since you want to reduce your debt).
Akash, I noticed something from all the feedback so far. People who are younger and who have not been landlords very long or at all are pushing to hold, readers who have been landlords for a while are pushing to sell.
May I ask if you are a landlord and if so, how long you have been landlording? Thx
Managing a rental property and tenants is much harder than it sounds. And hiring a property manager doesn’t solve every problem either. I’ve been stressed out multiple times dealing with a property manager. Sure they do the bulk of the work which is great but things will inevitably fall through the cracks.
I understand why this is such a hard decision. My vote is to sell. I don’t think you can go wrong either way though.
Can you elaborate about times you’ve been stressed out dealing with property managers?
I voted for the property manager option, but I don’t know much about the relationship between a property owner & manager. Extra curious because I may want to go this route myself someday.
We currently manage all of our units and we have an 8 unit place on the market right now. Our lives have changed over the last few years and the rental units don’t have to be part of our financial plan anymore. We also had no luck finding a manager – until now. The realtor we are working with has a solid property management in our area (which we had never found in our search for managers) – so if we don’t get the price we are looking for, we’ll move to management too. I’d be curious to also know what negative experiences you have had.
I self manage and also use a property manager. Property managers don’t make the big decisions for you, you have to do that. Property managers use their own contractors. If you are familiar with costs, you may think they are way overpriced, some property managers also take a cut. Property managers sometimes make silly mistakes which you have to spend time correcting (paying another property’s expenses out of my account, forgetting to make a deposit, etc). On big repairs you still need to be present if you have input. The manager had recommended I pay 20k for repairing a drainage system in my side yard, my own investigation showed a clogged roof gutter which only cost a couple hundred to repair. You will always care more about your own property. In SF, property managers are very expensive. On the plus side, my manager was aces with leasing and found awesome tenants.
I’ve had 3 property manager and they weren’t ideal. They are just too busy to keep a close eye on my property. One tenant built a tree house in the backyard and the neighbor wrote to me about it being an eyesore. That’s not good for the owner because of liability issue as well. Property manager is helpful if you don’t live close by, but you can take care of your property better. They didn’t find great tenants either… I’ve had better luck with tenants on my own.
Sell and take profit! SF had an amazing run. They are way ahead of the US market. I can’t believe it will last.
I’ve heard so many people complain about their property managers and how much it costs to hire one without getting much return. When you hire a property manager, you typically need to pay them at least the first month rent. Some property managers only check the property once a year and will call you whenever the tenants call them. It’s such an unnecessary middleman. Unless you get a great reference for a PM from friends, I’d say either do lots of research to find a good one or manage the property yourself.
I’ve decided to sell 2 of my rental properties recently as well. One is under contract to be sold in 3 weeks and another I’ll be listing on the market next week. Rent prices are slowing (and I believe in SF may be decreasing from a recent article I read), tenants aren’t getting any easier to work with, and I think housing prices are going to slow drastically this year as rates continue to climb and homes continue to become more unaffordable. Plus, as for Sam – if you decide to rent out your main property, you no longer get a tax deduction if you go to sell down the road (sliding scale for a while then goes away). I’m going to invest elsewhere.