I’ve owned rental property in San Francisco since 2003, and my experience has been mostly bad. Being a landlord is tough work, which is why I've been diversifying into real estate crowdfunding in order to earn income more passively.
But when you’re in your 20s and early 30s, you’re willing to deal with the BS to try and earn passive income for financial freedom.
My choice was to either invest in rental properties and deal with tenants, or end up working at a miserable job for the rest of my life because I didn’t have enough passive income!
I thank my lucky stars that I started accumulating property in San Francisco at age 26, because real estate allowed me to retire at 34.
Below is my passive income snapshot from 2017:
My first rental I still own is a 2/2 condo in Pacific Heights. The average turnover is once every two years, and dealing with the HOA during move-in/move-out, furniture delivery, complaints, etc was annoying, especially because of the HOA.
Tenants were generally good for the most part because they were working professionals with higher incomes. But I’ve had leaks into my neighbor below, a broken window with impossible to find replacement parts, and lots of HOA complaints.
The only good thing is that the condo I bought for $580,000 in 2003 is now worth about $1,250,000 and is paid off. This rental is “Rental 2” in the chart.
My second rental was a 4/3.5 single family home I bought in 2005. Loved living in it for 9.5 years until I decided to rent it out for 3 years because we bought a fixer in 2014.
Renting this house was a nightmare because I could only get 4–5 dudes as tenants given it was in The Marina and it was on a busy street next to the busiest street in all of SF. Families stayed away. My tenants destroyed the house, threw parties, ran across my neighbors roofs, and frequently paid their rent late. I’m glad I had $15,000+ security deposits.
After three sets of 4–5 dudes over three years, I had enough! I sold the house in 2017 for ~30X annual gross rent, and reinvested $550,000 of the $1,800,000 proceeds in real estate crowdfunding in the heartland. The rest of the proceeds went to stocks and bonds.
My SF net rental yield was about 2.5% versus 10% – 15% through my multi-family and commercial properties in places like Texas and Alabama. Best of all, the income earned is completely passive. No deadbeat tenants. No leaky roofs. No neighbors complaining!
This rental is “Rental Property 1” in the chart. “Rental Property 3” is our vacation property in Squaw, Lake Tahoe. A poor investment, and an explanation for another time.
Rental Property Is A Young Person’s Game
Here's my passive income now after selling my single family home rental that caused me so much grief.
Even if you hire a property manager, you have to manage the property manager. Our HOA property manager is terrible, for example, so don’t count on them being your solution to less rental property stress.
Own as much cash flowing physical real estate as possible when you are young. When you have a family and get older, you won’t want to bother dealing with rental property hassle anymore. Especially not in SF where tenants can take advantage of your kindness due to the rental laws.
Thanks to technology, it’s much easier being a passive landlord in more logical areas around the country. Prices in San Francisco don’t make sense for landlords anymore. I’m only keeping my final rental here because I worry in 20 years my son won’t have a place to stay.
Build passive income folks! You will eventually get so sick of your job or get blown out that you’ll be glad you did. Not a day goes by where my wife and I aren't grateful to be able to take care of our boy full time. Investing in real estate crowdfunding through Fundrise has given back our time.
About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
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