Back in 2001, I rented a crappy two bedroom, one bathroom apartment at the edge of Chinatown in San Francisco. The garbage truck would wake us the hell up at 4:30am twice a week. The paper mache walls couldn’t deaden the incessant arguing sounds of our Cantonese neighbors.
At $1,800 a month for two, the rent was cheap compared to the $2,100 a month studio + alcove apartment I rented with a colleague in Manhattan earlier. $300 less a month and 25% more space. What a steal in the world’s cheapest international city.
Unfortunately, I think my roommate was a little schizophrenic. About once a week at around 10pm, I’d hear his head banging on the wall as he screamed nonsense for about 30 minutes in a row. I was too afraid to see if anything was wrong so I stayed in my room.
One evening, my roommate came home from his night shift at In N’ Out Burger all bloodied. He had been whacked in the head with a bottle by assailants who stole his wallet as he traversed the Tenderloin district, at that time, the most dangerous neighborhood in San Francisco.
The trail of blood he left on our hallway floor jolted me into making a lifestyle change. Was the sacrifice to save as much money as possible putting me in danger?
DECIDING TO SPEND A LITTLE MORE ON RENT
As you may recall from my post about accumulating a million bucks, I had just moved to San Francisco from Manhattan after a promotion and a raise. Yet, instead of living it up, here I was spending 30% less on rent because I wanted to save as much money as possible in order to not have to work in finance forever.
Ever since I was a kid, I was always told that renting was flushing money down the toilet. Back in 1999-2001, spending more than $1,000 a month on rent felt like I was being financially mugged every month. But getting woken up by noisy garbage trucks and seeing my roommate get beat up encouraged me to stop being so parsimonious.
Instead of capping my artificial willingness to rent at $1,000 a month, I raised the amount to $1,800 a month. $1,800 a month bought me a place of my own in one of the nicest neighbors in San Francisco where I’d stay for another year. But once again, I had bad luck with my neighbor who enjoyed playing deep bass music until 2am almost every night. Then the landlord wanted to raise the rent, so in 2003 I finally decided to buy my own two bedroom place.
Until this day, I’m unwilling to pay much more than $2,000 a month or $24,000 a year on rent. It’s just a mental limit I’ve drawn in my mind that I refuse to cross no matter how much I earn. Okay, now let’s see who’s willing to pay more than 4X that amount!
WHO SPENDS SIX FIGURES A YEAR ON RENT?
Before 2014, the most I ever charged for rent was $3,800 a month for my two bedroom, two bathroom condo in Pacific Heights. This was the condo I purchased when I just turned 26 years old back in 2003 for $580,000. A 2/2 property is a highly coveted size due to its flexibility. It can be rented out to a widow, a couple of empty nesters, a couple of roommates, a small family, or a well-to-do professional who just wants more space. No wonder the place has received maximum occupancy since it first became a rental in June, 2005.
But my new rental is a four bedroom, three and a half bathroom house, which I purchased back in 2005. I originally thought I’d be lucky to get $7,000 a month ($6,500 realistically), but after doing research on the market comparables on Craigslist, I decided to test the market at $8,400 instead. To me, $100,800 a year is an unfathomable amount of money to spend on rent. I had my doubts the house would ever find new residents.
But within a day of posting my ad on Craigslist, I had three inquiries. After six open houses, I had three interested parties. The winning tenants decided they liked the place so much they agreed to pay $300 more a month to $8,700 a month instead! I accepted. The tenants ended up being four males with jobs in finance and technology, whose income totaled roughly $400,000 a year.
For my latest round of open houses, here are some of the prospective tenants who came:
* Professional baseball player making $7.5 million this year who was acquired by one of the MLB teams in the Bay Area during the off season. He and his family needed a place to rent for six months. They have a house in Tennessee during the off season. Given his large salary, I was surprised he’d even consider my house. Update 11/1/2015: Ben Zobrist was traded to the Kansas City Royals and just won the World Series! Just goes to show you that you never know what your future will hold. Hang in there! Update 11/3/2016: WHOAH! Ben just won another World Series withe the Chicago Cubs!
* Hedge fund manager of 10 years, his wife and high school freshman daughter. They just sold their 5,700 square foot house close by for $7.1 million dollars. One daughter is off to college this year, and another daughter is already in college. They are looking to downsize to a mid-2,000 sqft house for three years until their youngest daughter goes to college.
* A Berkeley PhD student, her friend who works at Facebook, and another couple friends who work in the energy sector. The PhD student drives a BMW convertible that costs $60,000 new. Not sure how she has the money. Perhaps family support.
* Multiple groups of four guys working in tech and finance. Common employers include Twitter, Amazon, Apple, and Google. Guys outnumbered gals looking for housing 10:1. The standard budget per roommate is $1,500 – $2,500 a month. Nice one bedroom apartments in San Francisco cost $3,200 – $3,600. Nice two bedroom apartments cost $3,900 – $5,500. Nice three bedroom apartments cost $5,500 – $7,500.
* A 44 year old private equity managing director, his ~28 year old wife, two labrador retrievers, and two live-in helpers (6 heartbeats)! I asked whether the two live-in helpers would be OK sharing the room downstairs, and they said the room downstairs is massive compared to the room they are living in now in Hong Kong. One helper is to be the wife’s private driver. The other helper is to cook and clean. Talk about living large!
* A partner at a large law firm who owns a home but recently went through a divorce. Has a couple kids who will visit on occasion. Wants to move to a more urban area where there is better nightlife, bars, and restaurants to meet people.
* A managing director at a boutique investment bank and his pregnant wife and two kids. They have been renting for eight years, and have decided living in an apartment with only one bathroom is too difficult (agree!). Was the most nit-picky prospective tenant ever, asking why a door handle was loose, whether I’d repaint the walls, change the cabinets, etc. Then they played hard ball with me on price by offering $7,000 a month even though I have lots of demand over $8,500 a month. I can see why they didn’t buy property any time in the past eight years, and missed another rental property: unrealistic expectations of the market.
* A 60+ year old couple relocating from Massachusetts. “Life is too short to live on the East Coast. The weather is dreadful. I went to school in Berkeley, have been away for 25 years, and want to come back to the Bay.”
* Co-founder of a bootstrapped startup with 10 million users a month. Was runner up for a TechCrunch award for best bootstrapped startup. Has a wife and son.
* A partner at a Venture Capital firm who invests in financial tech companies and his startup CEO wife who has an urban baby sitting business. They have three sons. I was surprised they hadn’t bought yet.
* The President and CEO of an advertising agency from Bogota, Colombia who is relocating to SF. Daughter going to a private school north of the Golden Gate Bridge.
* Co-owners of a popular Italian restaurant in little Italy with over one thousand Yelp reviews averaging 4 stars. Was hoping they might be tenants so I could get some comped food and always a table.
COMMON THEMES OF PROSPECTIVE TENANTS
There have been plenty of reports that San Francisco is the most expensive real estate market in America. I firmly believe Manhattan is at least 20% more expensive than San Francisco, but that’s no consolation for those looking to rent or buy in SF. Here are some common themes I’ve observed from the people willing to spend so much money on rent.
* Everybody is shacking up after college. From ages 22 – 35 it is common for college graduates, master’s graduates, and PhD graduates to all live with roommates. You can easily find a room for $1,200 a month, just not in the best neighborhoods. With Facebook engineers making $110,000 right out of college, and investment bankers now earning $85,000 base salaries + $25,000 bonuses, a lot of new graduates can afford $2,000 a month. New MBA graduates can usually spend up to $2,500 a month given they are earning $10,000 – $15,000 gross a month, or $6,500 – $9,750 net (based on a 35% effective tax rate).
* Empty nesters. One of the discussions about the future of housing is what will happen when the Boomer generation dies? Will there be a flood of housing that will suppress prices? The couple that sold their 5,800 square foot place sold the home to buyers who were downgrading from a 10,000 square foot place in Napa! I decided not to sell my 2,300 sqft home, but rent it out and downsize to a 1,900 sqft home with one less bedroom and bath. There seems to be an endless supply of people looking to rent or buy who are downgrading/right-sizing. Simplifying life as one gets older is a common theme.
* High cash burn rates. It’s expensive to raise a family in San Francisco. Every parent had a high income job at some private equity, venture capital, investment bank firm, yet they were still renting. Two specifically mentioned their high cash burn rate at over $350,000 a year. If you’re spending that much to support a family, either you’re killing it or chances are high you’ll have to work for a very long time.
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HIGH INCOME + LOTS OF JOBS = HIGH RENTS
I’ve always fantasized about buying a nice house in Honolulu with a lanai overlooking the Pacific Ocean. I’d spend the mornings doing yoga caressed by the ocean breeze before typing up new posts for Financial Samurai. Afterward, I’d walk down to the beach for a quick snorkel or surf session before taking my family out for a nice picnic lunch.
But I didn’t fulfill my fantasy due to fear and economics. You either have to come from money, be an entrepreneur, or be a doctor to afford the $1.5 million+ home that I so desired. Given that I no longer had a full-time job, I felt the risk of buying in Honolulu was just too great. I would be comfortable buying a $800,000 home in Oahu, but sadly, you can’t get much for that amount.
Spending $1.5 million for a house in San Francisco or even $2 million felt much safer because there are so many more employment opportunities here than in Honolulu. As someone with 13 years of experience in finance, and six years of experience in online media, I don’t fear not being able to find a six figure job even though many jobs in startup land pay like crap. Now my goal is to try and bring island paradise to San Francisco.
I never thought someone would ever spend over $100,000 a year to rent my house. But inflation is a powerful force. It’s important to accumulate assets that will inflate over time or produce income that inflates. Without being on the right side of inflation, it’s hard to ever escape the rat race. But I also know that plenty of these prospective tenants aren’t struggling at all. To them, $100K+ on rent is probably much cheaper than many alternatives!
Explore real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns.
Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look.
Shop around for a mortgage: 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. This is exactly what I did to lock in a 2.375% 5/1 ARM for my latest refinance. For those looking to purchase property, the same thing is in order. If you’ve found a good deal, can afford the payments, and plan to own the property for 10+ years, I’d get neutral inflation and take advantage of the low rates.
Updated for 2019 and beyond. I ended up selling the rental property I mentioned in my post for $2,740,000 and reinvesting $500,000 of the proceeds in real estate crowdfunding to earn completely passive income.