If you are considering selling your rental home, this post shares why I sold my rental home in 2017.
At the time, I was very conflicted because I believe, to build great wealth, we should hold onto our real estate investments forever. However, sometimes life gets in the way. We must make decisions that best suit our needs at the time.
To minimize regret, the key is to utilize the proceeds for equal or greater returns or comfort.
The Dilemma To Sell My Rental Home Or Not
Here are my thoughts from 2017 on why I sold my rental home. I'll then provide an update about my decision at the end.
After hearing direct feedback from about 80 of you through social media, my weekly newsletter, various post comments, and a poll with over 1,500 votes, I decided to sell my Marina, San Francisco rental house I bought in early 2005.
I lived in the house from age 28 -37 and had some wonderful memories there. But after three years of being a landlord, it was time to move on.
The decision was incredibly agonizing because I believe it's best to hold onto a property forever. When I finally sold the house, I didn't feel joy, but disappointment.
I sat in the lounge area of a bank branch looking at the largest check I've ever seen in my life and feeling like I had failed my son, myself, and all of you. I'm long-term bullish on San Francisco property, but I felt I had to start living for today.
20 years from now my son may how I could have sold the house for so cheap. If he does, I'll point him to this post as I'll have long forgotten all the details by then. Hope you can forgive me dear boy if I don't properly reinvest all the proceeds.
Thankfully, more than five years later, the revinested proceeds have grown. But at the time, I was filled with uncertainty on my decision.
Why I Decided To Sell My Rental Home
Back when I was 27 (2004), I decided I no longer wanted to live in a two-bedroom condo even though it was perfectly fine. Unfortunately, average single family homes in the northern part of San Francisco cost about $1.8M or more back in 2004.
But one rainy December afternoon, while I was parking to look at a $1.2M three bedroom condo for sale, I stumbled across a handsome single family home that nobody seemed to want.
The listing agent was from out of town. All she had was a messy home and a flimsy one page black and white flier. To contrast, most homes in this price range were pristinely staged and had multi-page colored brochures.
The house had been sitting on the market for two months and she told me if she didn't get an offer by Christmas, she was taking the house off the market and re-listing it in the Spring.
Knowing that selling during the holidays is a sign of desperation, I sat down with her to learn more about the seller's story.
The seller was a newly retired couple that hailed from Texas. They had wanted to relocate to San Francisco, but after a knee operation, the wife decided she didn't want to live in a house with two flights of stairs. As a result, they never moved in and kept renting back the house to the previous sellers. Then I came along.
Stretching To Afford An Upgrade Property
The listing price was a “more reasonable” $1.55M. It truly was since other homes of similar or smaller size sold for $250,000+ more.
Besides not being marketed properly and the incessant winter rain, the main reason why the house wasn't selling was due to its location on a busy street next to one of the busiest streets in all of San Francisco. We had our concerns about the noise too. So we parked outside the house multiple times for 30 minutes each session to see if we could stand the road noise.
The overall market in SF was still strong for properties under $1.5M in 2004. But I discovered that as soon as I crossed the $1.5M threshold, demand fell precipitously.
Opportunity To Pay Under Asking Price In A Hot Real Estate Market
Here was an open market opportunity to buy a single family home below asking, instead of constantly get outbid. I decided that with the installation of double pane windows, the road noise would be bearable. I proceeded to make an offer $25,000 below asking in December 2004 for $1,525,000.
When they accepted, I felt instant dread. Should I have offered $1.45M instead? But deep down, I felt the house could easily be worth $2M within 10 years. Therefore, I went ahead and dumped my life savings into the house. Plus I got a two-month bridge loan from my grandfather for part of the 20% down payment. My year end bonus got paid out every February so I knew I could pay him back quickly.
After purchase, the house continued to appreciate for two and a half years. But the global financial crisis came and knocked its value right back down. The house's value might have even decline to $100,000 less than my purchase price.
With a $1.2M mortgage, I wasn't feeling that good about my financial future anymore. Instead, I was feeling incredibly stressed!
A Recovery In Real Estate And Another Chance
After almost losing my shirt during the financial crisis, the market finally stabilized. Miraculously, after more than seven lay off rounds, I still had my job.
I remember telling myself that if the housing market ever rebounded where I could eek out a profit, I would sell and never take on such massive debt again.
So in 2012 right when Facebook went public, I decided to list the house. I thought surely someone would be interested in buying a 3 bedroom, 2.5 bathroom home with an unwarranted room and bathroom on the ground floor.
The listing time also coincided with me leaving Corporate America and losing a healthy six-figure salary. The mortgage was still about $1,000,000 and I worried whether I had made the right move to leave a job so young. During a time of transition, having more liquidity seemed prudent.
After one month of no buyer interest, I decided to do something cheeky and raise the asking price from $1,695,000 to $1,780,000 and then to $1,789,000 (see picture).
My ego was bruised and I wanted to show strength. But after another 28 days with no interest, I decided to remove the listing. Destiny wasn't cooperating with my plans to sell, so I didn't force the issue. Instead, I refinanced my mortgage to save ~$400+/month and focused on traveling around the world and growing Financial Samurai.
The Transition To A New Property
In 2014, we bought a fixer on the western side of SF because we wanted to experience a new adventure in a different part of town. The neighborhood is Golden Gate Heights.
We were *this* close to relocating to Honolulu, but decided if we could bring Honolulu to San Francisco in the form of a house with ocean views and a large lanai, we'd stay for several more years.
Instead of trying to sell the Marina house again, this time we decided to rent it out. To our surprise, we found tenants willing to pay $8,500 a month in rent, so we accepted. The four guys and a dog ended up being a PITA to manage, but $8,500 was way higher than we thought we'd get so the aggravation seemed worth it.
Constant Turnover Of Tenants
This initial set of tenants only stayed for one year. My next set of tenants were five guys who were willing to pay $8,800. They were the best candidates I could find at the time, largely because families with small children were worried about being so close to a busy street. Either that, or they simply bought.
I accepted a $17,000 rental deposit and prayed everything would be OK. For the most part, everything was OK. But there was constant roommate turnover, late rent payments, and maintenance issues (leaky roof, broken kitchen faucet, broken fridge, holes in walls, cracked tiles, damaged kitchen doors, noise complaints, and lawn neglect) that finally made me cry uncle.
Related: Being A Landlord Tests My Faith In Humanity
So Many Things On My Plate
In addition to dealing with all these issues, I was also busy project-managing my new home remodel. Remodeling an entire home is already stressful. Add on rowdy tenants and life begins to become unbearable, even if you don't have a job to go to.
Thank goodness we have been able to resolve these stresses and focus on the birth and care of our new son. As prospective parents, we didn't know what to expect, but we did know from lots of feedback that raising a baby is way harder than what people say (so true). We wanted to free up as much time as possible to prepare for this new chapter in our lives.
Renting out the Marina house for three years wasn't a great experience, but at least I gave it a go. The ~$60,000 in net rental income enabled me to finally achieve my long term passive income target of $200,000 a year. But like Anthony Scaramucci, who was fired just 10 days after being named White House communications director, my $200,000 a year in passive income didn't last very long.
Hard To Let Go Of The Property
I held onto the Marina house in 2014 because it was tough to let something go after so many good memories. I also didn't want to be embarrassed again. Besides, I was bullish on SF real estate. Financially, I had a $400,000, 7-year CD come due that provided for the downpayment of my new home. Further, my online business continued to grow.
But after vacating it for almost three years, I no longer had a strong attachment to the Marina house because by then we had made amazing new memories in our new house in Golden Gate Heights.
When you remodel every inch of the house, you naturally get more attached to it. I also remember the first night we brought our son home at midnight. It was a magical moment that solidified my current home as the forever home.
San Francisco Property Prices Rise
From a financial point of view, we got very lucky. Because nobody wanted to buy our house in 2012 we've been able to double benefit with leverage from a ~20% appreciation in the Marina rental house and a ~35% appreciation in my primary residence.
It's funny to see how quickly sentiment can change. Most people generally have to sell to buy another house in SF, but I took some risks and leveraged to the hilt.
For some time, as the bull market kept on going, I felt stymied by an earlier decision to lock up $300,000+ in a 4.1% yielding 7-year CD . But as it turned out, it was the expiration of the CD and the availability of that money that enabled me to buy my new home.
Further, I had thought there would be a two or three year slowdown in property prices starting in early 4Q2015 when many private companies had their valuations slashed. While the market did slow down for a couple quarters, by the Spring of 2017 it had recovered and was as hot as ever for single family homes. The condo market, on the other hand, is definitely cooling due to a surge in new supply.
The Itch To Sell My Property Increased
By early 2017, after the 8th time my tenants were late paying rent, I started thinking maybe I could get $2.3M or $2.4M for the house (from $1.7M in 2012). And if I could, I would sell.
I was texting back and forth with my neighbor to give him the first look. He said he'd be interested in buying my home via a private transaction for $2.1M.
I passed, even though it would have been nice to save on all those fees. I remember feeling vindicated that finally, my home was worth what I thought it could be worth all these years later.
Then, unexpectedly my tenants gave me an opportunity to test the market by informing me of their intention to vacate on May 8, 2017. I set up a race like I did in 2016 when my condo tenants vacated.
An Opportunity To Sell By
In one lane was me in charge of finding suitable tenants within 30 days. In the other lane was a realtor in charge of finding a buyer off market within the same time period for $2,500,000. I decided on $2,500,000 as a stretch price because I was reluctant to sell. Whoever found the client first would win!
Unlike in 2016 with my Pac Heights rental condo, I lost. I couldn't find my ideal tenant, someone who would take care of my property and stay for at least a couple years. One divorced mother of four children offered $7,500, but I passed because she was a highly unprofitable startup founder.
Another family of 6 offered $7,800 and I passed due to too much wear and tear and such a weak offer. This was the beginning of my tenant hunt when I though the rental market was stronger than it was. It is much harder to find a $9,000/month renter versus a $4,200/month renter.
Meanwhile my realtor was able to identify a buyer who had lost in a bidding war for a comparable property in my neighborhood.
One thing led to another and I received an offer for $2,600,000 just nine days later! It's worth noting that I had already been looking for tenants for 30 days already before the race began given I received a 30-day move out notification.
Analyzing The Strong Offer
I was astounded by the $2,600,000 offer. Another highly experienced realtor had told me that if I put in $50,000 worth of work painting the house, updating the light fixtures, changing the master bathroom tub, and replacing the kitchen floor I *might* be able to get $2,500,000 or so. She was a top producer with 30 years of experience and visited my house twice to come up with her assessment.
Another realtor I interviewed said that if I put $30,000 into staging, painting and modernizing the light fixtures, I'd probably get around $2,300,000. I was not impressed. But I understand it's important to manage expectations and surprise on the upside.
Deciding On A Realtor Was Tough
I went with my realtor because in 2016 she had sold a neighboring home in Golden Gate Heights for a massive premium. I was impressed with her professionalism when I corresponded with her and most importantly, with her results. The aforementioned house was a dump, had to go through probate, yet finally sold for $150,000 more than I thought (10% over).
My realtor firmly believed I could get $2,500,000 without having to do any further work since I had already painted a couple rooms and refinished the floors. My house is 2,070 sqft plus about 200 sqft of unwarranted space.
If you slap on the average price/sqft of $1,171 in the Marina, you get $2,423,970. But my house should trade at a 10% – 20% discount due to its location on a busy street.
Even with a surprising offer of $2,600,00, because of commissions, I wasn't completely convinced I should sell. I was able to negotiate the total selling commission down to 4.5% from 6%, but that was it. In this day and age of the internet, a 4.5% commission is still egregious.
That said, the previous realtor who I used in 2012 for a 5.5% fee hadn't found me a buyer for $1.7M after 28 days. So at least my latest realtor had something for me to consider.
In November 2023, a Missouri jury found the National Association of Realtors, Keller Williams, and HomeServices of America guilty of collusion to keep commissions high. Therefore, hopefully commission rates will come down over the next several years.
The Counter Offer
We had several other realtors come with their buyers, but nobody made us an offer. The road noise and traffic were always the main deterrents. For some reason, these buyers didn't mind the noise and were charmed by the aesthetics of the home.
Given I didn't need to sell, I decided to counter at $2,788,000. A higher price would cover my commissions, transfer tax and then some. Why not try and test the upper limits without losing the buyer? The cost to sell a home is expensive!
After several days of hemming and hawing, they came up to $2,700,000. They said this was the best they could do because their purchase depended on bank underwriting.
I was tempted to accept because now I was $200,000 – $300,000 higher than what I hoped to get. But, my realtor kept encouraging me to reconsider the price because she knew I was on the fence.
Countered Right Back
I countered $2,750,000 firm with a lovely letter. In the letter, I discussed how much they would enjoy living in a single-family home instead of in a condo. I wrote about all the upgrades we had done over the past 13 years to make the home perfect.
I gave them an Excel spreadsheet of all the things we did. The spreedsheet included the cost of each item to make them feel like they were getting a good deal. I also showed them pictures of all our work.
After another several days past my acceptance deadline, they acquiesced! $2,750,000 is a significant number because it is a full $1,050,000 more than what I would have sold it for just five years earlier. Being able to earn $210,000 a year in equity while also collecting $100,000+ a year in gross rental income the last three years blew my mind.
It felt like I may have won the lottery!
I write “may have” because the buyer wasn't the commonly cited cash buyer all sellers hope for. Instead, the buyer had to not only take out a $2,000,000 loan, he had to take out another $300,000 loan at a much higher interest rate because he only had about $400K in downpayment.
Three years earlier, he had bought a $1.5 million condo in the same neighborhood before he had a son. Based on his finances, the max the bank would allow him to buy was $2.6M. The sellers admitted they had been hunting for properties in the $2.3M – $2.5M range when they heard about my house.
Things Started Getting Dicey Once In Contract
When the deadline to remove the financing contingency arrived two weeks after accepting my counter, nothing happened. His bank was making him jump through more hoops so he wanted to keep his financing contingency. If he had removed the contingency, and the loan didn't go through, he'd be out $82,500 (3% earnest money downpayment).
With no other rental offers, I decided to extend the deadline several more days. This was after already extending the inspection contingency deadline by four days. But after five days of not getting any sort of update, I began to worry.
Worry turned into frustration, so I decided to aggressively look for more renters again! Each day the deal didn't go through was another day of lost rental income in my mind.
I kept on telling myself that I would regret selling the home 20 years from now due to the robust job engine here in the SF Bay Area. So after a 15 day respite, I marketed my property hard again to find a group of tenants.
After a week, I found a group of five guys (girls don't exist in San Francisco) who ironically all worked at my old employer! It was destiny!
Temptation To Just Hold On
They all made about $80,000 – $95,000 base salary each as first or second year financial analysts. I thought it would be hilarious to write in a future post that even after getting paid for five years after I left thanks to my negotiated severance, I would still get paid by my old employer for at least another year! It would feel absolutely fantastic, so I decided to go with them.
There was only one problem. Instead of offering the $9,000/month that I wanted, they offered $8,300. I countered with $8,500 and told them they could start one month later on July 1, instead of on June 1. They were originally asking to move in on July 16. But I felt that leaving my property empty for that long while also having an outstanding offer to buy was too much.
They finally agreed on the terms. However, they bailed the Saturday morning we planned to meet up! They told me they found another property and thanked me for my time.
In other words, the true market rental price for my house was not $8,500, but closer to $8,000 a month or maybe even less given two other parties offered $7,500 and $7,800, respectively.
What's interesting is that a Missouri jury found the National Association of Realtors, Keller Williams, and HomeServices of America GUILTY of real estate collusion to keep commissions high. Let's see if I can get some renumeration after the fac!
Major Uncertainty While In Contract
Now it was time to panic again because I had sent a document to my buyer to reject the offer and release him of his $82,500 earnest money deposit. Now I had NOTHING.
Using my Buy Utility, Rent Luxury framework, someone was offering me 28.5X – 30X my gross annual rent compared to the 20.5X average for the SF Bay Area and I rejected him. What was I thinking?!
But thankfully, the buyer didn't know everything that was going on, on my end. After I sent the recision document, they told me they were working as hard as they could with the bank to get the loan finalized. They still really wanted to buy my house. They said that by Monday or Tuesday, they should be able to remove the contingency and for me to please wait several more days.
Just Kept Waiting For The Financing Contingency To Be Removed
Given I had nothing, and nothing could be done during the weekend, I told my realtor to tell the other realtor that I was OK to wait, but no promises. I wanted them to feel a tremendous sense of urgency to get their loan done since they were already a couple weeks past the deadline.
Meanwhile, I was mentally preparing to just keep my house empty for the next 22 years because I was so sick and tired of dealing with renters.
That's right. I was willing to pay $22,000 a year in property tax, $2,000 a year in home insurance, $5,000 a year in random maintenance costs totaling over $600,000 after 22 years just to hold onto this asset nobody seemed to want to buy or rent. My pride was speaking again.
I even hired a leasing agent to tap into his relocation specialists network for a one month rent fee to see if any ideal tenants could be found. Nada, except for a group of six guys! No thanks. All signs pointed towards the deal not happening.
Nail-biter Until The Very End
I was stressed, annoyed, and anxious during this 45 day process. Remember, I was getting very little sleep taking care of a newborn. He would wake up every 30 minutes to 2 hours. I was running on adrenaline. Then I was running on fumes. Then the fumes ran out so I decided to settle on leaving the house empty forever.
When the buyers were finally ready to remove the financing contingency, I had to make a decision to tell them to go ahead with writing a new offer or telling them I had moved on.
By this time, I was too tired to negotiate any longer. They were also holding me to about $35,000 in immediate weather-proofing work that needed to be done. The work was pointed out by the inspector who found leaky windows and dry rot. Inspection contingencies are another tactic for buyers to reduce the price.
I had disclosed to them one of the light wells leaked through the dining room during the recent winter storms. They were rightfully concerned, and so was I since all I did was get up on the roof and spray the crap out of the roof with FlexSeal.
The seller's disclosure is very important when selling a house. You must be as honest and thorough as possible to build trust and avoid future backlash.
The Final Sales Price Of The Home
In the very end, we agreed to a price of $2,740,000. I gave them a $10,000 discount to address the inspection report. Then they agreed to finally remove the financing contingency and get on with it. The final price/sqft came out to be $1,323. This was a 13% premium to the average price/sqft in the most expensive part of the town.
I'm happy for the buyers because their loans went through. They've now got a great home to raise their son for the next 10+ years. I just hope his new business venture goes well, he can sell his old condo to free up some liquidity, and the economy continues to chug along.
This piece of real estate served us well. Now we no longer have a use for it because we have a new home and more powerful streams of semi-passive income.
Why I Sold My Rental Home: Family
In 20 years, I'll have wished I held onto the rental property. But I just have to remind myself about all the time and stress I will save by not owning. Paying $500,000+ in property taxes alone during this time period didn't sound too appealing either.
The older you get, the more valuable time becomes because you have less of it. Besides, I'm just thankful nobody bought the house for $1,050,000 less in 2012.
Dear son, if you got through this beast of a post, well done. The bottom line for selling is that I wanted to simplify my life so I could spend as much time with you as possible. Two years later, we had your baby sister and we couldn't be happier.
You two are growing up so quick. The time I've spent with you has been priceless.
Reinvested The Home Sale Proceeds
For all of you wondering what I did with the proceeds, I reinvested $500,000 into real estate crowdfunding. I did so to diversify my real estate holdings, maintain real estate exposure, and earn real estate income more passively. I also invested $500,000 in stocks and $500,000 in AA-rated municipal bonds.
I've gone from having $2,740,000 of exposure in one extremely expensive property to owning a $800,000 portfolio of 17 properties around the country. These properties generate higher yields and are cheaper. Here's a reflection of investing in private real estate funds for seven years. I'm glad I reinvested the proceeds because home prices, like the stock market, have continued to go up.
Favorite Real Estate Crowdfunding Platforms
If you're looking to buy property as an investment or reinvest your house sale proceeds, take a look at Fundrise. Fundrise is one of the largest real estate crowdfunding platforms today with over $5 billion in assets. With diversified funds, Fundrise enables investors to gain commercial real estate access in a less volatile way.
If you are an accredited investor looking to invest in individual real estate opportunities, check out CrowdStreet. CrowdStreet focuses on real estate investments in 18-hour cities, those cities that are less expensive with higher rental yields. If you have plenty of capital, you can build your own select real estate fund with CrowdStreet.
Earning Income Passively
It's been over six years since I reinvested my home sale proceeds into real estate crowdfunding, stocks, and municipal bonds. So far, it's been great, despite the pandemic. It feels wonderful to earn income 100% passively. To have diversified exposure has reduced volatility, which enables me to sleep better at night as a dad and retiree.
If you can reinvest the proceeds after selling your rental home, you will minimize the regret of selling. The key is to find risk-appropriate investments that will hopefully continue to provide you income and a return.
Good luck with your home selling decision! Building passive income is the holy grail of personal finance. With interest rates at rock-bottom levels, the value of income-producing assets have gone way up. This include rental properties, dividend-paying stocks, and online businesses.
I just finished reading this entire page—the whole post and all the comments. A couple paragraphs into reading the post aloud to my partner, I started to cry. My mom recently died, so he’s used to these out of the blue tears, but when he asked why I was crying, I told him it was because I was suddenly overcome by how incredibly helpful your blog has been to me over the last weeks and months, Sam. I told him I was going to write you a letter thanking you for creating this site and for sharing so much information.
I am unlike you or the majority of your readers. I am not a finance wizard. I am not a real estate investor, well, not in the ways you all are. I was born into poverty, the only child of a single mom with severe mental health issues. I didn’t go to college, in fact, due to family issues, I didn’t even complete high school. My mom never owned a home, we were long-term tenants in a Los Angeles apartment where my mom was forever terrified to ask anything of the landlord lest she respond with a rent increase she could nary afford. Consequently, we lived with broken things and never had anyone over. I had every reason to believe I would always be a tenant for the rest of my life.
But, in 2013, I sent an email to my landlord that changed the course of my life forever. After an incredible roller coaster of a seriously nail-biting ride—while both my partner and I were unemployed and without savings—we purchased the SF duplex we’d been tenants in since 1995—for 60% of its market value, despite a previously generous and benevolent seller who had chosen to become adversarial half way through the process. Talk about feeling as though you’ve won the lottery! There has never since been a realtor, a lender, a friend, or a stranger that has not listened to our story with their eyes wide and their jaw agape, chin on the floor. We know, we’ve heard it countless times “That’s a true blue moon story and blue moon stories don’t happen in San Francisco!” Seriously, we pinch ourselves everyday.
Six years later, our duplex has taken us down so many planned paths that were ultimately thwarted by circumstances, by familial health issues, by deaths, by jobs gained and lost, and the lesson we’ve learned from it all is to just hold on and pivot, pivot, pivot and persevere without letting ourselves be undone by the shift we didn’t want. We’ve become far more flexible and resilient people and I appreciate the encouragement this situation has provided to grow in those ways.
We’ve now got two condos instead of one duplex thanks to SF’s condo conversion scheme for 2-unit buildings. We’ve struggled with whether to sell both, rent both, or sell one and rent the other. Every time I’ve taken to the internet to research some aspect of our circumstance, google offers up a Financial Samurai blog post seemingly written just for me in that moment. I feel so honored, lol. :)
We paid $600k in 2013. We currently have $1M in debt on our two Inner Richmond condos that at a $1k/sq ft valuation should be worth $2.88M. We’ve finally—just last night—decided to sell our upper unit, take our $500k tax-free gain and pay down some of the existing debt with the additional proceeds. We’ll still have a mortgage (unfortunately, an alt-doc at 5.99% due to loss of employment at the start of the attempted refi that would have allowed us to keep both condos) on the rental, which is the more valuable of the two condos as it is the lower and will have deeded yard and garage use—so we can build an ADU if we choose. And then we’ll take our $500k gains and move to Honolulu (hey! that’s our dream too!).
We’re going to rent there for two years and see how renting out our SF prop goes. Two years will give us time to see how we feel about being first-time and long-distance landlords. It’ll give us time to see what happens with both housing and rental prices here as well as whether or not this inverted yield curve is going to affect us and our future decisions. We may add that ADU or we may, after seeing how we like/don’t landlording, sell the additional condo.
Sam, I have to take this minute to pointedly thank you for what you have provided here. I did not and do not have education or expertise to assist with the analysis I have been working hard to do around our situation. Ours was a situation that never should have happened, but I read and researched and nearly busted my brain making it happen back in 2013 and I’m proud of what I’ve accomplished for my family. More than anything, I will always feel such pride and gratitude for the fact that I was able to take my mom into my extra unit when she was being harassed by her SF landlord to move from her rent-controlled apartment because he wanted to sell without protected tenants. It got so bad I was worried for her physical safety. Shortly after we moved her into the unit we’d just rehabbed to rent out for income, my mom was diagnosed with an incurable disease—the same one her sister had just died from two years earlier.
We tried several times after that to move with my mom to Oahu before she passed, but it kept not working out. Like you with your 2012 sale not happening, it was a very good thing our purchase fell through. Shortly after we tried to buy a triplex there for $1.675M, I was diagnosed with 3 incurable auto-immune diseases in the same organ that my aunt and mom had a similar but different disease in. Talk about having your priorities illuminated! I’m so honored to have been able to give my mom the home and security and warmth and loving care she received from us the last 3 years. We did not know they would be the last 3 years of her life. I think it will prove to have been the proudest feat of my entire life.
But, somewhere along the way, I got scared about what I had here and what I might be setting myself up to lose if I sold one or both units. I started making myself sick with worry over making the wrong choice and I forgot completely the promises I’d myself when my good friend died suddenly and unexpectedly, and then again, when my aunt died from super advanced cancer no one knew she had. That promise? Of course, it’s the same one we all make to ourselves after someone close dies…to live for now, to enjoy every moment, because none are guaranteed. But we so often forget the promise before we make good on it, because stupid life and the daily grind push it out of our minds, until the next person dies. But while I was reminded of that promise once again when I received my own diagnoses, somehow the promise of SF real estate and its ability to always appreciate kept throwing me off that “live for now!” track and kept making me think I needed to work myself into a (seriously stressed out) pretzel to hang onto both units lest I someday hate myself for having been so stupid as to have sold an SF property.
Last night though, I saw the title of this post, I saw that “live for now!” encouragement and suddenly everything shifted and clear perspective came into view once again. I remembered what the point of all this was and I remembered I’d worked so hard at getting to this point because everyone/I might die and I want to go snorkel in Oahu every day before that happens.
My partner and I are preparing to celebrate our 20-year anniversary in September. I told him we are retiring for our anniversary gift. I told him we don’t even need to go to a fancy dinner, that I will be perfectly happy just packing for Hawaii on our anniversary. Sam, I feel liberated. I feel actually happy about all of this for the first time in a very long time. I know some of your readers that chastised you above for selling will be disappointed with me as well, but your post made me remember that if I’m not happy, if I’m not cutting down on stress that is both a trigger for and very negative factor in auto-immunity, I’m not doing anything good for myself or my partner at all. We have no kids to worry about passing a legacy to. My mom only retired a few months before her death so her retirement funds were barely touched. I’m lucky to have inherited her IRA which I can move into a self directed IRA to invest with. She made me a video before she passed and she was emphatic about going and having the happy life I’ve been trying to make for a long long time—she was emphatic that we hurry up and get to Hawaii. So, I finally found the clarity I’d been lacking about what is right for me—and only me. You sold in favor of time with your son. I’m selling in favor of (healthy) time with my love of 20 years and really truly enjoying what we’ve not been able to have until now, because we know it might go away any moment. So, thank you, thank you, thank you, Sam, for putting all these many wise and insightful words up here on your blog, for me to find and discover true gold in. You have so positively impacted my life, not just my finances, and for that there will never be enough thanks.
Sam, I know you are focusing on severance negotiation consultations pretty much exclusively now, but we would so love to have you help us figure out next best steps because we know there’s more to do to ensure a secure future for ourselves, but we’re not sure what. But at almost 50 and 54, and after all the last 6 years have put us through, we’re super ready for our “early retirement” and beyond ready to experience both the health benefits and the bump in quality of life that this lottery-esque, blue moon, SF real estate story has made possible.
Thanks again, Sam, to you and all of your readers who share here. I’ve been given so much to think about, so much to research, so much to motivate me, and so much good stuff to help me move forward with confidence at a really critical time in my and my partner’s life. Again, the impact cannot be overstated, you didn’t have to share so much of yourself with us, but you chose to, and I want you to know the fact you did means you are helping people in significant ways beyond just the financial bottom line. You should feel really good about that and proud. To help others is such a tremendous service and you are a gift.
Hi Dana’s Daughter,
I’m honored you left such a detailed comment about what is going on in your life and sharing it with me in the community. I’m also glad you guys have come along way and have benefited from so many things over the past six years.
It’s amazing how time flies and serendipity comes when you least expect it right?
Sam
I was in the same boat as you. I was tired of dealing with tenants and wanted to sell. But at the end, I just hired someone to manage it for me instead so I didn’t have to deal with it. My management guy told me to buy a home warranty so I didn’t have to worry much problems with the house. I am glad I didn’t sell because the houses in SF are skyrocketing. SF properties will keep going up in the future years. It’s just too bad, there are so many homeless though.
Thank you for sharing such a riveting story. I live in Marina Del Rey and just recently made a jump into the investment property game. I purchase a duplex in Venice/Mar Vista, which is adjacent to where I currently live. I have to say reading your post brought up some of the same feelings I had when I went through renovating one of the units as well as going through the process of finding tenants. My wife and I decided to forgo using a property management company and decided to take a crack at landlording ourselves. So far, so good. But you’re right in your assessment about managing properties. It’s a lot of work and you find yourself losing out on living in the moment. Don’t get me wrong. There’s something to be said about working hard and trying to secure a stable and comfortable financial life because who wouldn’t want that. However, at some point, it can’t always be about the hustle, right? There’s got to be some sort of balance with this process and it’s real easy to get lost in this and constantly find something new to worry about.
We just recently closed on a $1.5 million duplex in which we’re renting out both units. Thankfully, we’re operating in a positive cash flow situation (~$1,000/month). It’s not much, but with the way things have been heating up in Silicon Beach, it’s probably safe to say that the fundamentals of the local economy are strong and to expect that over time, the price of the area will continue to rise over the long term if the economy here remains vibrant. Much like the Bay Area, my husband and I have been seeing a rapid rise in rental/housing prices. It’s basically impossible to purchase a single family home without help from family or if you’re some sort of investing wizard. We work in healthcare and had to work our butts off to make that down payment and even still, it wasn’t guaranteed. There were 15 offers and one was a cash bid that was $25k above what we were offering. I just want it to be known to your readers who live in the area that letters DO work because that’s what we did.
We’ll see if this gamble (because at the end of the day, isn’t that what all investing really is? A form of gambling in which everyone tries to find an edge to mitigate their exposure to risk) will pay off. The good news is our property is zoned to house a total of 6 units and not under the city’s rent control ordinance, so there’s room for growth on this property. That said, I’ll just cycle back to my original comment to your post that it’s real easy to get lost in project after project in an investment property…and while it may (or may not) pay off in the long term, it does behoove one to think about the costs of doing so. on
Thanks for sharing.
Love this post, Sam! Congrats on the close and it was fun to read the nail biter to the end.
I assure you, you’ll never regret a decision that allows you more time with your son. :)
Hope so! I think that’s the right attitude regarding time. It’s priceless that whatever time I can spend with him is worth it.
I really enjoyed this post and showed it to my SO too. I have been reading your blog for a while and my SO and I both know that you are a solid real estate investor. Hence, this post was a little surprising. However, I know and understand why you went ahead and sold. I wish you all the best for your future endeavors!
This is amazing, Sam!! The numbers are just baffling to me. I am in the middle of the 150-200K family homes here in OK, so your BURL theory is something that I could do fairly well in the future. From a parenting standpoint, if you teach your son your financial ways as a young kid and teen, he will be able to do all of this on his own. If you want to help him later on, there will be plenty of money and opportunities. There is a house/condo on every corner.
It baffles me as well Ashley! It seems kind of absurd people are willing to spend 30 times the annual gross rent to purchase a place. To put it another way, if you buy property at 30 times gross rent today, it will take at least 30 ywads to get back to even. But in reality, it’ll take many more years because of operating costs.
Based on my expenses, it will take 42.5 years. But it’s not bad if the buyer lives in the property and hold it for the long term.
I’m envious of your prices where you live!
It’s fascinating to watch how tough a negotiator you are while also hearing that you considered spiting your face by neither renting nor selling if the offer was not perfect. I think you made the right choice in the end. This property and the way you interacted with it caused you unnecessary stress.
When you don’t care what happens, that’s when you can negotiate the fiercest. It is dangerous though to let ego and emotions get in the way. So the realtor helped be the mediator to keep things rational. It is much more emotional selling a house than buying. As a buyer, you can just walk away with lose nothing. As a seller, if you screw your sale after 45 days, the vulture start circling and question what’s up!
Here’s a snippet of my passive income. I need to update it though for 2018.
I brought my first property (I partnered with a college buddy where we purchased a duplex and condo converted) in the mid 90’s. I was working in high tech then as a marketing director. Then in 1999 I got out of tech (was burned out of the incessant ups and downs) and started my own business in an area I loved- international contemporary art- where I curated and sold art to large corporations to enliven their common work spaces and promote cultural diversity. It was a very cool business, but difficult to build it into something sustainable, as art is of course a luxury. Plus the dot com crash didn’t help ;)
After that I expanded on my interest in real estate, and made 2 great purchases in the mission mid 2000’s. To give an example, I brought a large dumpy SFH for $520k. It had a huge illegal inlaw which I knew I could develop into a legal unit due to the zoning. I spent about $280k legalizing that unit, and renovating the top unit (our home.). Back then it was a sizeable investment to put into a building in the ‘up and coming’ mission. We also later condo converted. Fast forward today, and both units are conservatively worth $2.5 mil. And (this is the kicker) the land is now so valuable that I could “throw away” the $280k I spent, and totally redo plus expand both units, spending several hundred thousand, to have a building worth closer to $4 mil. Although I don’t have the energy to deal with it.
I made my last purchases (duplexes that I can legalize the inlaw and turn to triplexes) in 2014-15 in Bayview. They are already worth a lot more than what I paid, and kick off nice cash flow. Bayview is like the mission 10-15 years ago, and I’m confident that these will multiply in value.
But I don’t have plans to buy more. For several reasons. One I don’t want to manage more property ;) Two I want to invest in developing the inlaw units to bring my last purchases to highest and best use. Three prices are sky high now and I feel we’re in uncharted waters politically and overdue for some kind of financial correction. Four I reached my cashflow target. Why just take risks, add significant work to generate more money that you don’t really need? It’s not as if we live frugally, but I also don’t need a Ferrari. (I’m happy with my mini convertible :)
We’re in our early 50’s, no kids. My wife recently quit her job as a psychologist at a mental health non profit, and we are taking stock of what we want to spend our time on. We’re pretty sure that eventually we’d like to start or contribute to a non profit (where we can make a real difference) and eventually will our RE assets over to. So it’s kind of like leaving a legacy for your children, and it’s nice to be able to use the assets to give back to a world that we benefit from.
So are you making significantly over $20k a month with your business? How do you see growing and securing it for the long term?
One of the reasons I like your blog is that you explore a wide variety of assets and investment approaches. So what’s your take on diversification? I know that it sounds “right” to diverse, but those who are successful know that usually you need to go in deep in an area you excel at, rather than just mediocre at a range of things you don’t intimately know. But once I finish my current developments, I’ll start thinking about putting the extra cashflow we generate every month into a different asset class. I think diversification makes sense after you “make it” with your core business. What’s your take on that?
So if you’re not buying now because you think prices are sky high, then the only difference between you and me is that I decided to just lock in the gains because I didn’t want to spend one additional second managing and maintaining the property.
Good luck with Bayview. I decided to focus my money on the western side of San Francisco instead. Prices are blooming here in the inner Sunset and Golden Gate Heights area as well. Redfin just named Golden Gate Heights the number to hottest neighborhood in that tire country. Go figure.
There is a never ending amount of money to be made, so you’ve got to decide for yourself how much is enough. I decided for properties in the bay area was one too many.
Don’t diversify if you are comfortable with the risk and the time spent on your assets.
As for my online business, it’s been going for over eight years now. Anything made is gravy. To secure the business, I can just continue to write or sell it. I just got an offer last week actually. But given I’m not focused on the money, I’d rather just keep this business for as long as possible.
Hi – just curious about your Bayview holds. Are you still happy with them? I’m currently trying to buy in SF, those homes are in my price range, but I’m so nervous about those neighborhoods.
With Airbnb and DoorDash going public, and a vaccine by summer 2021, San Francisco Bay Area real estate is going to be very hot imo.
Of course investors have different talents, perspectives and priorities. I was just giving you specific examples of what *I* would consider doing with the marina property.
My portfolio GRM is close to 20. But the way I look at it as that I’m getting about a 5% return on my equity from the net rents, plugs averaging another 7-9% on appreciation long term. So that’s a good overall return for owning prime and safe assets. Plus I keep most of my income, as my write offs are phenomenal. Also keep in mind that I live in a pretty nice condo (part of a duplex I own) in the mission (4br, 2ba, parking, deck, yard), and that I paid a fraction of what it’s worth years ago. So I benefit from my real estate personally as my home mortgage is quite low. Given that, and my write offs, my $15k cash flow is probably close to $30k for w-2 earners, as they pay taxes up the ying yang, and probably have a fat mortgage on their home.
And as I tried to explain above, what I also like is the security that it should be reliable for the foreseeable future (cataclysmic events aside.) Personally I never connected to paper investing- stocks, bonds, etc. And I’m not a huge fan of the private business. Even if it’s going awesome now, you can never really coast. If it’s truly a great idea someone else will copy it, and you will need to take major risks to grow it to the next level, so you can be the big player to protect your market share. Or one product/idea is strong, but you need to expand to sustain your growth, and that is risky too. Usually a Business that is viable changes A LOT during 5-10 year, much less 20-30 years. With prime real estate in a highly desireable area, once you’re cash flowing and the property is stabilized, you can pretty much coast, if you’re happy with the return and don’t want to expand.
As you can see I’m quite optimized for real estate. It’s sort of a closed loop system where you optimize all your variables to lock in a tight, secure and well performing portfolio. I’m sure you do that too with your investment vehicles, which you seem well versed in. For real estate it took a long time, hard work and risks to get there. My first purchase was in 1994, and I became an active investor (multiple properties) in 2003. All my RE was purchased by refinancing and leveraging, so it takes a while to build, and of course the Great Recession didn’t help ;)
Not sure what you mean by 10x the RE income. $150k/month? Sounds rich.
Got it. If I were you and 100% leveraged to real estate I would totally be biased for real estate as well. Just be careful thinking that no cataclysmic event can happen to real estate.
If you’ve been investing since the 1990s, then I’m assuming you’re over 45? Definitely a great time to buy back then. Not sure how old your partner is, but if you are to start a family, your real estate portfolio is great for security and your child. And given real estate is your sole income source, you have actually more time than me to manage it. Real estate is a minority portion of my net worth.
Are you buying more real estate now? If so, where and at what multiple? It’s always good to think forward instead of backward. How do we best mobilize our money now?
And yes, if you were making $150,000 a month in another business where you had a lot more fun, you might not be as enamored with your real estate portfolio anymore. Everything is relative in finance.
Related: https://www.financialsamurai.com/net-worth-optimization-exercise-make-sure-time-spent-is-commensurate-with-each-assets-value/
Sounds like your decision to actually sell was rather arbitrary. If those girls wouldn’t have flaked out, you would have rented to them and kept it. Not sure that’s the smartest or most disciplined way to make such a big decision.
As for managing tenants, I think you were a bit greedy expecting such a high rent, given that rents have dipped in the city, especially for such expensive properties. Plus, it’s NOT WORTH a month (much less 2+ months) of vacancy to get the top rent. Experienced landlords know to list the property at a bit lower than max rental value for 2 primary reasons: 1- you get more prospects to choose from (and can select a lower maintenance tenant profile) and 2- you don’t loose the vacancy time which reduces your actual rental income.
Not trying to be harsh, but those are my observations. Personally I don’t think managing a home in a high end neighborhood is that much work (as long as you avoid the douchey frat boy crowd the Marina is known for). As long as you had fixed long term financing, I’d have kept it (along with the other condo) as stabilized blue chip investments. What happens if you blog’s revenue stream wanes in the future? How secure is that for the long term, given you can’t control the competition, or if more compelling products appear? Prime RE is almost always safe. My 2c.
I think you’re right that I’ve been arbitrary and greedy. Selling for 30X annual gross rent is an arbitrary number. Why not 35X or 40X right? The SF Bay Area average multiple is 20.5X, so I arbitrarily decided that 30X was a good enough premium to sell. But in the future, or compared to Hong Kong or London, it’s cheap.
What is the value of your rental properties and at what price would you sell for? I know you’ve said you rely on them to live, so perhaps you will never sell. I don’t rely on my rental properties to live. I never have after all these years. 100% of the money gets reinvested. My thought is to turn $60,000 in semi-passive income after expenses into $100,000 – $150,000 using my BURL strategy.
As for greed, I am DEFINITELY greedy of my time. I can’t get time back and I want to spend as much time with my newborn. Do you have a family or little kids to take care of? If so, I’d love to know your routine.
Everybody has their limits. My limit was owning three SF Bay Area properties. I tried owning 4 for three years and had enough. My other property in Honolulu doesn’t count. Are you buying more now? If so, where and at what annual gross rent multiple? How much do you determine is enough and what is your current rent roll?
Finally, I’m definitely a risk taker as you are implying with asking what happens if my blog revenue goes down. After all, I did leave a high paying job at age 34 to just blog. But I find it thrilling to venture into the unknown. It’s truly been a fun adventure. See: Entrepreneurship Is Like Early Retirement: Awesome!
Any forward looking guidance is appreciated as I’ve got much to learn. Dwelling on the past is nice, but not too helpful. Thanks for sharing your thoughts!
Yes my primary income is from the real estate, so my plan is not to ever sell. When we get old we will probably set up a non profit and donate our holding to it, so they get it at a stepped up basis. We don’t have kids, but even managing the 13 units we have (3 condos, 3 triplexes, 1 office) isn’t close to a full time job, maybe 1-2 hours per day, so spend plenty of time at home.
But I agree with you, there is a limit to how many units is ideal to manage. My number is 13, so I’m not planning on buying any more. Net income is 15k/month now, but will grow to 18-20k once I legalize some inlaw units. That’s plenty for our needs, which include owning a nice home in SF, and a plan to get a 2nd home overseas where we have family and enjoy the culture. I’d like to live 50/50 eventually, though we may have to turn the property management to someone at that time.
I’m hesitant to to give any advice, because IMO investing in SF RE is an all in proposition, to do it well and extensively. And that’s basically all I do, so I can really optimize it. For instance, in your case, you could have considered legalizing your rooms by the garage. The added legal sq ft would add more value to your property. Or, if you’re really enterprising, you can now add an ADU (accessory dwelling unit) to most SFH’s in the city now, and rented that out separately for added income. Of course you need the knowledge and bandwidth to do projects like that. Or, you could have 1031 into a nice du or triplex or 2-3 condos, taking your GRM down from 30 to 20. Basically more rent for the same building value. But that’s more property management.
But philosophically, the reason I believe in long term buy and hold, especially in blue chip areas, is that over time things just keep getting better on their own! And unless hell freezes over, prime SF RE should be able to weather most socio-economic malaise we may encounter. I just need to manage and maintain the properties, and appreciation as well as significant rent increases come my way. (As an example, my rents in the mission went up an incredible 50% from 2010 to 2015.) Of course it’s less fun during a downturn, but you need the patience (and foresight) to wait that out. And i don’t mind managing the properties for now. I’m learning how to hyper optimize tenant selection, and creating super efficiency in dealing with tenant issues. All my tenants have been good to great, as this is a high end tenant base. I’m sure I’ll get sick of it, but when I do I’ll have enough added rents to just pop it off to a property manager. That will probably correspond to when I want to spend more time overseas in our 2nd home. Basically I want to keep a tight clean portfolio that I don’t need to mess around with too much anymore. I get a sense of achievement streamlining and simplifying my holdings.
Hope that helps.
Thanks for the suggestions. What is your gross annual rent multiple now based on today’s prices and how old are you? How long have you been accumulating these properties?
It is possible that if you have a baby, your attitude about managing property might change. I thought I was happy to manage all these rentals as well until I had a baby.
Another thing to consider, is that no individual profile fits all. What’s good for you, may not be good for me or other people.
For me, it’s important to focus on assets in my portfolio that generate the biggest returns with the most enjoyment.
Just imagine if you earned 10 times your rental income and had more fun doing so to boot. You might change your tune. I used to think rental income was the most superior type of semi passive income. Then I discovered online income, which blows it out of the water.
A wiser elder investor advised me to never invest passively where you have no control in your real estate investments. I like syndicated real estate, Delaware Statutory Trusts, and REITs as a very small supplement to my real estate portfolio but never to replace my core real estate portfolio holdings.
Real properties give me control, whereas RealtyShares and DST products I have pretty much have no say to the operations of my investments and how my proceeds are invested. My passive income from 10 Single Family Homes nets me right around $100,000 / year. Even if one property is vacant for 3 month, my cash flow from the other 9 properties would spread out my risks. This is the danger of having a large amount of capital tied up into 2-4 very expensive investment properties. My rule of thumb is to not purchase any rental properties above $275,000.
Let’s assume the rental property is valued at $900,000 and land value is $200,000. $700,000 / 27.5 = depreciation of $25,454/year. If you hold onto this property for 10 years, your estimated depreciation recapture tax owed is approximately $63,636 not including the capital gains tax. Doing a 1031 exchange compleletely makes sense in this situation to defer the capital gains and depreciation recapture tax. My purchase price for an investment property has never exceeded $275,000 for a SFR investment.
If I had $500,000 in real estate that I 1031 exchanged into $450,000 and needed the extra $50,000 DST to cover the full exchange, I would investment in a well run college town apartment DST, but I would never exchange this entire amount into a DST or a crowdfunding platform like RealtyShares as I would then lose control of real estate investments. There are many ways to skin the cat and this is just my opinion.
No concerns about loading up another $250k into RealtyShares DME fund? I am in there for $250k myself, and would consider doing more. But is a relatively new platform, and clearly post housing crisis/bubble. On paper it all sounds good, but am a little cautious about loading up the boat.
Sam,
It is not so much the 15% capital gains tax I would be worried about but the 25% depreciation recapture tax. I can easily see the depreciation recapture tax being over $80k for an expensive rental property like yours. Without doing a 1031 exchange you will have to pay both the depreciation recapture tax as well as the capital gains tax.
Would be interested to see your breakdown of taxes for this sale for not doing a 1031.
I don’t really understand the logic behind turning down a family of 6 kids for wear and tear concerns but then wanting 4-5 young/single guys as tenants?
I hate that you have had to experience such awful land lording woes…but I think most good landlords could have informed you that would be the result of multiple single male tenants and income scenario.
John Schaub saved me years of headaches and pain by sharing his wisdom and experience with land-lording. He has a book and does a couple yearly seminars (not the get rich quick kind…it’s legit) Check him out if you ever want to attempt real estate again and “own forever”. I would say my first rental property has truly felt much more like a passive investment. My tenants always pay early and actually improve the property like it’s their own. All techniques and strategies I learned from Schaub.
Granted…8500/month rent in SF is a bit different than what I’m dealing with in TN market..so I understand this isn’t complete apples to apples…but I think a lot of it would translate. I know he has a lot of students in California because he goes there specifically to do a yearly seminar. Anyway..congrats on getting the price you wanted!
It’s pretty simple. The family of 6 offered $7,800 from my $9,000, so I rejected them early on. This was when I thought I could get closer to $8,500-$9,000. This was a 45-50 day tenant hunt process.
The 5 guys were 5 guys from my old employer at the end of the hunt, which I thought would be a hilarious story to share. One less person, $700 more dollars a month, seemed OK. But they bailed at the last minute, and this was at the end.
If I had both offers at the same time, I MAY have gone with the family, but not sure I wouldn’t have just sold. $7,800 X 12 = $93,600. My offer was 29.3X that figure vs the average of 20.5X in the Bay Area. I want to follow BURL and be disciplined. What is the multiple where you are?
Sometimes you win, sometimes you lose. Just have to make the best decision at the time. How many units are you landlording? And what is your rent roll?
The multiple for my current property would be 12x. So nothing near your market for sure.
1425 rent. (~600 cash flow) 2007 SF 3/2 worth about 200-210k. Bought in 2014 for 145k. Lived for a year and used a residential VA loan with zero down. 30 year fixed at 3.25 (yeah yeah I know, you think I’m a sucker for doing fixed…maybe you are right. But if I want to own this house forever..I don’t think I’m losing a lot by locking in 3.25 for 30 years)
The best thing about this purchase was the leverage. I basically have about 2k invested. Which was new carpet and paint when we moved out to turn into rental. My ROI is ridiculous.
My first tenants paid early every month and fixed all the maintenance issues themselves. A ceiling fan fell and the guy texted me a photo. They went to lowes, picked one out and asked permission. Bought it and installed and texted me the results. I credited their rent the value of the fan. Loved them.
New tenants paid former tenants to move out early. I had zero days between tenants and never had to search. They reached out to us on Facebook wanting to rent the property.
It’s been a great first experience and now my main issue is how to scale quickly. I want to build a portfolio of 3-5 homes with my own money to have substantial ROI and case study to go get investors
Schaub has students with 100+ single family’s.
12 is a great multiple to buy and be a landlord. What area is this? If you can handle the tenants and maintenance, I would be buying as much as you can comfortably afford.
I bought my house at around a 22X – 23X multiple, and not only did the rent grow from around $5,500/month to $9,000/month peak (but then back down to ~$7,500 – $8,000/month), the valuation therefore also grew to 29X – 30X. So for me, I’m comfortable cashing out and reinvesting the proceeds in sub 15X multiples.
Yeah I get why you sold and sounds like a solid plan.
My area is Murfreesboro TN. Top ten fastest growing mid size city in nation. Home to largest state university. VA hospital and multiple other great hospitals as well as access to Nashville hospitals and Vanderbilt. 45 mins from downtown Nashville. TN has no income tax. Mild winters.
It seems like it will be a great place to invest for the next 30 years.
Also ties with your article and theory about investing in heartland US.
Wow Sam that was a whole lot of waiting and eagerness to get the deal done. I would have gone crazy just waiting to get that deal done. But the main thing is it’s a done deal.
You timed your selling at about the right time when the SF selling market was really high.
You know what… I am usually 100% for buy and hold- long term/never sell. However, the San Francisco market is a different animal. I think you chose a perfect time to sell… seeing that SF prices are as high as ever. Sure, at some point 20 years from now prices may be higher, buy I can almost promise you that they are going to go much lower before that. Property goes in cycles… and we are on the higher end of one right now.
I’m actually sure that the market is going to go ballistic now that I’ve sold :)
I really donno if property prices will go much lower than 5% – 10% here in SF. SF is so cheap compared to other international cities, especially considering all the income growth opportunities.
But we shall see! I never plan to sell my 2/2 condo rental and my current primary home.
Hi Sam,
As you get older, I doubt you will ever regret selling this house. My daughter is heading to college next year and I’m fast approaching the big 50! I don’t regret not earning the extra million or two while she was younger. Looking back, my biggest regrets would’ve been not being there for the soccer games, or the school plays, or whatever.
I commend you for selling this rental in order to alleviate stress and free up time for your son. The difference between having 10 million and having 12 million will not add any happiness to your life whatsoever. However, being truly available for your son will not only ensure your happiness but your sons happiness as well.
Congrats, Bill
Thank you Bill. As an older father, I appreciate your perspective and insights.
I also believe by biggest regret will be not being there for my son for the next 18 years because I’m too busy chasing money or managing assets.
At some point, accumulating more wealth is absolutely pointless. I kind of feel that way now. Besides, anything more than $10.98M per couple gets taxed at 40% anyway, so forget it! Give any money above that away to people who really need it.
Exciting times about college! I’m envious you are only 50! I’ll be 58 when that time comes. Wow… time will fly.
Sam
Yes! Went through almost the exact same decision process in March of this year! Had a moderate 2/2 that was in need of renovation, but a tight supply market and no big incentive to keep renting led me to finally sell. No longer had the passion to invest ~40k on a home with a market value ~$175k in order to then get market rent. On a marginal basis, that 40k would likely see a 6-8% return in the form of getting market rent instead of a discounted rent due to non-luxury condition, fixtures, etc.
Instead, I took the opportunity to sell, see a good return, and get more passive. Seems to be one of those situations where sitting in the middle offers a weak proposition, either needed to invest more heavily (in this case, a basic renovation with new floors, fixtures, kitchen, bathrooms, etc., to modernize) or take a solid gain since buying in 2012 and invest in a more passive investment elsewhere.
I took the cash! No regrets… only if I buy some stocks that end up wiping out. :)
Yeah, if you spent a lot of money renovating, then you would feel required to get a bigger return on sale or hold on for much longer to get your money back. It’s kinda like going to business school. Better work AT LEAST 10 years after b-school or else what’s the point?
$40K into a $175K home sounds way too much.
I think the new buyers are going to put in $100,000 – $300,000 into my home b/c they want to renovate the kitchen and bathrooms. They were pretty open with everything. I spent ~$4,000 to prep the house (painting, refinishing floors, doing the back yard)
My friend sold their house to a young couple who pretended to be ok with everything regarding the condition of the house. Guess they were concerned about my friend’s feelings. Selling price of $4.5 million, and then the couple scraped it and are rebuilding from the ground up. Got to love the SF Bay Area!!
That’s an amazing story, Sam, thanks for sharing it.
You really took a lot of risks with your initial house payment with a huge mortgage and you even had to go thru the financial crisis as well. Now I understand why you are such a hard worker and why you always advise being frugal.
Thanks Alex. Surviving the financial crisis definitely had a hand in making me want to sell. This bull market is like a second chance at life!
When you go through bad times, you definitely appreciate the good times so much more. I was just consulting with a client who started his career and investing in 2013. EVERYTHING he touched turned to gold, and at 26, he was thinking of walking away from a $450,000 a year comp package……….
It’s a great market to sell in! Perhaps we will see a downturn here in the future and a chance to buy back in Sam!
Congratulations on the sale Sam! The run up in prices may have hit a peak now. Prices in the coastal cities have plateaued and in some cases have come down a bit from 2015. It doesn’t hurt to take a massive profit and you can probably get a better long term return without the stress being that you’re a savvy investor. At a young age you’ve already made a ton on money, more than most people over an entire lifetime. It’s not a great idea to have too much allocated in one sector anyway. As Steven Roth said “the easy money’s been made, now the smart money is going into cash” It’s a great time to be a seller
Indeed, managing rentals are incompatible with happy and healthy living. You’ve made a good decision. With a little person counting on you around the clock, you need to simplify life and free up time. I understand, I have a 17 months old, also a son. It doesn’t get easier as they get a little older, these energized bunnies runs around and wants to be entertained all the time. Welcome to the parenting club.
My mom used to complain about selling her 2 rental properties and only having kept one or else I’d be a multi millionaire now instead of JUST a millionaire. Jesus Christ . She passed away last year but to me my fondest memories were the time we spent together not the times she had to run off to fix something at the rental right after a call from the tenant . Albeit it helped put food on the table.
Now I’m a property manager and I’m glad I only have to manage one place instead of 3 cause I had no clue what I was doing at first . I still don’t honestly. Thank you YouTube and the handyman .
good work–I have never sold a place–but I think I m done expanding with real estate–but it is so easy to expand once you re in the biz–It has been lotsa work over the years but I have learned to become very handy…I learned he building business over time
in a way you made a mistake because you sold a viable business for your kids–but real estate is a lot of work–I understand–stock market is good too–I am amazed that my dividend money comes every month and I don t have to do anything for it…
very much enjoy the honesty in your blog–shibuyarepublic.org
Good detailed story about the stress and headaches that go into selling Sam.
I can relate albeit on a much smaller financial scale. I moved out of a 2 be/2 ba condo in 2007 moving to a rental in another city. We listed the condo at $300k eventually dropping it to $250k. At this price I had my doubts about wanting to sell. We got one low-ball offer for $200k and my response was not to even give them a counter.
The unit is next to a major college so I rented it out to 4 girls. Like you there was some roommate turnover and occasional issues. (like a flood from the unit above on a day I was in court and couldn’t be there). Ugh
In 2015 after 7 years of being a landlord I decided to test the waters again. It closed near the end of 2015 for very close to my asking price-$312k. I’ve used the money to pay off my mortgage on my main home which I bought in 2010 and has appreciated $200k since.
And while I did have to pay taxes, etc on the sale, (commissions we’re lower since I used Redfin), I’m thankful it didn’t sell in 2007 since I would have lost half of those proceeds in an eventual divorce.
Like yourself I have young children, two girls, with shared custody. Now I have more time to spend with them without dealing with tenant issues. You can’t put a price on that benefit in my opinion.
What a tough decision but I think your son will appreciate that you chose to spend time with him now and in the future versus being busy dealing with the headache of the rental. Given that you weren’t able to sell back then is a good thing and you netted much more over the span of a few years. I’m in Vancouver and had to sell a house my ex-boyfriend and I owned few years ago because we broke up. Let’s just say that if I still had the house I would have probably reached my goal of $1 million net worth by now LOL but would have had to deal with a lot of repairs, high cost of electricity, almost unaffordable mortgage, and renters in the basement in the meantime.
Congratulations on getting a great price and simplifying your life. Time is everything and I doubt I would have the patience to be a landlord. Your son will understand that!
Thanks Sam, that was one of the best reads I had in a long time. Not to sugar-coat here but ohhhh man oh man, are you lucky!!! Not only to be in the SF market but to survive it through the bust. This a true nail biter til the very end for sure but wow that price tag is right! Nicely done.
I feel a bit like you that I don’t want to sell my rental because I picture passing it along some day but when the garbage disposal starts acting up and they find electrical problems…it’s just a mental blood bath dealing with it. The cost of repairs, the loss of occupancy…all post tax…it makes me want to run away to St. Louis and get myself a nice house for 1/5 of the price, be done with it.
“Girls don’t exist in San Francisco”
Yup, I was one of the last ones out hahaha.
Why is the cost of repairs post-tax? Rental property expenses are all tax deductible.
And it’s good for you to pass on the rental property to your kids. You get a step-up in basis, no taxes owed by your kids when they sell!!
Haha, you caught that. It is amazing how I’ve only had one set of tenants with a female or two (out of 3-5) show interest in renting out of maybe 80 people who’ve come by my open houses over the years for this house. Not sure where all the women live.
Very interesting to read your story about your decision to sell the property.
It once agains shows that real estate investments are often very personal investments. You not only deal with an abstract structure such as a bond or stock but you have to deal with people, their stories etc.
I personally think real estate investments are quite lucrative when things work out. But the numbers have to make sense and I don’t want to have a bad feeling when going to bed in the evening.
I am sure you will make a great return by investing into real assets in other locations. With approx. $2.0m in fresh equity after paying down your mortgage you could probably buy real estate worth $10.0m (LTV of 80% should work in the US!?).
Kind regards
Harald
I currently have no mortgage on my primary home. I have a 600k mortgage on my rental property at 3.25% 30 yr fixed. I can get a 400k 30 yr fixed mortgage at 3.625% on my primary residence. I am thinking about this while rates are low and to max out the tax savings (up to 1mm principal) because I plan to buy a second rental property in 1-1.5 years after prices settle/fall and want to lock in the cost of capital. The downside is the negative carry on the money (400k x 3.625% interest x .65 after tax benefit = $9,425 less 400k x 1.2% interest income x .65 after taxes = $3,120) of $6,305 per year. Anyone have any thoughts?
I hope you understand that the tax deduction is only on your primary residence, and does not include rental properties, regardless of whether you are at the 1m cap or not.
Congrats. Do you know what the rules are for how many “primary” residences you can sell and benefit from the 250k/500k tax break? Meaning could you do that tomorrow with the house you currently live in?
I think you made a good decision Sam. Time is becoming more valuable as you age, especially with your son, so reducing your burden of running and maintaining a property and investing the proceeds into a more passive income, will likely lead to a much richer life, quantitatively or not.
Sad to see you sell!
Maybe I’m firmly in the minority when it comes to this, but I really do love real estate long term.
It’s a tax advantaged hedge against everything. Inflation, currency manipulations, even just life.
I hope you take the proceeds and invest in more real estate elsewhere! In that case, it would be a super smart move IMO. Would most definitely get more cash flow and higher NOI somewhere else, although maybe won’t capture as much appreciation… but cashflows king.
Congrats, and best of luck on your next investment! :)
Yeah, it is sad. But I have to live in the moment now. How many properties do you own and how do you manage them all? What is their valuation in terms of annual gross rent?
Just 3 at the moment! So it’s pretty easy to self manage. By no means am I a pro, or have it all ‘figured out’, but I’m a RE > Stocks kinda guy, so I plan to keep learning and being a student, adding as many as I can until I reach my goal. In the meantime, I am definitely neglecting my 401k, but it’s a conscious choice I’m making…
Fantastic and insightful read. Congratulations on the sale. Looking at it from the other side, what was your initial reaction when you heard the buyer was purchasing a house for $2.74mm with only $400k for a down payment? Obviously all you cared about was getting your check but talk about levering up!
Once I found out he was stretched, I basically lowered my expectations for the sale going through. After missing the financing contingency deadline for several days, I felt like nothing would happen.
I resigned myself to keeping the property forever and letting destiny take its course.
Congratulations on the sale Sam, and for sharing that roller coaster of a ride with us. Do you feel “lighter” now that some time has passed, having unloaded that beast and stepped off that stress train?
And about “20 years from now when my son asks how I could have sold the house for so cheap”: here is the thing. If you have done your job right, your son won’t ever ask that question. He will be grateful for all the time and all the opportunities you have given him, will not feel entitled to more than he has, and will not try to make his father feel bad about a decision made with the best of intentions 20 years ago.
As it’s only been several months, it’s too early to tell. I think the price is good for this year (post coming), but every year that goes on where I do not reinvest the proceeds in something equal or greater means I’m falling behind.
If there is an earthquake today, god forbid, that devastates a lot of buildings, I will probably feel relief. But I’m so long-term bullish on the San Francisco Bay area that right now I don’t feel a lot of relief.
You tell the story well, Sam. I like how you gave us all the ins and outs of the transaction.
As you said, giving up a property is tough because we are likely to regret the decision many years from now. My wife still cringes when she thinks about the time they had to sell the family home in the North Bay, and what it’s worth now.
Housing is tough because it’s got so many emotions tied up in it, too. It’s not strictly an investment.
FWIW, I think your priorities are right. Family first.
I was contemplating selling my San Jose condo and this happened:
mercurynews.com/2017/08/09/google-village-sparks-new-downtown-san-jose-property-buying/
Suddenly units in my complex went up by 150k in about a month. So I am going to suck it up for few more years. I hope my boys would thank me for keeping the property! I always thought San Jose was the most undervalued city in US. Most companies would set up shops in suburbs like Palo Alto, Cupertino, Mountain View etc. But now with Apple, Google, Amazon etc making the shift to San Jose, I am hoping that San Jose lives upto its title of “capital of silicon valley”.
Yep, the SF Bay Area is a job creating machine! Is the SJ condo your primary? When did you buy and for how much and what could you sell it for now?
Just think! Hold onto your condo for 7 months at that rate and you’ll make a cool $1 million! Much better than my slow rate of return.
I think you did well to sell the property. We own several rental properties in the silicon flatiron area as it is known to locals (Boulder, Colorado), and the key is not to be renting out big, expensive properties but cute little bungalows. We deliberately bought (5 years ago and 3 years ago) ’50s bungalows but then fixed them up so they’re cute and updated (wood floors, glass tile backsplashes, granite countertops, stainless appliances) and the up and coming youngsters (20s) love them. Particularly since we allow dogs, and all up and coming youngsters seem to love dogs. We put in a sprinkler system so the yards look nice. It works better renting smaller properties with smaller rents than large fancy properties since you can’t scale up rent linearly (at least, not easily) and then you have more complexity in the house which adds up to $. Our two bungalows were deliberately chosen not to have basements and simple one-floor layouts. We have one big rental house, which is a pain, but that one is outside the city limits so we were able to split it into two units using the daylight basement and upper story. That is the only way the finances work out, since even though it’s worth 3X our smaller bungalows, there’s no getting 3X the price. Now we get 2X the price since it is two units. They’re fully paid-for so it’s easy to invest some money in all of them every year, we are definitely not slumlords! But I do think that at a certain point, there comes a time to sell. We might sell one of the bungalows when I RE in 1-2 years time to have a big chunk of cash to enter RE with and to help pay college expenses (soon!!). Many thanks for your detailed analysis of the decision to sell, your motivations, and then the process, it was an interesting read!
Congratulations!
Well done. Now the big question! Tell us how you are going to reinvest your biggest check ever? – we know you have to fill that disappointment void with something. What else but smart investments? How will you allocate it?
Finally, I will leave you and everyone here with one more thought: you didn’t just add time with your family on a daily basis as you won’t have to deal with tenants but also probably significantly improved your overall health:
Stress symptoms can affect your body, your thoughts and feelings, and your behavior. … Stress that’s left unchecked can contribute to many health problems, such as high blood pressure, heart disease, obesity and diabetes.
There go enjoy now, well done!
Thanks Pierre. I’ll have a post on what I plan to do with the upcoming proceeds. I can give you a preview now:
1) $250,000 went to RealtyShares for a total of $510,000
2) $500,000 went into buying municipal bonds and zero coupon bonds with a 3% – 3.5% net yield = 4.5% – 5% gross yield.
3) $100,000 went to the stock market during this recent sell down.
4) The rest I’m holding cash and waiting
I totally hear you on HEALTH! So much more valuable than money.
Related: The Health Benefits Of Early Retirement Are Priceless
Are you worried about the duration risk with investing so much (so soon) into real estate, municipal bonds, and zero coupon bonds? The widespread sentiment seems to be that rates are going to rise, perhaps significantly, in the coming months.
Not really. If you buy a municipal bond at par or below, you get $100 back per share at par at expiration.
Although I made a good amount of money since buying bonds heavily after the election, I’m still quite sanguine about interest rates. Check out bond prices since November 2016. It’s been a great run.
Do you feel that investing 20% of the sales price of a single property into cheaper real estate in multiple properties around the country is more risky? If so, please share why and let me know why and what you’re doing with your money.
I’m definitely open to hearing about what you would do with the proceeds. What is your financial situation correctly?
Thx!
My outlook hasn’t changed much since April 2017:
https://www.financialsamurai.com/financial-samurai-1q2017-investment-recap/#comment-314877
Portfolio is divided equally among four asset classes: stocks (Vanguard Total Stock Market ETF), bonds (iShares 20+ Year Treasury Bond ETF), gold (iShares Gold Trust), and cash.
It’s simple but it works for me. I’d probably use the proceeds to top off the underperforming asset classes and get back to equal 25% weights.
It sounds like the investment alternatives you provided offer more attractive returns at this point in time than holding the house. Real estate here in California will inventively go up over time, but there’s also an opportunity cost with that. Purchasing municipal bonds has already improved your net yield for each dollar invested and it is a much more passive investment. I would argue it is also less risky since you don’t have the associated vacancy risk like you do in rental properties.
The good news is that you can always buy more real estate later at more opportune prices. Best of luck!
So let me get this straight..
You sold a home worth 2.75 million which would only rent for 8k a month.
After you reduce rents by 20% to cover taxes, maintenance, and insurance your cap rate is 2.8%. Take out inflation and you assume huge risk for almost no gain.
That is an albatross if I have ever seen one. San Francisco has a massive credit bubble mania going on. Good on you for pulling the ejection lever.
$2.74M actually, but who’s counting.
Yeah… I was surprised that I couldn’t come close to the $9,000/month I was renting it out for last year. It seems with the production of thousands of new luxury condos, it’s really put a damper on higher end/competing rental prices. Most of my inquiries were just 4-5 dudes working in tech, and I didn’t want to deal with them anymore.
The property tax of $22,000 a year and rising really started bumming me out too, not to mention dealing with everything. SF.
But if this was the only property I had, I would have lived in it and held on forever. LT, SF is a winner IMO.
It’s funny how people will jump at a $10 discount on a $50 item, but treat a $10,000 difference ($2.74M vs. $2.75M) like it’s nothing just because it’s part of a bigger transaction. It’s irrational, but that’s just how the human mind works.
Sam,
My take away with this post is that you structured this so that you would come out ahead with either option and you certainly didn’t need the money. Congratulations for selling at a premium.
You are right- in 15 years it will be a $4M property but that is only at 2.8% compounded growth rate minus property taxes, insurance and fees. You can easily beat that in another investment? Maybe time to pick up some more REIT’s like OHI that is yielding north of 8% and continuing to grow the distribution by mid to high single digits each year?
I hope you and your wonderful wife can get some much needed rest between shifts with the young lad.
-Mike
Hopefully, I should be able to reinvest and return a greater rate, but there’s no guarantees. But I am hedged w/ my existing SF Bay Area portfolio.
The only thing I knew for SURE was that I hate dealing with tenants and maintenance issues, along with paying $22,000/year in property taxes. So given it’s rational to do less of what you hate, and do more of what you love, I made the choice to let go.
Man, I’m looking forward to sleep getting better. Had a nice dinner w/ the parents last night until about 9pm. Worked from 10pm – 1:45am and back up at 6:30am. Time to take a nap before our son’s checkup at 12:45pm!
Hope all is well with you guys!
Sam,
Thanks for sharing that stressful story on trying to rent and sell your house at the same time.
Congrats on selling it and for making over 1M on it!
Now, it is time to get rid of the Lake Tahoe vacation rental too.
You really need to get over the future value of it. What if ..what if scenarios will only drive you crazy. The important thing is to BE HERE NOW because tomorrow may not come.
What if something happens to you then do you want your wife and child to deal with tenants and selling it?
My parents had 4 houses and 2 buildings and it was a PITA to manage them. It was so stressful for my parents to keep their heads above water with 6 mortgages and to run their garment business. I am so glad there are just 2 houses left to manage 5 tenants.
Use the money on investments that truly generate stress/work free passive income.
You are doing so darn well with your online income and other passive incomes so be happy with that. I am guessing your networth is 7-10M now and in ten to twenty years it will be 20-25M. You can’t spend it all. You have enough money NOW to last several life times.
Whenever you feel regret selling your house think of the stress and the PITA dealing and finding new tenants. Think of the stressful process of selling your house.
By the time your son is of age, you can leave him your SF house since you would have purchased a kick butt place in Honolulu!
Adam
Thanks! We’re actually all going to my lake Tahoe property this week!
I actually feel zero stress about my Lake Tahoe property because it is managed. I never get a phone call or anything. All I do is call the reservation desk before I come up and enjoy it fully.
The only thing I did was make a bad timing decision when I bought it. But, as I was sitting in the hot tub with another owner, the value of the property is now very small percentage of our network so we don’t stress about it at all. What we do enjoy for all the great memories that brings with her family.
Check out this realization! https://www.financialsamurai.com/a-vacation-property-buying-rule-to-consider/
I think your guess of $7-$10 million is way low. I’m guessing $12-$15 million, with annual income almost at 7 digits. From your guess, author has been successful at stealth wealth!
Sam, how were you able to negotiate a selling commission down 1.5% from the industry standard? What did you have/use as leverage? I’m in a similar boat; getting ready to move overseas (Germany) for a military assignment, but choosing to keep my current house, at least for the next 3yrs, as a rental before I’m forced to a decision point, much like you were, about the capital gains tax exclusion. I used a VA loan to purchase, which offered 100% financing up to $419K, so in essence, I benefited from not having to tie up a lot of liquidity in a down payment. On the flip-side, however, looks like it’ll take about 12yrs of loan maturity to clear a profit after expenses.
I just asked. Then during the whole process, I asked even more to lower the price, but she wouldn’t budge, even when I was wavering to cancel everything AND even after I did cancel the whole transaction, she wouldn’t budge!
But I did get a $500 gift certificate to Gary Danko’s (one of the best restaurants in SF) that I used to treat my mother and father for her 70th birthday last night! :)
Recently read an article from a local Realtor venting about how frustrated she was by the frequency with which buyers/sellers try to negotiate down her commission fees. But I agree w/ your point – in the day & age of the internet, if you [at least as a seller] put some effort into marketing your own property for sale/rent and get a bite, then you should definitely ask for a reduction in cost. in your example though, it appears she brought the offer to you? In my case as an Active Duty Service Member, I have access to resources that a realtor doesn’t (like AHRN.com, Homes.mil, and Militarybyowner.com). I’ve listed my property for rent, and really only need the Realtor for property management services. Sure, they’ve got a platform for advertising my home for rent, but if I bring them a qualified applicant from one of my resources, then I think a management fee reduction is in order (since the 10% they’re charging me includes marketing)? Thoughts?
Sure. I’ve never paid a leasing agent to find a tenant in 12 years with a couple properties. But if a leasing agent brought me a tenant I thought would be great, I would happily pay a fee. Not sure if it is 5%, 10%, or whatever of annual rent.
I got a leasing agent to try and find tenants for 14 days towards the end of my deal and would have happily paid him his 7% fee. But he couldn’t find any at $8,500+, and there weren’t anybody offering $8,000 either! My how rents have dropped.
So yes, if a realtor brings me a buyer at a price I think is good (higher than what I think I could get on my own, or the market), then I should be happy to pay a fee. But I’m still not… at a $2.5M+ price point, 2% seems like a more appropriate number.
Congratulations. And not to be self-ish, but it helps me feel better about selling my FL home 1.5 years ago when my company forced me to move (and they paid all closing costs). Lately, as my employer as not done as well, I’ve wished I had the house down there. But I made a lot of money on it, and the company paid closing costs, and had I held onto it, they would not have and I’d have renters, etc, etc. So you are helping me with my self doubt. Also, my wife just had a baby (2 weeks old) so gotta run and will read more later.
Wow huge post. Did you get some of the primary residence exemption or was gain fully taxed. Did you 1031 into something else?
$500K of it is tax free, and then I’ve got a bunch of expenses I will load up to increase the cost basis after 13 years of ownership. So the tax bill won’t be as huge as one might think when I finally pay it next year.
I was gonna pay $2,000 to have the option to do a 1031 exchange, but I realized I would just be jumping out of the frying pan and into the fire. My main goal was to simplify life. Getting a $2,740,000 rental property may mean a multi-unit building, or a large house somewhere else in America that would require a lot of upkeep.
Related: Clarifying The $250K/$500K Tax Free Profit Rule
Sam, wow what nail-biter. I think it ended well though. You shouldn’t regret it down the road and I don’t think junior will be either. It was a rational decision and you did your due diligence. You got a great return from the property. And with a newborn, I agree with your decision to live today. You’ve “made it” using any financial metric I can think of. Congrats!
Sam, thanks for sharing this.
I have to add something you didn’t account for-the decline of your property as it ages, and the expenses you would have if you held on to it. I have found as the rental properties get older, the decline seems to happen fast, and be more costly than anticipated.
We have liquidated all of our rentals, sometimes taking a little less money, to be free and clear of these properties. The buyers, who are planning to stay living in them, will be taking care of the upgrades and repairs now…
Amazing article Sam. Congrats. So much info here for people to learn from.
Looking forward to part 2: how you’re investing the proceeds.
Sam, though we’ve been blessed with excellent tenants and our rental home is finally mostly recovered from the housing crash, I’m selling it in the spring and can’t wait to be done with it. Our proceeds are going into purely passive investments or I will use them eventually to expand my business or start a new one. Real estate just has too many headaches and risks for me and I’m one of the lucky ones so far!
I think you are smart to have done this.
Thanks for sharing about selling your property! Sounds like you made a good profit on your investment so there should be no regrets. You will also be reinvesting the proceeds so it’s not like it will be sitting in a bank account earning zero interest. Are you going to redeploy the proceeds to RealtyShares? Also to answer your question I think the San Francisco realty market will go down when the IPOs dry up and people start selling the overvalued tech names like Tesla.
Yes, I reinvested $250,000 in RealtyShares for a total of $510,000, and I’m now considering whether to invest another $250,000 or just take a wait and see approach. There are other investments I’m considering that I’ll write about soon.
Now that I’ve sold, I’m pretty sure the SF property market will continue to go ballistic! Uber, Airbnb, Pinterest, Slack etc are all planning on going IPO over the next three years. Billions in liquidity will be a great thing for asset owners.
I figured, if I could win back some time, and still benefit w/ the existing properties left in my portfolio, that was a win. If the market tanks.. then that’s fine too.
Congrats on the sale! It definitely doesn’t seem like a walk in the part but I’m glad it worked out in the end and you didn’t sell in 2012 :-)
I agree since your moving over into a more passive style the hassle with renting may not always be worth it.
Whew, that was a long article…Thanks for explaining your reasoning in such detail.
P.S. What’s with all the ads on your site now? So many things flashing in my face…I’m guessing you are trying to strengthen the site’s income stream?
I need to buy my boy some new shoes. Feel free to use an Ad blocking software as I understand the expectation now is for everything to be free. All good.
Congrats Sam. Must be a good feeling to sell, make a nice profit, and know a family will raise their kids in that house. This article proves to me that being financially independent leads to more money. Without the pressure to sell or the need to find another home yourself, you were able to wait it out and make quite the profit. Nice work.
Congratulations! I think you did the right thing. Life is getting too busy and you need to spend more time with the family. You can always make more money later. That property sounds like it was a lot of work to deal with. I’d like to see a follow up article on the taxes at some point.
The taxes won’t be too bad b/c the first $500,000 is tax free and I’ve got a lot of expenses I can load into my house over the years.
Seems like taxes would be pretty bad still. With your biz income you will be at the highest tax % for cap gains on federal, and CA taxes don’t distinguish between cap gains and ordinary income. Total tax rate will be 36% on all gains over $500k?
Also add in that your cost basis would have been reduced by the depreciation expenses used to help offset the rent revenue these years.
This coming from a guy who paid over 1 million in cap gains taxes the past 2 years.
So it seems like some of the motivation to sell now might have been to unload it while it still constitutes a primary residence to the IRS and allows you to avoid taxes on the first $500,000 gain – good strategy.
Definitely. Tax free profit on $500,000 is like saving $150,000 in tax.
One can simply to calculate the breakeven point for how much the property has to appreciate for how many more years to match selling with the tax free profits.
So when you combine this factor with 10 other factors in this post: https://www.financialsamurai.com/when-to-sell-an-investment-property/, I thought it was finally time to make the move.
I thought the tax benefit is prorated. So the tax break would be 2/5 of $500,000. I’m not 100% sure about this, though. That’s why I’d like to see a follow up after you talked to your tax guy and filed tax.
HI Sam
Yeah, but you would also need to factor in the opportunity costs of reinvesting the proceeds when calculating the break even against the cost of taxes. So the house would need to exceed your alternatives for a while to make up the loss in taxes…
Glad you made the decision. I actually think you’ll come out on top financially in the long run having sold, because now you have more flexibility to shift your capital to lower cost opportunities.
You could have chosen to pass the house onto your kid after your eventual passing. 0 capital gains taxes at that time since your cost basis gets stepped up to the market value on that day.
Could have. But there are four other houses I can still pass on using the step up. We can only live in one house at a time.
Sometimes the hardest decisions turn out to be the easiest ones. Thanks for another great post filled with unbelievable amazing info.
Winning! I think you by FAR made the right decision for your life. I would much rather spend time with my kids than have the headache of managing a rental, especially with the premium being paid for it. The equity you got from that property is more than most people set as a target for retirement. You made the right decision and I’m sure in 20 years your kid will thank you for all the opportunities he has and will have, thanks to the smart financial decisions you have made in life.
I hope so John. All I really want is for my son to say one day before going to college (if he goes), “Thank you dad for always being there for me.”
That’s really all I could ever ask for. I would give anything for him to be happy and healthy, including all the profits from this home.
Sam, I feel the same with my daughter, I worked from home while raising her and always involved with her! She would always comment that her friend will be moving out of our neighborhood because their parents where chasing Money (jobs transfer). Today she is in law school and thanks me for always been there!
Wonderful to hear! That is sad when friends away. I had to move away from my friends every 2 to 4 years because that was the required tour of duty for foreign service officers.
Always heartbreaking to break up with friends as a kid. I’m going to try to be as stable as possible during my son’s childhood. That was the one thing I wished growing up.
*> In this day and age of the internet, a 4.5% commission is still egregious.*
Look at it from your realtor’s perspective. With her expertise and experience, you were able to get an offer worth a few hundred thousand dollars more ($2.6-2.75M vs. the original $2.3-2.5M).
She definitely earned her commission!
Yes, she definitely found the buyer and helped give me the courage to counter much higher without scaring them away. But I felt my letter writing/convincing skills would keep them in play.
The expense is a write-off, but it definitely feels bad, bad, bad to pay that much commission.
Thanks for putting this beast together Sam and while you may regret the sale in the future, if you are doing what is right at the time you can’t beat yourself up over it. You will give your son the best thing a parent can – security and wisdom. And you don’t even need to repeat yourself, you can just send him to this site!
We sold a house before it ran up another 30K in 6 months. Doesn’t sound like a lot but we sold the house for $210,000 and the market went on fire around us.
Yeah, it’s tough to see prices go up even further after selling. I knew this before selling so I used it as a means to counter aggressively AND rescind their offer! When I rescinded their offer of $2,750,000, I then started thinking, “Am I freaking crazy?! WTF is wrong with me. It’s $1M+ more than I wanted to sell it for just five years ago.” My EGO starting talking huge b/c I couldn’t get the tenants I wanted, so I started rejecting everyone.”
But after about 45 days, I was just too tired. I may have been able to squeeze out $10,000-$20,000 more… but I just wanted to be done with it by then.
Where and when did you sell? Did you rebuy? And what did you do with the proceeds?
Congratulations on the sale! I didn’t know you have gone through so many ordeals with this property. The process indeed sounds stressful, exhausting, and frustrating. I’m glad it’s all over now, and you can take a step back and relax.
Do you think it’s partly because of the expensive housing market in SF that makes the property more difficult to sell and causes you so much stress?
Not sure. The stress was probably more from:
* Sleep deprivation being a new dad
* The seller not meeting and removing the inspection contingency and financing contingency on time
* The cost to sell
* My inability to find good tenants at the price I wanted
* A period where I had nothing to show for after 40 days since my last tenants left and the thought of having to do so much remodeling/prep work
* Whether I was making the right decision
Got it. That indeed sounds really stressful. I know what you mean about sleep deprivation. Lacking sleep can ruin our energy, productivity, and mood. I get very cranky with my hubby when I don’t get enough sleep. You can picture what it was like right after we had our baby >_<
I don't know much about the housing market in SF, but I think you made the right decision. Now it's time to relax! :)
Wow, what a rollercoaster ride to get to this point! Congratulations on the great sale! It sounds like you made the right decision financially and I’m glad that everything worked out in the end (what a bummer it would have been if it had dropped off…).
The only real estate transaction my husband and I have been involved in was that purchase of our primary residence. It went very smoothly, but it was a bit of an oddball in some ways (the owner posted only on Craigslist as “for sale by owner” and had a dislike for real estate agents… so we brought our agent and negotiated directly with him).
Thank you. The buying process is definitely less stressful in general then the selling process, because the worst case for the buyer is that if it doesn’t go through, you don’t get what you never had in the first place. You can always rent.
But for the seller, there are many times when you get into contract and the deal falls through a month later or two months later or whatever, for whatever reason. There are so many reasons why deals don’t go through it’s kind of amazing.
But once the deal is done, you look back and realize the actual amount of time wasn’t that long. I just feels like an eternity during the process.
Glad you sold but was it worth haggling an extra 50k vs piece of mind? You had an offer for 2.7 m…dont be too greedy, the dealcould have fallen through.
One of the takeaways from this post for those considering to sell is: When you don’t need to sell, or don’t really want to sell you can afford to be “greedy.” I had already accepted keeping my home empty for the next 22 years and paying $600,000 in holding costs.
It’s when you need to sell when your emotions may get the best of you. Sell in the upswing I say, not the downswing. When things are going down, there will be VULTURES looking to low ball you and you will have no leverage (like I felt in 2012).
Congrats on selling the property although I’m sure it’s bittersweet knowing in the back of your mind that you may have made a mistake since you love the SF real estate market. Have you considered using the money to diversify into your love of the Midwest properties that you think are undervalued? That may allow you to feel better at night knowing all your assets aren’t tied up in a single location.
My key is to accept that it will go to $4M within 20 years, hence, I have to find a way to reinvest the proceeds to get close to that figure or beat that figure. I still have my primary residence, 2/2 rental condo, and Lake Tahoe condo that should ride any positive and negative waves.
I’ve so far used $250,000 of the proceeds to diversify into Midwest, Southern, and other properties through RealtyShares. My cap rate on the SF rental at current market price was about 2.6%. I hope to earn a 10% – 15% annual return with the proceeds instead.
BURL baby! Although in my case, I still own my primary residence in SF.
So……. did you 1031 to realty shares ? How are you getting around the taxes on the profits ? Awesome job my friend. I have a 600K home rented that Emotionally I cant sell it but financially it makes so much sense……. But my kids were born there hahaha same history different figures…..
RealtyShares only had one investment choice to roll the proceeds into and I didn’t want to buy another building (goes against the whole purpose of simplifying life), so I decided not to 1031 Exchange. I looked AGGRESSIVELY for something else to buy online, in SF, and in Honolulu, and didn’t find anything that made sense at the moment.
I could have spent the $2,000 to have the option to 1031 Exchange until Dec 31, 2017, and perhaps I should have. But I decided at the end, I didn’t want more property.
So does that mean you did have to pay the capital gains taxes? Did that take a huge chunk out of your profits?
Congrats, but that’s a lot of drama for selling a home! I’m one of the people who voted for selling so I think you did the right thing.
I don’t think your son will care one way or the other because he’ll be successful on his own. The greatest gift you can give your son is teaching him self-reliance.
Thanks. Yes, it is a tricky subject I will tackle in the future. If you have a paid off home in SF, a job waiting for you after graduation, etc… maybe the motivational fire will not burn as bright. That would be a shame.
Wow Sam, that was some ballsy negotiating… congrats on extracting maximum price/value out of your place. Of course only time will tell if you made the right decision, but I certainly do based on all the available evidence. But the remaining determinant will be how you invest the proceeds.. I know you indicated what you might do in earlier posts, but hopefully you will tell us what you actually do/did..
Yep, i’ll publish a post this year on what I do with the proceeds and why I did them. At the very least, you’ll see a quarterly investment update.
That was a crazy twisting story of selling. I can’t imagine having to wrestle with those kinds of numbers and deals, much less on the lack of sleep you have with a newborn. Whew. That sounds incredibly rough.
I love how much I can see your heart and love for your son. That is so sweet and awesome! I know he will appreciate all you have done to take great care of him.
Everytime I get excited about our future plans to be rental owners, I read another post about how terrible it is. And I find that I may not want to go through the hassle. We aren’t at the point to be able to do it yet, but I am hoping to learn from all of Y’all and be prepared for the worst if/when it happens.
Thank you! So many hopes and dreams. You never know whether you’re doing the right thing for your child. But I feel that there is one decision that’s always going to be the right choice, and that’s spending as much time with your kids as possible.
Never, honestly. We’re always going to need housing. Unless we all move to Mars and float in invisible suits. Ha. Until then – rather bullish/bear market. Housing will be a necessity.
We currently rent because it’s the best option for our current lifestyle. And after reading this article and similar ones around the web. We might be renters forever. Just kidding.
I’m glad you were able to sell (this time around), pay off the mortgage and made a cool profit. The stress of having the property stressed me out. And all I did was read. Whew.
Your Son, in the future I hope he understands. Eventually. Having had a new baby too, I realize everything we do is for them. EVERYTHING. The love runs so deep, now I understand my parent’s motives.
No matter how much financial sense it makes, I don’t think I could ever be a landlord.
Congrats on your sale Sam!
Justin,
It’s honestly not as bad as you think! For every horror story there are tons more people who live a pretty independent life apart from their tenants day-to-day issues.
Not to mention once you gain a critical mass of units, you could hire a property manager to really pull yourself out of the day to day.
I agree with you, Justin. Every success story has ups and downs. Nothing good comes easily in life. What matters is what you prioritize and how you assess the particular situation that you’re in to make the right investment that works best for you.
I think it’s important to note the uniqueness of Sam’s property. I would NEVER want to be a landlord on a property like that. Bravo for selling.
I personally have 4 properties. A house, 2 townhouses, and a condo. I own them mortgage free. By far the best returns are on the townhouses and condo. Only worth about $380,000 or so combined. The cheaper units are just easier to manage. Renters usually stick around, and tons of people can afford them. You don’t get roommates like Sam did, either.
With the townhouses and condo, the maintenance fee covers everything outside the front door. No lawn, no roofs, no pool, no paint, no nothing. So outside the occasional small fix, there is very little that I need to do. Almost nothing other than collect checks. I have a handyman who I just call when I need something fixed. I have an AC company that I use for the AC and an appliance company that I call for appliances. They call the tenant and schedule around them and send me a simple bill. How hard is that?! I don’t even have to go out there. 5 minute phone call and done.
The house is a little more work but not bad. I have a lawn/pool contract. I rarely hear from the tenants as well.
Don’t be afraid of rentals, I personally love them. I have some investments with RealtyShares and Fundrise as well, and the returns are actually better with both than rentals… but I like OWNING my property. I like the control and security of it. So I diversify.
Thanks for sharing! Managing my 2/2 condo in SF is much easier too. I’m HAPPY to pay the HOA fee and let the HOA deal w/ the roof, common grounds etc. My vacation property in Lake Tahoe also takes zero time.
Owning feels great up to a point. And that point for me is when my property taxes a year reached $50,000+. I thought that was ridiculous.. simply crazy. So now, I “only” pay about $27,500 a year in property taxes.
I pay about $24,000/year on my primary. It’s awful! Between all my units, it’s about $40k.
For me, it’s not just about feeling great owning… I like to have control over my funds. I am not terrified with RealtyShares, Fundrise, and even the stock market, but man, that money is GONE… it’s a number in a computer somewhere and you hope it doesn’t disappear.
For me, the goal was to have enough property for security. Which is why I own them all outright. Only my primary I carry a mortgage. I can move back into my rental house – which is a stunning house in one of the best school districts (I have children)… I can collect from my other 3 rental properties and survive just fine. I could work for $10/hr, part time, or whatever and be more than comfortable in a fairly high end home… or maybe not work at all. It’s just that sense of security that helps so much.
So now I have been putting more into Fundrise and RealtyShares (thanks to you for the suggestions) and going from there. If another rental pops up that is worth buying, I’d grab it, but prices are skyrocketing right now so not great for purchasing rentals in the current market here.
I’ve always wanted a vacation rental in Tahoe! Still thinking about it but didn’t want the headache.
$24,000 is a lot. What is the property tax percent rate and where do you live?
Are you still love rental property income, but after I discovered on my income, it blew it out of the water. So my perspective has just changed over the past 10 years.
Check it out: https://www.financialsamurai.com/ranking-the-best-passive-income-investments/
South Florida. I’m paying about 2.5% on my primary residence, which includes a CDD (maintenance fees). So about 2% if you don’t count the CDD.
I just got notified today that RealtyShares closed a couple of my deals after a VERY short time. Which made them almost useless. And now many of the new offerings are just not really that good. 6.5% debt? A chicken restaurant at 9.5%? No thanks.
Fundrise seems like it may be a better option now, but I’m not really that sure. I’m hardly an expert on it. I’m a business owner (have 3 businesses) and diversifying out in to other passive investments.
I am enjoying a lot of your articles.
Hmm, not cheap. Sf is is 1.27%, but our house prices are crazy.
What was your return, duration on these early closed deals? What was the duration expectation? We’re there no prepayment clauses?
The return was 12.5% on both. Which is great. Problem is they are so short that the return was not 12.5%…
[($10,000 * 12.50%) / 360] * 104 days = $361.11
These were my first few deals testing out the platform and having to do the due diligence, reviewing financials, etc… it’s just not worth it for 3 months of interest. I guess if you are someone who just trusts RealtyShares and selects anything they have it’s not a big deal?
No prepayment clauses according to my contact there. But I don’t have much interest in deals that are closing in just 3 months. 2 of my 3 test deals closed in just 3 months!
I’m kind of thinking Fundrise makes more sense. Seems to be doing about 10% – 11% return, you don’t have the risk of getting stuck on an individual investment for 5 years or whenever, you can take money out quarterly, and no dealing with deals that close out so quickly. Plus, the new RealtyShares debt deals are only 6.5% – things must have changed in the last few months, no? I do like knowing the exact investment I’m making on a specific property, it’s kind of cool, but not convinced it’s better. What do you think?