If you plan to invest in real estate, there's a key real estate investing rule you should follow. It's called Buy Utility, Rent Luxury or BURL for short. Using the BURL method, you increase your chances of making a higher return on your real estate investment while also maximizing your capital for a better lifestyle.
Let me first share some of my experiences investing in real estate since 2003. Real estate accounts for about 50% of my eight-figure net worth. It is the key asset class that enabled me to retire at age 34. Next, I'll explain in detail what BURL is why you should follow this real estate investing rule.
Part of the reason why I bought a smaller house in 2014 was because I wasn't willing to be a renter of my own house for its market price. At that time, the market rent price was ~$8,500/month. Crazy high, I know!
The price to rent my house had grown from about $5,000/month when I first bought it in 2005. If I had kids and a penchant for throwing tons of money away on rent, maybe I would have stayed.
BURL is a way for all real estate investors to stay disciplined when looking for the next property. As we exit the pandemic, the real estate market is very strong. As a result, even more discipline is necessary to get a good deal.
Rental Opportunity Cost And BURL
To optimize my finances, I figured I should buy a new house more suitable to my house-spending desires. At the time the max I was willing to pay to rent was ~$5,000/month. Next, I should rent out my old house at market to those willing to pay $8,500/month in rent. This way, economic waste is eliminated, and everybody is happy. This is the BURL rule in a nutshell.
Conduct the same mental exercise with your existing home. If you haven't rented in a while, you may be surprised by how much your primary residence can command for rent in the open market. Inflation is a beast, which is one of the reasons to own real estate over the long term.
The cost of living in your home isn't the actual money you are spending to live there. The actual cost is the opportunity cost of not renting it out at market rate.
Real Estate Investing Rule To Follow: BURL
Let me share with you why it's important to follow the real estate investment rule of Buy Utility, Rent Luxury (BURL). If you want to maximize your lifestyle and your net worth it's more important than ever to pay attention to this rule.
Buy Utility, Rent Luxury (BURL)
A common real estate investing rule a savvy real estate investor follows is to pay no more than 100X the monthly rent as the purchase price. In my example, an investor wouldn't pay more than $900,000 for my now $9,000 a month rental house.
That said, it's IMPOSSIBLE to follow this real estate investing rule when buying in expensive cities such as New York, San Diego, LA, and San Francisco. Even finding properties priced at 150X monthly rent is extremely difficult to find.
Lifestyle And Capital Appreciation
Why? Because there is excess demand looking to buy property for lifestyle and capital appreciation. Housing becomes more than just basic living expenses, it becomes a luxury option. A Honda Civic takes you around just fine, but some people like to buy classic Ferraris.
I've chosen to live and remain in San Francisco because I believe it offers a great combination of wealth creation and lifestyle. The average temperature is in the low 60s and six-figure jobs are a dime a dozen.
In addition, consulting opportunities are endless, it's picturesque, and the food is amazing. Plus, there's tremendous diversity, and there are plenty of outdoor activities thanks to the topography. San Francisco is amazing, which is why it's so expensive.
I'd love living in Hawaii, but it lacks a robust domestic economy. With tourism as its main industry, the economy is subject to the whims of others. Unless you are a doctor, lawyer, or entrepreneur in Honolulu, there just aren't many six-figure jobs. You need to already be rich or have a location independent business to comfortably afford a sweet home.
Rent Luxury Example For BURL
Spending $9,000/month ($108,000 a year) on rent sounds expensive. But, it's actually good value since you need to spend roughly 303X the monthly rent (25.25X annual rent) to buy my house at market price ~$2.7M. The 100X – 150X monthly rent rule gets blown out of the water.
Even if you owned the $2.7M home outright, you'd still have to pay $33,000 a year in property taxes ($2.7M X 1.2%), $2,500 a year in insurance, and around $5,000 a year in maintenance costs.
Meanwhile, your $2.7M could earn a 2.5% annual rate of return risk-free = $68,500 for a total cost of roughly $109,000 if you had no mortgage. Knowing the numbers is very important when following a real estate investing rule.
Most Homebuyers Only Put Down 20% Or Less
But the reality is that most homebuyers only put down 20% or less. Let's say a buyer put down 27% and got a $2M mortgage at a 3.5% interest rate. His annual mortgage interest cost would be $70,000 on top of $33,000 in property taxes, $2,500 in insurance, $5,000 in maintenance = $110,500.
Then you must bake in the opportunity cost of not getting a 2.5% risk-free return on the $700K and you get $17,500. The total gross cost of ownership is therefore $110,500 + $17,500 = $127,500 after putting 20% down.
Obviously, renting for “only” $108,000 a year versus owning for $127,500 a year is a financially cheaper option if you don't include the tax benefits, not to mention the benefits of less maintenance stress.
The only way the owner comes out ahead is through principal appreciation and tax deductions. The problem most people have is coming up with the 20% downpayment. Meanwhile, getting approved for a mortgage is much more difficult post financial crisis and post pandemic.
Buy Utility Example For BURL
Now let's look at the other side of my BURL real estate investing rule. In the MidWest, there are actually $100,000 properties that can earn you $1,000 a month in rent. The value you get in the heartland is partly why I'm so bullish.
An $80,000 mortgage at 3.5% after putting down $20,000 only costs the homeowner $359.24/month or $4,310.88 a year.
Add on $200 a year in property taxes, $1,000 a year in maintenance, and $500 a year in opportunity cost for not earning a 2.5% risk-free return on the $20,000 downpayment costs only $6,010/year to own compared to $12,000 a year to rent.
If you live in the Midwest, you need to be a buyer of real estate since it's cheaper and you can cash flow immediately. Capital appreciation is slow compared to coastal city property, but that's OK because the income generation is so much higher if you begin to accumulate rentals.
So why doesn't everybody just buy all the Midwest property they can? It's partly because many people in the past believed that in order to buy Midwest property, you had to live in the Midwest.
Benefits Of Investing In Real Estate Crowdfunding
It's natural to want to be able to see and manage the property you want to own. Given half the country lives in the coastal cities, half the country focuses on accumulating coastal city real estate. But now, you can surgically buy specific Midwest property through real estate crowdfunding, which makes following my real estate investing rule so much easier. This is financial arbitrage at its finest.
The solution for half the population living in expensive coastal cities such as SF, NYC, LA, San Diego, Boston, Washington D.C. and Honolulu is to therefore rent where you are and buy in the Midwest and South to maximize income and net worth.
What Determines Luxury And Utility?
We can qualitatively say without prejudice that coastal city living can be considered Luxury living while non-coastal city living can be considered Utility living.
Who doesn't want to be near the ocean, see the ocean, fly direct to other countries, eat a wide assortment of food, be constantly entertained, and take advantage of the highest concentration of job opportunities? There's a reason why expensive cities are expensive.
But of course, non-coastal city people will balk at this classification given there's so much non-coastal city living has to offer too. There's something great to be said about a slower pace of living, much lower costs, and lots of space.
We're all biased for where we currently live or where we come from. Therefore, the easiest solution to determining what defines Luxury and Utility is to utilize objective math.
Luxury And Utility Median Price To Rent Ratio
According to data compiled by Zillow, the national Median Price to Rent Ratio is around 11.44 (see dotted horizontal line below). Therefore, we can say the higher a property is valued above 11.44X annual gross rent, the more it is considered Luxury and vice versa.
If we use one standard deviation to determine the Luxury and Utility Median Price to Rent Ratio, the breakpoints are roughly 13.3X and above for Luxury and 9.6X and lower for Utility. In other words, roughly 68% of homes in America trade within 9.6X – 13.3X annual gross rent, which makes renting or owning a wash.
As you can see from the chart, San Francisco (Zillow includes Contra Costa and Alameda counties) trades at a Median Price To Rent Ratio of 20.51X, way above the 13.3X ratio I've determined to equal Luxury.
However, my rental home trades at 26X annual gross rent, therefore, I decided to sell my rental property in 2017. I used the proceeds to reinvest in lower-cost areas of the country, buy stocks, and municipal bonds for 100 passive income.
Invest In Properties That Trade Below 9.6X
On the flip side, check out properties in Raymondville, Texas with a Median Price to Rent Ratio of only 5.2X. In other words, the median $60,000 house commands almost $1,000/month in rent ($60K / 5.2 = $11,538/year). In other words, in just 5.2 years, you can have your renter pay back your entire property assuming you took out a 100% mortgage!
Raymondville, Texas clearly is considered Utility, and a savvy real estate investor should be buying Raymondville property all day long if their job market remains stable. The problem is that access to the market hasn't really opened up yet.
Not to worry though, since there are literally hundreds of other towns and cities with properties that trade below the 9.6X Utility classification ratio if you look at the CrowdStreet platform. CrowdStreet is a way for accredited investors to invest in individual real estate opportunities, with a focus on 18-hour cities where valuations are lower and rental yields are higher.
18-hour cities are secondary cities with lower valuations and higher rental yields. These cities also have higher growth potential due to job growth and demographic trends.
If you are a real estate enthusiast with more time, you can build your own diversified real estate portfolio with CrowdStreet. However, before investing in each deal, make sure to do extensive due diligence on each sponsor. Understanding each sponsor's track record and experience is vital.
Alternatively, you can check out the Fundrise platform, the industry leader who manages over $3.5 billion and has 2 million clients. Fundrise focuses on diversified real estate funds to give investors more broad exposure. Their returns have historically been stable and consistent, especially when the stock market is correcting.
Related: Real Estate Crowdfunding Learning Center
The Optimal Investment Lifestyle Combo
Of course, real estate is a very personal situation for each individual. We live where we want to live mainly due to our families, friends, and jobs. Not everything is about money.
But given this is a blog about ways to optimize our finances, a savvy real estate investor should seriously consider my real estate investing rule advice of Renting Luxury, Buying Utility.
Here's a scenario I've been pondering now that I'm in the second half of my life. I want to be closer to my parents and live it up like a boss before I die.
Another Luxury Vs Utility BURL Example
For the sake of dreaming big, there's this sweet 5 bedroom, 5 bathroom, 6,400 sqft new construction home in Honolulu with a killer view asking $6.95M. Think how many sweet blog posts I can write from the pool!
Let's say the real price is $6.2M since it's been sitting for a while. Based on a 25X Median Price to Income Ratio, this means I can rent the house for approximately $248,000 a year or $20,500 a month.
$20,500 is a lot of money. But think about how much rental income $6.2M can earn in Raymondville, Texas.
First, check out this picture and short video highlighting the $6.2M property. I'm happy to throw a pool party for readers who want to stop by and hang.
If the $6.2M was deployed in Raymondville, Texas, I could theoretically earn an insane $1,192,307 a year in gross rental income since the annual gross rent to price ratio is only 5.2X.
After spending $248,000 a year living in a sweet home in Hawaii, I'd still have $944,307 left over in cash flow if I followed my real estate investing rule of Renting Luxury, Buying Utility.
Seriously, the last thing I want to do is own a humungous house with tons of ongoing maintenance to deal with. But renting it is a different story. Besides, I don't have $6.2M laying around!
Real Estate Investing Rule Shortcut
Here's a shortcut to decide whether it's better to rent than to buy. The chart below shows the share of homes in each city that can be rented out for more than their monthly expenses according to Zillow's database.
Of course, you just can't buy every single property above the rental profitability line. You must still carefully run the numbers and do your due diligence.
Below are the 10 markets where the greatest percentage savings come from buying vs. renting according to Zillow:
Detroit: -48.9 percent (it's 48.9 percent cheaper to buy here than to rent)
Baton Rouge, LA: -47.6 percent
Columbia, SC: -45.5 percent
New Orleans: -44.5 percent
West Palm Beach, FL: -43.5 percent
Greenville, SC: -43.4 percent
Charleston, SC: -42.8 percent
Philadelphia, PA: -42.6 percent
Cape Coral-Fort Myers, FL: -42.4 percent
North Port-Sarasota, FL: -42.1 percent
And below are the 10 markets where the percentage savings from buying vs. renting are the smallest according to Zillow:
San Jose, California: +12.2 percent (it's 12.2 percent cheaper to rent here than to buy)
San Francisco: +5.8 percent (5.8 percent cheaper to rent)
Honolulu: -2 percent (2 percent cheaper to buy)
Seattle: -10 percent
Portland, OR: -13.8 percent
Madison, WI: -14.7 percent
Milwaukee, WI: -15.5 percent
Sacramento, CA: -15.8 percent
Oakland, CA: -16.3 percent
Las Vegas, NV: -16.8 percent
However, after two years of price underperformance during the pandemic, I think big cities such as San Francisco and New York City are buys. And that is exactly what is happening now that there's a return to work movement now that the pandemic is over.
People are rushing back to big cities to network and find the highest-paying jobs. For example, there is an influx of talent in San Francisco due to the boom in artificial intelligence. As a result, I'm buying as much San Francisco real estate as possible on large lots with ocean views. In 10-20 years, they are going to be worth much more.
Plentiful Real Estate Investing Opportunities
The opportunities are plenty to buy cash flow generating properties around the country. Specialized REITs and the rise of real estate crowdfunding companies like Fundrise are making this move easier today. Fundrise is one of the largest real estate crowdsourcing companies today. You just need to figure out what type of real estate portfolio mix you want.
For 15 years I've been 100% long luxury growth markets. Now I'm shifting towards a balance of growth and income (utility) because valuations are stretched in expensive coastal cities. Plus, I no longer want to spend so much time managing rental properties now that I have kids.
As a result, I sold a San Francisco rental home for $2,742,000, equivalent to 30X annual gross rent in 2017. I reinvested $500,000 of the $1,800,000 in proceeds in heartland real estate crowdfunding.
The $500,000 has the ability to generate the same or more amount of passive income as my entire $2,742,000 exposure given net and gross rental yields are so much higher. I re-invested the remaining $1,200,000 in stocks and municipal bonds.
If you can remove emotion, pride, and prejudice from the equation, you should be able to maximize your lifestyle, cash flow, and net worth. Ready to BURL?
Explore Real Estate Crowdsourcing Opportunities
If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, do take a look at Fundrise.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments. You can now invest beyond just where you live for the best returns possible.
For example, cap rates are around 3% in San Francisco and New York City. But cap rates are over 10% in the Midwest if you're looking for strictly investing income returns.
Another great private real estate investing platform is Crowdstreet. Crowdstreet offers accredited investors individual deals run by sponsors that have been pre-vetted for strong track records. Many of their deals are in 18-hour cities where there is potentially greater upside. You can build your own select real estate portfolio with Crowdstreet. However, you need to do more due diligence on each sponsor and deal.
Personally, I've invested $954,000 in real estate crowdfunding to generate more passive income and diversify my real estate holdings. $270,000 of the money is invested in Fundrise, which is also a long-time Financial Samurai sponsor. I plan to continue following the BURL real estate investing rule as demand for real estate heats up post-pandemic.
The Real Estate Investing Rule To Follow is a FS original post. For more original content, sign up for my free weekly newsletter where I have helped real estate investors achieve financial freedom since 2009.
How do you square your two rules of BURL and “buy your primary residence as soon as you can,” while living in a coastal city (where buying is a luxury by default)? Which is more important? Perhaps a blog post where you run the math of each scenario could be interesting? As someone living in SF, contemplating between buying their first home and renting, I find myself trying to find the right balance.
You would just rent in SF and buy rental properties in higher cap rate cities directly or through private real estate funds like Fundrise, CrowdStreet, etc.
But the reality is, it’s hard to do. I’ve gone ahead and bought plenty of primary residences here in San Francisco because I knew each time I would be in the city for at least five years.
I like what you said about how 6000 square feet is probably going to be a few million dollars. My wife and I are willing to spend 3.2 million and need a realtor. We’ll have to get a realtor who knows the suburbs of Atlanta really well.
Your BURL rules makes a ton of sense! Thanks
Wow, it’s interesting how you used the rule of not paying more than 100 times monthly rent as the property price. My uncle is thinking about investing money to have an extra source of income. I will share this article with him so that he can see the benefits of investing in luxury real estate.
I’ve stated looking into Real Estate Crowd funding and have completed 2 deals on RealtyMogul and attempting to complete one on CrowdStreet. RealtyMogul gave me a dedicated person to assist me who has been great, responsive and knowledgeable. Crowdstreet has not returned 2 calls with messages left on Monday 1/13 and no one answers the phone through out the week calling the number given in the Their deal singing screen. Message says leave a message and they will call me back or email them for faster service. They have not returned either call after 5 days and have also not responded to the email other than an automated espouse saying they received the email. I am trying to complete the documents for my first deal with them. Is this normal operating procedure for CrowdStreet?
Situ
50% outright owner in a SB, CA 1031 investment duplex. Bought for 1.1 in 2006 going in with zero basis, current market value 1.5. Now deploying $72,000 steady annual gross rent.
Using your rule – Value is 21x annual gross rent. Its getting up there.
PLUS
Principle home where I live is in London for past 11 years. Purchased for £750,000, now worth £1.5 ish..give or take (with Brexit some downturn in market has taken place). Practically own outright. As above in another post, we have Council Tax here in lieu of Property Tax which for me is $1500 a year. So I am thankfully not burdened with that issue here. I also luxury vacation rental London home when I am in SB/elsewhere; do very well with the 12 weeks/year its operating as a VR. Using your rule: 38x annual (VR) rent (but only 12 weeks/year)
As a 60 year old, having done the long-distance land-lording+partner+8 hour time difference = headache routine, I want to either
1) Buy out my partner/brother in the SB duplex, hire a PM to manage it, use one of the units to live in while I am in SB (around 3 months a year) + VR’ing it when I am not there. Other unit would be long lease to cover the big costs.
2) Selling my bro/partner my share or selling entirely on open market and moving into a more passive and diversified income stream. I have no other investments besides real estate. Time to shift that. Will for sure be reading up on your posts.
This one articulated some of my latent thinking ( This was the first link I landed on via a google question! ) – Weighing up the the real benefit of being able using one of the units for myself and my son while in SB over renting on an as needed. Yes, I would not have the day to day land-lording side, I would still be covering all costs: $13,000 PT (that could rent me a nice VR for 2 months in SB) plus all operating costs + PM (6%) outlined in the various posts above.
Does it makes more sense to cut bait, even with the CG implication (which is significant) and invest in a more diversified passive income producing/growth scenario. Going to look into these passive REITS have been hearing about them, have a fairly good handle on entering the stock market.
Eventually I will sell London once we all digest Brexit here (prob 5 years) and make a move back to SB. Big looming issue is CGT in UK and US as I am a two-home owner. No CGT in UK on London home if I sell, but CGT on London home to Feds (and possibly CA if I reside there when I sell it) and CGT in UK for SB duplex should I sell that because I am a domiciled resi here (both capture worldwide income and inheritance).
Upshot….. I own two luxury and no utility and no diversification and all my income is from land-lording and property management, which I am getting to the end of my tether with.
Is it as simple as selling the duplex and putting the funds in eReits and stock market is the better move over holding onto it, using it now and then, being responsible for hefty 50% mortgage on the value of the buyout and selling it 5 years.
Thoughts?
It is foolish to buy and attempt to rent out expensive properties. Buying and renting out multiple inexpensive properties is much wiser because if there’s an economic downturn (which there always is) many renters need to downsize so the high end rental properties will be left unrented while the low end places will always be rented. In renting, occupancy is king and if you cannot talk about occupancy rates in a given area with authority, you really have no business being a landlord. And occupancy rates are one of the most closely held secrets of property owners.
It is important to understand that renting out property is always a risk. Getting money for nothing, which is what investment is, does not carry zero risk. It actually carries much more risk than just working. That’s why the author emphasized why SF is so great because of the endless consulting and 6 figure jobs – even he knows that those income sources are lower risk than property investments and you need them to fall back on if your investments go south – which will ALWAYS happen from time to time if you invest for long enough.
It is only the people who jump into the investment market, invest for maybe a decade or so then retire and get out – and who are lucky enough to jump into the market right at the beginning of the bull and jump out right at the end – who are naieve enough to think that investments will always go up – like the author presents here.
And lastly, if you cannot do the maintenance work and repair work and remodeling work that property needs – if you don’t understand property or construction – you WILL lose. When my wife and I shopped for our second house 2 years ago it was an eye-opener how much junk was being pushed on the market. Homes with cracked foundations, one with a disguised in-ground oil tank that was still there, shoddy electrical…the list was endless. And all of it carefully concealed by rented and staged furniture, throw rugs, and anything the owner could dig up they thought would do it. One of them had a flower pot on top of the abandoned oil fill and when I moved it and discovered it the sellers realtor claimed it was “a drain” despite oil film still being present!!! It took 2 dozen homes before finding one that did not have major faults covered up.
That is interesting that living in a coastal city can be considered luxury living. Maybe it would be good to find a house in a coastal city. Then I would be able to start luxury living.
You use the risk free rate for down payment but the down payment is at higher risk.
You also did not calculate the value of time and education that has to go into real estate investing and hunting – over investing in an index fund or REIT for that matter.
The house appreciation comes with higher taxes
The tax deduction benefit is not that great because it is only the amount of deduction above standard deduction that is extra benefit.
As for repairs, you have to have half the handyman knowledge so to not get fooled by handymen
And the risk of having to relocate for jobs, bad neighbors, what not.
Do not forget the time value of upfront costs, including your own time/labor
I bought a smaller house in 2011 was because I wasn’t willing to rent my own house for the market price at that time of 8,500/month. The price to rent my house had grown from about 5,000/month when I first bought it in 2004.
Nice Post . I have townhouse in San Mateo which is close to freeway and thinking if I should sell or rent it out for 4500$/month. It is not all paid off. We owned it only for 5 years now, it has appreciated around ~30% and have mortgage to pay off. With bay area market going downwards and it is close to freeway which is also negative, I am not sure if its good idea to hold the property or sell it now and invest in midwest for lot cheaper. It would be great to know your thoughts on this.
You brought up a great point when you said how hard it is to get a mortgage after a financial crisis. That’s why it’s important to invest in a luxury lot while you have money and security. My friend wants to live in a luxury community, so I’ll help him find a contractor that can help him build his custom home.
Great article! I do want to make a few points, though. Productive vs consumptive assets (i.e. buying to rent vs buying to use) is an important distinction to make. You make this point by talking about the opportunity cost to own is determined by the market value. Investing only for cash-flow, though, is a common mantra of real estate investors. I think this pushes investors towards marginal properties and fails to recognize the other benefits (Tax shielding, debt pay-down, and appreciation) Choosing properties with positive cash flow from day one is akin to investing only in dividend stocks. The cash is obvious but the future appreciation and rent growth may stagnate. Also, because the cash portion of real estate returns is taxed as ordinary income ~35% of every dollar goes to tax expense. Appreciation, however can be realized whenever the investor chooses or deferred indefinitely and transferred between generations 100% free of a tax bill. If you’re looking for a long-term investment then capital appreciation is your friend. If you want to consume more today, go for cash-flow.
Hi John,
Rent income is taxed as ordinary income, but if you leverage and take depreciation into account, you usually have passive loss (even though you don’t actually have a loss so it’s like tax free income and then on the back-end, depreciation recapture is taxed at 25% max).
Investing for capital appreciation is riskier especially if you leverage and not be able to handle the negative cash-flow during your holding period.
In both situations, you can pass on the investments to your heirs tax-free.
Coastal cities like Jacksonville Beach, FL come with crazy high home insurance, if one can even find coverage. I’ve watched my friend’s home literally get swallowed into the ocean from erosion. It’s hard to consider this luxury living.
Great Post! I’ve been shopping in Oakland for a home now that I saved enough for a down payment of 10%. Maybe I should wait till next year to see what happens. I have an old post I made on my blog about price to rent ratios and I found that it’s possible to get some good cashflow from markets in Pittsburgh, Miami and Charlotte. I think the MID 750k limit and the SALT tax are a political play to make more people move out of coastal cities. I guess that strategy assumes that people would vote conservative once they do so.
People don’t change their politics with relocation after they have made up their minds. Trump did what democrats wanted – less breaks to the people who can afford expensive homes (progressive taxation).
That’s an astute observation and Trump is a democrat pretty much so this makes sense. I find that people change their politics based on their age; It is also probably true that these hipsters moving to Austin are going to remain liberal and attempt to change the politics where they find their new homes.
“The cost of living in your home isn’t the actual money you are spending to live there. The actual cost is the opportunity cost of not renting it out at market rate.”
Or the returns you sacrifice (income plus capital gains) from alternative investments by sinking your capital into bricks and mortar. Whichever is greater.
The 3.5% is not realistic rate for buying an investment property. I recently bought my condo I am living in and got preapproved for 3.275%. The loan representative told me the rate differs at 4.25% for an investment property.
So the Midwestern example doesn’t accurately depict the correct assumptions.
I thoroughly enjoyed reading and found the information useful.
$200/yr in property taxes seems extremely low as well.
I really like the way you are thinking. If you would ask random 3 people on the street what would they do if they won $10M the answer would be: buy a luxury home (like the one from the video you shared) and an expensive car. After a short time, they would realize the maintenance cost is something they can’t afford. Only 10% of people would think the way you presented. Great post will be coming back.
Hi FS! Penny for your thoughts about hanging on to a newly remodeled 3/2 family home investment property in a nice area of Marin today (Oct2017). I don’t own any other properties, and aim to move downtown SF. No debt.
Gratefully,
Do you rent, and then rent out this Marin property? You’ll have to send me some of the numbers in terms of what it may sell for what it may rent for etc. Thanks
Hi
Looking to find out if I should sell my rental property worth 400,000.
No mortgage . Pay 950’per month with two assessments yearly .
I rent it for 2100 monthly about 3 % yearly income.
I own and live in a coop apt with a large mortgage and maintenance. Am a senior . Is it time to sell and get the cash. Will pay around 30% taxes, and will come way with $300,000.
Please help as the renters lease is up shortly.
Thank u!
Ella
Any thoughts on syndications? Multifamily, mobile home parks, or otherwise?
I live on the East Coast and am going to be in the market for a utility home in the next 12 months. Luxury is for hotels when I’m visiting with my love. Daily life does not need that. Just a place to be secure.
I’m wondering what this would like like for a city like Chicago. Does it make sense to be a landlord for a “luxury” property and rent utility?
Paco, who said RE in the US/CA goes up forever as that’s obviously not the case as seen from 2007-2012 in virtually all markets? I have no reason to sell RE and in fact want more to think it’s a bad investment so less supply of buyers. Just sharing my input and success as I’ve thankfully made enough.
Instead of being a smart allic, let’s say you have $10k to invest now with minimal debt and starting to build your financial nut, how would you allocate? I’d say in any market where it’s still the case largely, for sure put that as a 3.5% or .5% FHA down loan and buy your first home where you’re not only paying less in rent, you may experience appreciation years down the road..beats I think buying gold, Bitcoin, <100 shares of aapl or spy, or bonds huh?
Can you email me and I can give more info, my old blog..I like to keep a stealth profile Along with wealth as unfortunately a lot of jealous people out there.
Hi Sam,
You gave a one line passing remark to the idea of capital appreciation here – but that is crucial, and the main reason for buying over renting. I’d argue that most of the return comes that way. The reason that so many people have done so well out of cities like SF and NYC is capital appreciation.
I think a better analysis would include the capital appreciation in the midwest and places like SF and then see where it’s better to invest your money.
Also the capital appreciation is significant because it amplifies the return if you take out a loan to buy a property. If the property value doubles in say, 10 years, in SF and does much less in the Midwest which area would you rather be invested in?
Judy
Hi Judy, feel free to do the analysis and send me a draft. I think it would be a great read. You can basically do an analysis of that fits whatever you want your thesis to be.
If $1 million of Midwest property generates 12% annual rental yields versus 2.5% rental yields for 10 years for a San Francisco property, and the Midwest property appreciates by 20% in this timeframe, but the San Francisco property appreciates by 100%, who comes out ahead?
When did you buy your property and how has it done with its current metrics?
I don’t agree as much investing in the economically depressed and unstable employment base of the Midwest as likely to have months of vacancy which kills returns and then add on minimal and in many cases like Kansas declining values and it’s a losing proposition..add in that Sam is not taking into account the very relaxed permitting there and so virtually assures minimal price appreciation, whereas in California CEQA and other local environmental regs., Especially in SF, ensure continued very limited supply and thus higher prices..for the best income to capital appreciation, I’ve seen Sacramento getting comfortably 7-8% cash on cash returns while having the highest YoY rent increases the last 3 years, these are for 2000 and newer built homes and thus minimal maintenance for years/decades..just had 4 new renters from South SF, Concord (east bay), San Jose, and santa barbara..will continue due to purchasing power, far more spacious and newer homes, ability to telecommute and Amazon bringing 1500 jobs along with other tech money coming here since buying the Sac Kings (Vivek from Atherton, Mark m. From Orinda, Jacobs from la Jolla, former cpo of fbook, etc)
Can’t you build forever in Sacramento? There seem to be a lot of land in every single direction.
common misconception Sam..you know how expensive permitting goes up annually and with a these new assessments, especially in CA? That’s why the new homes bring up comps..i.e. current rental is $400k, brand new pulte/Hovanian homes a block away are $450-$500k+ with a smaller lot, HOA, and higher mella-roos and they’re subsidizing us greatly with higher prop. Taxes and thus better schools, etc. Davis, it’s essentially ocean front property as they a local measure J where voters have struck down any new development for 15+ years and hence median home price is ~$700k matching walnut Creek/San Ramon, with just .2% vacancy so even better rent, as UC Davis keeps increasing enrollment but not new housing.
Sam – Long-time reader, first-time commenter.
Do you have any advice or experience hiring a property manager for a remote Midwest property? I live in Michigan, and looking in some of the Midwest University cities (Akron) as attractive places to buy. Any tips?
Do a search for local property managers, in the community you want to buy in. In general, they charge 75% of first months rent as a commission for leasing the home for 12-months (includes screening, background, employment checks). After the tenant is moved in, they will charge either a flat fee of 75.00 / month for management, or, a percentage of 6-8% of monthly rent. They will deduct all fees from the gross rent, and direct-deposit proceeds to your bank account.
100x is far too strong of a gross return as that translates into a 12% annual rental yield, when getting half of that is a great deal when we see the 10-year yield at just 2.3%..I live in Nor Cal myself, in the Bay ~300x is average=~4%, Davis ~200x=~6%, ~150x in Sac area ~8% which i think gives the best rental yield and capital appreciation ratio..rents have increased there the most year over year the last three years!
I think you are comparing apples and oranges. If you invest in a 30-year governent bond you get your return of 2.86% and that’s it.
But your “annual rental yield” is not totally yours, you have to deduct the operating cost and use the cap rate. My understanding is that your 12% “rental yield” would imply a cap rate in the 6-7% range under US-conditions with its high property taxes. That would be a satisfying compensation for the risk indeed. If the location is a good one where probability of rents increasing ist very high, in my book you might consider accepting a cap rate in the 3-4% range. If you are paying more you are betting on a decent amount of (rent) inflation for the future and interest rates at least not going up significantly.
Nah pack, in fact the opposite where not only getting the rental yield which is largely tax-free due to depreciation, expenses, etc. But capital appreciation as well..example I’ve gotten is a 4 bd Sacramento home for $255k at the end of 2012 rented that year for $1845..not just appraised at $406k and renting for $2700..CA property taxes are only ~1.2% (varies due to what we have on different developments, mella roos paid off or not, special assessment like Sam brought up in SF regarding BART funding), BUT most importantly in CA protected via prop. 13 where it can only increase the max of 2% since it’s enactment in 1978.. therefore, even though my home is now valued at $406k, it it only assessed for $271k thus saving already ~$1500 EACH year and will compound even more..another example is my father still has the first home he bought in 1979 for $40k, now 4 months ago appraised at $555k, but his basis is just $121k thus saving $430k in assessment or ~$6k each year.. moreover the rent more importantly on that home has increased from $200 to $3200/mo meaning he gets more in rent now each year for this home he originally bought!! And he only put $2k (5% down) so what’s the CAGR on that lol?
Best of luck all on this great goal of breaking the shackles of enslavement/corporate America . thankfully at 31 I’ve broken free with a self-made net worth of ~$2.5m, but more importantly FCF of $10,800k/mo and growing
Congratulations for reaching financial independence. Can you share your story of how you got to $2.5M by age 31?
Also, any thoughts of leaving Sacramento, if that’s where you live?
Thanks Sam and likewise! Looks like we both come from first generation parents so that’s always cool..Gladly Sam, what’s the best way?.also was an accomplished blogger from 2011-2013 with seeking alpha and motley fool, garnered 1.5m+ unique page views, ~$100k in profit with that and just got drained(wrote ~500 posts lol and I know you know the energy it takes)..I live between Davis/Sacramento where family is and la Jolla/SD..not a fan of traffic so Def. Not LA area and in the bay fan of Marin (near mt. Tam) or East Bay (Orinda) or peninsula (Los Altos, Hillsborough..but not that Flintstones house that finally just sold lol)
Didn’t know that house prices always go up in the US, regardless of fundamentals such as interest rates, rents, income and price paid.