Are you wondering whether to sell or continue renting out your home? I had this same dilemma of sell or rent out my home back in 2016. In the end, I decided to keep my rental property to build more passive income.
Things are strange now with many people buying a home during the coronavirus pandemic. It's almost kind of nuts how strong demand is due to record-low mortgage rates.
Maybe you're thinking about selling your home because you think the market is going to crash. Or maybe you want to sell your home to upgrade your lifestyle since we're all spending more time at home now.
Whatever the case may be, the question to sell or rent out my home is one that many people are wondering right now. Real estate is one of my favorite ways to generate passive income for financial freedom. Once you sell your home, you lose a good income source.
Let me share with you my own situation to sell or rent out my home as it may help you better decide as well.
The Sell Versus Continue Renting Dilemma I Faced
2016 was supposed to be the year where I'd finally achieve my passive income goal of $200,000. The goal was first established in 2012 when my passive income machine was generating about $80,000.
I figured, if I could find a way to generate $200,000 a year by 2015, life would be good and I'd never have to work in the salt mines again. In 2015, I came up $25,000 short. Now it looks like I'm going in reverse! What the hell is going on?!
As fate would have it, just a couple weeks before my business trip to Europe, my tenants gave me their 30-day notice on a rental that is generating $4,000/month.
After all expenses, the property nets around $3,000/month or $36,000 a year. This rental has been a champ with not a single month of vacancy since its 2005 deployment.
Now I'm faced with a decision. Do I try and find new tenants or sell the property in what appears to be a weakening real estate market. Maybe you will face this dilemma one day. Let's discuss some considerations to make the best decision possible!
Sell Or Rent Out My Home?
The older I get, the more I want to simplify my life. When I was working full-time, I used to love real estate. During my darkest corporate hours, real estate was the main HOPE that would allow me to one day break free. I didn't care about doing house calls when things broke.
I didn't mind going to the yearly HOA meetings. Hosting open houses was fun because I could meet all sorts of people who shared fascinating details about their lives. I knew that every action brought me closer to financial freedom.
Since escaping my employer with a severance, however, I have slowly become less interested in landlording. Every text message from a tenant with a problem or every flaker at a open house bums me out.
Due to my severance that is still paying out today, the plan to live off my passive income did not materialize. In fact, since I left work pretty much all my passive income has either been saved or reinvested.
Then starting in 2014, I rented out my old house because I downsized to a fixer in a quieter neighborhood. With two rental properties to manage plus a vacation property, I became even less satisfied with landlording.
Although I have a lot of free time, landlording started feeling like a job, which is completely opposite of why I wanted to retire early! And what bums me out most is tenants agreeing to lease terms and then breaking the lease terms. Why can't everybody just do what they promise?
Catalyst For Wanting To Sell
The final thing that's really made me consider selling is the unexpected growth of my online business. I'm having so much fun being an entrepreneur, that I'm finding I don't really want to bother with real estate anymore. I've always preferred having fun and making money on the side rather than making money and eking out some fun.
My layoff strategy guide alone makes around the same amount as my rental property. Further, the book requires no maintenance or ongoing tax on its value. It's about as passive an income stream there is. I've got a pretty fun post in the pipeline which compares real estate and an internet business you won't want to miss.
But the real reason why I thought about the sell or rent out my home question was because we were having our first child in 2017!
The last thing I wanted to do as a new father was manage tenants and maintenance issues. As a result, I ended up selling our home.
Always Do The Math When Deciding To Sell Or Rent
To determine whether to sell or rent your home, always do the math.
Now that I've shared my subjective feelings, I'd like to focus on objective numbers. At the end of the day, an asset's value is based on the cash flow it can provide.
Not continuing to rent out the property means roughly $36,000 in lost income. Due to depreciation, the taxable income is actually much less. Not all is lost, however, because selling the property would yield proceeds that can be reinvested.
Nobody knows exactly what they will get for their property until they finally get some offers. But you can make educated guesses about a price range you will likely receive by comparing the comps that recently sold based on price/sqft and using cap rates.
Analyze The Comps
My property is 1,000 square feet. Recent comps have sold for $980 – $1,500/sqft in the Pacific Heights neighborhood. Therefore, the range is $980,000 – $1,500,000. Anything above $1,300/sqft is a prime property that has been remodeled.
The only thing that has been remodeled in my condo is a bathroom. Everything else is original since 1980. But, I've got an amazing dead on view of the park. Therefore, my educated guess is somewhere around $1,100 – $1,200 / sqft, or $1.1M – $1.2M.
Please don't get hung up about the price of property here in San Francisco. It's expensive here. Focus on the methodology.
Use A Realistic Cap Rate
Now turn into an investor and use a capitalization rate (cap rate) to value your property. Take your annual Net Operating Income (gross rents minus property taxes, maintenance, HOAs, etc) and divide it by a cap rate in your region. Think about a cap rate as the required rate of annual return on the property or the rate of return buyers in your area are willing to accept.
For example, if you accept a low cap rate of 2%, you believe the property is in a rock solid area and has a strong chance of appreciating. Therefore, income is a secondary consideration to appreciation. If you accept a high cap rate of 10%, it means there's probably little chance of strong capital appreciation, so you want higher income now.
In San Francisco, the cap rate is currently around 3.8%. That's 2% higher than the 10-year bond yield, also known as the risk free rate of return.
If I want to drill down even further, I need to calculate the cap rates in Pacific Heights. If SF's cap rate is 3.8%, then Pacific Heights' cap rate must be between 3% – 3.7% in my opinion.
Related: How To Properly Analyze And Evaluate A Rental Property
Find Out Where The Two Values Intersect
To determine whether to sell or rent a home, take your annual Net Operating Income and divide it by your area's estimated cap rate. In my case, I would take $36,000 / 3% – 3.7% = $973,000 – $1,200,000. I can take the average and get $1,086,500.
Now I compare the cap rate calculation value to the comps and focus on the overlap. The realistic selling price is therefore around $1.1M. Anything more than $1.1M should be considered a win. Anything less requires more deliberation.
Identify The Special Features Of Your Property
Every property has its intangibles that might sway people to bid much higher than the numbers dictate. I place a premium on properties with views.
This property has fantastic park views. I would have happily paid at least $50,000 more for the property when I first stumbled across it for $580,000 back in 2003.
But some people like to face other buildings and would never pay a premium for having their eyeballs massaged after work everyday. You just need to find that one buyer who places a premium on what your property offers to get top dollar.
It's very easy to get biased about our own properties. Selling this condo is like selling my baby since it was the first property I bought as a 25 year old.
Being delusional about your property's shortfalls is hazardous when it's finally time to negotiate a selling price. Remember to treat your assets as a means to an end. My end has always been happiness and freedom.
Future Income On Sale Proceeds
Let's say this property sells for $1,120,000. After fees and taxes, I'm left with around $1,000,000 since there is no mortgage on the place. What can $1,000,000 generate based on what I want to invest in? Here are some reinvestment ideas after a home sale.
1) 5-year CD at 2%: $20,000 a year. Shortfall to existing income generation: $12,000.
2) California muni bonds at 2.5%: $25,000 a year tax free. Shortfall: $11,000. Don't think California will default.
3) High Yield Dividend ETF (DVY): $36,000 a year in dividend income. No shortfall, but potentially lots of principal risk.
4) Venture Debt fund with target IRR of 16%: $120,000 a year for a total return of $840,000 over seven years if I assume a more modest 12% IRR. But there's probably a 30% chance of losing $200,000 at the end of the fund.
5) Automatic investing: I could choose a very conservative risk tolerance and have a robo-advisor automatically invest a lump sum or new funds every month into a 50/50 equities and bond portfolio with a 2.5% yield to generate $25,000 a year in gross income.
6) Diversify into real estate crowdfunding. One of the best ways to make passive income is by investing in publicly traded REITs or less volatile private REITs offered by Fundrise. Fundrise offers a very diversified portfolio of eREITs or eFUNDs so investors can invest in real estate across the nation. It's free to sign up and explore.
As a father of two kids now, investing in real estate crowdfunding has been a great alternative. I now earn real estate income 100% passively, which is what I want since time is so precious nowadays.
Another great platform if you want to invest in individual commercial real estate deals and are an accredited investor is CrowdStreet. CrowdStreet focuses on individual deals in 18-hour cities, where valuations are lower and cap rates are higher.
The Final Question To Ask Before Selling Or Renting Out Your Home
Deciding on whether to sell or rent out your home is tough.
I believe everybody should own property for as long as possible. The 5% commission rate and the taxes on profit are economic leaks. Given inflation is almost always up and to the right, your property should keep up over the long run. You want to build as much passive income as possible for financial freedom.
But if you just can't take landlording anymore, don't want to hire a property manager, and believe the timing is right, then selling is a good solution.
The final question you should ask yourself before selling is, “Will I be kicking myself 20 years from now for selling today?” If you're over the age of 60 with a pension that provides for all your needs, who cares? Life expectancy is only about 84. You might gain a great deal by simplifying the remaining 24 years of your life.
If you're still working towards your financial nut, don't have any other income streams, don't really like your job, and aren't willing to start a side business, your property might be one of the few things keeping your hopes alive. It often takes several years of losses before finally breaking even. Be patient enough to let inflation make you whole.
The other thing to think about is what will your children in the future think of your decisions today? In 30 years from now, will they think you were smart or dumb for selling a home today?
If history is any guide, chances are high that in 30 years, our children will be impressed you bought real assets today. If you didn't buy, then at least you held on.
Latest Passive Income Chart
Below is my latest passive income chart that enables my wife and I to be stay at home parents to our two little ones. We plan to continue building our portfolio so we can remain financially free.
I ultimately decided to keep my SF rental condo. It's paid off and generates $4,200 a month. The condo faces a park in Pacific Heights and is a great passive income source.
However, in 2017, I did end up selling my SF rental house for 30X annual gross rent ($2,740,000) to simplify life. I didn't want to deal with tenants who kept throwing parties and breaking things. As a first time father in 2017, I was happy to sell my home.
I reinvested $550,000 of the proceeds in real estate crowdfunding and the rest in stocks and municipal bonds. It feels so much better to passively earn income.
Recommendation
Explore real estate crowdsourcing opportunities: If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible.
For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you're looking for strictly investing income returns. Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It's free to look.
Refinance your mortgage: Check out Credible, my favorite mortgage marketplace where prequalified lenders compete for your business. You can get competitive, real quotes in under three minutes for free. Mortgage rates are down to all-time lows! When banks compete, you win.
If you can refinance your mortgage and lower your carrying cost, it makes owning a home that much easier. I refinanced in 2019 to 2.625% for a 7/1 ARM and rented out the home in 2020. In 2020, I decided to take advantage of softness in higher-end property and buy a new home. I got a 7/1 jumbo ARM for under 2.35%.
I read with great interest the decision strategy by Vicki a few minutes ago, and now have curiosity to know what Sam decided to do? Sell or keep the home (property)?
I set up a race between a real estate agent friend of mine trying to sell and me, trying to find a renter.
Check it out! Create A Win-Win Scenario To Never Lose
You have a good nose for real estate. I was wondering what your opinion is on northern Colorado. Seems to be one of the hotter real estate markets. Seems like there is an argument that prices will level out or maybe even retract? Is this wishful thinking? We currently rent, and are waiting for the right time to buy a house. We then may turn it into a rental 3-5 years down the road.
The fed is indicating that they will raise the fed rate 3 times in 2017. What does that mean to the market? Will realestate slow down? Will there be a frenzy before rates really rise? Are the values in Northern Co way overvalued. From what I can tell from my random research. Prices seems to be 10-15% over fair value. However we all know “fair value” doesnt mean squat. It could be 50% over in a year or two if things continue.
Lastly, I found that in the past, real estate doesn’t go down when rates go up…unless its a quick spike. It seems that suppy and demand trump the cost of borrowing money.
Great blog much appreciated.
Hi Arik,
Check out these posts:
Should I buy a home in a rising real estate environment – this one should help you think about things more
Buy real estate as young as you possible can
Prices are softening in coastal cities, and slowing down in places like Denver. I don’t think there is any rush. There’s ALWAYS another great property to be had if you miss one.
In the meantime, I’m investing more surgically in the heartland of America (South, Midwest), where returns are greater, through a real estate crowdsourcing platform called RealtyShares. I just made a $25,000 investment in Austin, Texas this weekend, and plan to do more.
Sam
hey Sam, when you say you have close to $200k passive income, what is the actual net amount?
You have a few properties which have mortgages I assume. You rent out your SF house for $9k/month, that’s about $100k per year.
With all housing related costs (mortgage, insurance, taxes etc…) it’s very different from earning say $10k in dividends which is mostly tax free.
200k no doubt is a very impressive number, just that it’s skewed because of operating costs.
Here’s a post with a snapshot of my latest passive income streams. $108K/year is gross rental income. My net is about $64,000 a year if you include the $24,000 a year in principal I’m paying down through my monthly mortgage payment. I’ve got to do a 2017 update soon.
I just sold my triplex that I bought at 26, circumstances were a little different but I made the call to lock in the win. I’m a realtor in Southern California and I think we’ve definitely got the economic speed wobbles. I’m betting on the next crash being super bad and think that having the cash on hand to take advantage is worth paying the capital gains tax (still feels like the government is mugging me though). That being said, it sucks just sitting on the money for now, but I want it liquid just in case. Also, been reading your stuff for a couple of years now, really love the site! Thanks for all the great ideas and analysis!
FS – Do you worry if something like this passed, it would put downward pressure on both rental pricing as well as purchase pricing in SF?
https://time.com/4388177/san-francisco-tech-tax-ballot/
The downward pressure has already begun! Lower rents are great for people will will have more disposable income to spend and help the economy. More workers would be hired as well, driving back prices. I do feel tech companies have been a boon for landlords, and if they can pay the same or more to help displaced residents find affordable housing, great. I just don’t know whether the money will be used as intended.
What do you think?
Probably on the margin I think it would hurt rental incomes – it probably depends on how many properties they actually build, how big the units are, and what they actual charge tenants for them. Probably would be more “pain” at the low end of the rental market than middle and higher end.
What about Capital Gains taxes due on the sale…How do sale proceeds on a long term investment that are $1,000,000 not get taxed?
Long term capital gains tax rate of 20% or no taxes w/ a 1031 exchange or reduced taxes if one moves in for 2 years for the last 5 years, but is now prorated.
Sam, hold on to the property and get a property manager if dealing with the tenants is too much. in the long term you will be happy with the decision.
That’s a pretty terrible ROI on rental property. I’m not sure I’d invest in rental properties in San Francisco.
I make $25,000/year on a $425k house. I have a few other properties as well. Generally I buy properties in the $125k range and clear about $10,000/year on them. Rent of $1350/mo – fees around $500 (HOA and taxes are just $400/mo and figure $1,000+ in maintenance). On $1.2M, I’d expect to earn upwards of $75k/year.
I guess the decision is really about where you want to live. Because you can do much better in a different area with real estate.
What I have done is link up with a few good professionals and services. Appliance goes out? I know exactly who to call. They schedule with tenant and deal with it. Tenant moving? My realtor knows what to do. My actual effort is minimal, maybe a phone call or two a month – and that’s with 5 properties.
Indeed. Cities like San Francisco, Manhattan, London, Hong Kong, etc have very low cap rates. Instead, people buy property for lifestyle and capital appreciation.
Prices are supposedly up about 68% since 2012. So if you have a $1M property in 2012, that’s a nice $680,000 + the $40,000 – $60,000 in gross rent you are making.
Where do you live and buy and how long have you owned?
I’ve been off/on reading your stuff. I really enjoy your writing. As my business has done so well, I’ve been looking for more financial strategies and ideas.
Anyways, you have seen a better ROI simply based on the property value in San Francisco. But that only works when you sell it. I would expect rents to go up accordingly, and always thought they did, but it’s interesting that it doesn’t seem to be the case when hearing about your experience.
I own property in South Florida. I’ve started acquiring property about 4 years ago as my business boomed. Not knowing the future, I wanted to own free and clear property for financial security. So I bought 3 properties in the $120k range, and that income paid the mortgage on my primary. Then business kept doing so well, I paid off the primary and moved up to a bigger primary. So now I have 4 rentals and a primary.
I’m not sure if it’s the best approach, but it works for me. I know that I have an amazing house, paid off, in a great area/school district (I have 2 young children), and the income from the other 3 rentals is enough where I technically wouldn’t have to work, but would live semi-frugally. It feels nice having that security. I’m only 32 and I have semi-financial security for my family. It eases anxiety and pressure, that’s for sure.
I think the “smart money” might say to sell in San Francisco and buy elsewhere with better returns. But as we both know, it doesn’t work that way. I’m sure you love where you are.
Sounds good to me.
For SF and these other “international cities” is that cap rates have been low e.g. 4% or less for a long, long time. At least since the late 90s when I first seriously started looking.
Being not having to work at age 32 is amazing. Congrats! I should have bought a Manhattan 2/2 condo in 2000. I might have been able to be financially independent by 32 too! The place was around $800,000 and is probably worth around $2.4M today.
Hi,
Long time reader. Thanks for your detailed practical advice and insight.
I ran into this article today that analyzes SF housing prices over the last 30 years and attempts to find factors to predict. I thought you might find it interesting.
https://medium.com/@andersem/a-guy-just-transcribed-30-years-of-for-rent-ads-heres-what-it-taught-us-about-sf-housing-prices-bd61fd0e4ef9
I saw that article. Good to see rent and prices have gone up 6.6% a year on average for 60 years. I’ll take that, b/c my goal is for a 4% net worth increase each year compared to inflation of around 2%.
You can’t build fast enough in SF due to zoning, so holding for the long term is generally a great idea. I’m leaning towards holding on and just leaving my place empty until I find the right tenant. No more need to rush to get 100% occupancy anymore.
I’ve been following the conversation and must jump in here to help solve your dilemma. Since you say the work involved in getting the place ready for another renter was the trigger event, and now you would just as soon leave it empty, I’d offer to condo sit and do the physical labor required just to get to leave yucky Houston and stay in a nice SF condo for FREE. I’m an artist and retired from public ed., which means I’ve been through an FBI clearance if that gives you any assurances I’d be an honest worker/tenant who would cost you zero dollars and leave the condo looking great. I’ve considered a trip to Italy in one of those free rent in exchange for farm labor arrangements but I’m actually more of a city girl. Just thought I’d throw out the idea. Now, I wouldn’t offer this for just any condo. I saw the photo at the beginning of the thread and if that’s the condo I’d fuss over every little detail of that beauty like it were my own and be there to show to prospective renters for at least a month…
I’ve been following the conversation and must jump in here to help solve your dilemma. Since you say the work involved in getting the place ready for another renter was the trigger event, and now you would just as soon leave it empty, I’d offer to condo sit and do the physical labor required just to get to leave yucky Houston and stay in a nice SF condo for FREE. I’m an artist and retired from public ed., which means I’ve been through an FBI clearance if that gives you any assurances I’d be an honest worker/tenant who would cost you zero dollars and leave the condo looking great. I’ve considered a trip to Italy in one of those free rent in exchange for farm labor arrangements but I’m actually more of a city girl. Just thought I’d throw out the idea. Now, I wouldn’t offer this for just any condo. I saw the photo at the beginning of the thread and if that’s the condo I’d fuss over every little detail of that beauty like it were my own and be there to show to prospective renters for at least a month…
I think one problem and asset you have is your financially at the finish line, where most readers are not. You got a lot of dough to maintain your life, but now your biggest problem is not screwing up what u already have.
Your relevant investment thinking and decisions and sharing those creatively is what keeps your fine edge samurai sword sharp and why people read and hopefully you enjoy doing it as much as we enjoy reading.
I think your biggest risk in the sf property is lack of diversification for such a large amount of $.
Your return is fairly low to compensate you for keeping your wealth in one place also sounds like you have another property in same geographic location. I would sell and put my money in pockets where I could not lose in one big swoop. Maybe buy real estate in different locations and that would still be all in real estate if you think that is the safest. New homes have less headaches. If you decide on property management I bet with your skill you could cut a solid deal that would make you more money, and less hassle.
I am sure you checked with your accountant too. I always try to live for 2 years in my home before selling. Yes you still have to pay back the depreciation you took renting, but sometimes still advantageous to move in and sell or sell primary property.
With no crystal ball no clear cut absolutes around for returns, the closest we have is that the feds can’t let housing or the stock market crash because it could be unrepairable. but low interest rates and helicopter money for long term seems to be what is easiest to give.
I’m exploring new reinvestment opportunities if I sell the condo, but will only sell the condo based on a minimum price. Otherwise, the rental market is so strong in SF that I’ll just keep the cash flow forever.
Here’s a new option I just wrote about: https://www.financialsamurai.com/real-estate-crowdsourcing-investing/
I believe we’re going to go in a 2 year existing home sales lull as incomes try and catch up to price increases.
What’s your story?
All I can say is wow.
Freedom is the ability to make these kinds of questions about whether or not to sell SF properties with park views.
You’ve made it!
You have a 2 bedroom condo in Pac Heights that’s making you a significant amount of money. Unless you’re withdrawing from the San Francisco market altogether, hold onto it. Your tax base is super low and you would literally have to pay double the property taxes on an equivalent unit should you change your mind after selling.
BTW, I thought you wanted to accumulate more SF real estate, based on your previous posts, no? Sounds like you’re going through a period of re-evaluation of your priorities. Take your time…a month or so of vacancy is not the end of the world.
Weird how things change when there is a trigger event isn’t it? Sure, I’d love to keep the condo if there was nothing to do. But once work is involved, it’s easy to have a change of heart.
Weird how things change when there is a trigger event isn’t it? Sure, I’d love to keep the condo that there was nothing to do. But once work is involved, it’s easy to have a change of heart. The more I think about it and read the comments, the more I’m at peace with holding onto it.
If I have to pay 20% tax on a $500,000 profit, I might as well just not even rented for two years and establish residency there to save on taxes right? I would forgo the same $100,000 in expenses As rent. Or am I missing something here?
While you clearly don’t enjoy the prospect of obtaining new tenants, it’s a short-term issue. I think the real problem is that you have too much cash locked up into an investment with poor returns. Why not take a HELOC and invest in Prosper loans or other relatively passive investment vehicles where you can make money on the arbitrage between artificially low rates on the money you borrow versus the rate of return you can secure from the alternative investment. This obviates the needless cost of paying a broker commission/taxes, etc.. You would make money on the rental as well as on the other investment, and could probably deduct the interest you pay from your taxable income.
I’ve pretty much found my enough number, and if the enough number can grow at about 4% a year, I’m getting 4% more than enough every year. This is why I’ve held on for the past several years now, but now I’m wondering whether to simplify.
Why not take some of that money and invest it into creating a few more digital assets?
The income generated is EXTREMELY high ROI due to high gross margin of each sale and potential for upsells.
I want to invest personally into real estate (and it’s what I got my degree in but got creamed in 2008 and had to pivot the last 8 years or so) but I can’t see why a simple “buy and hold” is a good idea in your market.
The risk of the property dropping by 50% sometime in the next 5 years is a LOT higher than it increasing by the same amount in the next few years. Lock in the gains, sit on some cash, and then if you want to buy again buy once the startup bubble deflates a bit and the market gets bit more rational.
I mean doubling your digital businesses would be a LOT easier than doubling your real estate cash flow over the next 3-5 years. Waiting 10+ years for inflation to bail you out of a purchase (or not selling at the peak) is too risky in my opinion.
With your talent and experience, 10 years of optionality by selling your property now while the market is in a peak cycle and then having access to the cash either to reinvest into your digital businesses/assets and also just sit on it to invest into hard assets once things deflate a bit would be a lot more “risk smart.”
Hope that makes sense.
Full Disclosure: I’ve been working in the digital product creation world for the last 8 years and it’s getting easier and easier once you have a successful product like yours to add a simple backend and 50% increase your income by solving a “cousin product” to the folks buying your product.
A potential real estate downturn is definitely one of the reasons why I’m considering selling. We’ve seen a huge runup indeed. I think we’ll see a 10-15% softening, and then a flat line for years before an upward resumption.
What products do you digitally create? The point I’ve alluded to in this post is that my digital business is more profitable and fun than my real estate business. It’s what I mostly want to focus on now.
The question is, how much is enough? $250,000 a year in operating profits? $500,000? $1M? It never ends, which is why I’m traveling right now for business to mix things up!
Totally dig it :)
I was speaking with a gentleman who lives near me in the Orlando area and he’s been investing in real estate since the late 1960’s down here and one thing he said throughout the cycles of ups and downs was “never underestimate the power of closing out a big gain.” He had made his 1st million in 1972 when our local government bought part of his orange grove to put a road through it. That was his “big win” that set him up to own various assets and a local bank here.
Cool story but I’ll never forget how he got “lucky” a few times and he said inflation would’ve taken him another 30 years to make that money he did on that one key sale.
So all good on the real estate either way but thats what inspired me to vote for selling it :)
As for digital products, we do mostly 3-4 week classes and then sell the recordings after class is over. I’ve done a lot of other digital products such as product launches with affiliates, higher end (3-5k) phone sales, and more mid-ticket items in the $297-$1k range for people wanting to start businesses. Not the hypey/sleazy stuff obviously but consistent businesses focused on replenishable items sold on Amazon and through people’s own websites (like how you sell your book).
We mostly talk about dropshipping and wholesaling and are going to be doing more with Amazon’s Pay Per Click marketing services over the next few months.
As for “enough money,” I don’t know if there’s a number. I think there’s an element of a “video game” that kicks in once you have your number. I’ve made a lot of errors in my 20’s related to buying cars (which is how I originally found your site a few months back when I saw your 1/10th of income car rule post) and not being as focused on systems.
I as well had a finance background but graduated in 2008 with a focus on real estate finance (mortgages and financing of real estate was what I wanted to do) but that ended up being awful timing.
So been on the product creation side and building my own things and all that. Lot of fun in my opinion.
One big thing I’ve taken from you from a “mindset” type perspective is the focus on optionality. That’s been key over the last 6 months and has really lightened my load so appreciate you for that. For me, that means the option to make more and build more assets…or not.
It’s been fun having that optionality to start and build up more assets in the ways you have as well (I started digital assets and haven’t had a typical corporate job/salary or properties).
Anyhow…think you have my email on the blog comment…would love to connect with you when you have some time and chat digital assets…it’s the least I can do for all the value you’ve shared here. No rush as I’ll be out of town this week til Sunday but would love to show you a few things and see how you’re promoting your book beyond mentioning it in posts.
If I can help you out, I’d be happy to :)
Take care buddy and either way…I appreciate you taking the time to write and share a lot of contrarian perspectives. They’ve helped me out a lot.
Option 1 – 1031 the property into an area with a higher CAP rate, and use the increased cash flow to pay a property manager, to lower your involvement in running the property. To get a higher CAP rate, you might need purchase something out of state. Some upfront time involved in researching the property, and purchasing it, but after that should be minimal effort on the part of the investor.
Option 2 – Sell, and invest in first mortgage notes. Currently, I invest with a hard money lender that lender that writes Interest Only Mortgages with 8% return to the investor. The hard money lender services the loan, and just sends you a check every month. Principal is secured by underlying equity in the property (unlike Lending Club that is unsecured debt).
I will offer up a strategy for you to consider, since you previously lived in the home and I assume you like it enough to live there again.
The current state of capital gains tax on housing is that if you have lived in your home for 2 of the last 5 years, you can take a $250k gain exclusion for single or $500k gain for married. It doesn’t matter if you live there the first 2 years of the past 5 or the last 2 years of the last five.
If you move into the property for 2 years prior to selling and you can potentially pay no capital gains. (downside note, you will have to pay depreciation recapture tax either way…)
This is not to say I vote for you to sell, just that if and when you are ready, make it a 2 year process in order to get maximum tax benefit from the proceeds. My vote is to keep renting it for 20-24 years, then live in it for 2 years, then sell it for the capital gains exclusion.
(disclaimer: verify this concept with your own tax advisor, just because it works for me, doesn’t mean you wont get audited later for doing your taxes wrong…)
It’s a good idea, although I think the rules have changed somewhat on the tax free amount.
I may just leave it empty, or have it be my primary residence as I travel and stuff for two years to get some of that tax free profit back.
Since you already own 2 rental properties plus a vacation home, it might not be a bad idea to take some money off the table given the market is at a high with the median home price for San Francisco crossing $1 million. The San Francisco case-shiller price index at 218.87 for Feb 2016 is pretty much the highest it has been in the past 10 years.
Since you have 2 “risk” free methods that can generate 24-25 thousand a year with the potential money, the question for me would be is $12,000 more worth the hassle of dealing with tenants. To me it wouldn’t be. But that’s up to you. The potential damage tenants could do would eat up that extra in a hurry.
I have a home worth $340K at the moment and have over 100K equity. Would it be wise to rent this out and take the equity and use it to buy another single family home? Or take that equity and get me a small cheap property and continue living in the home that I am currently in? Or shall I just take that equity and invest in the market? I have witnessed the trials of having to keep up and maintain rental property. Even with a property manager you have to manage them as well. Not all property managers are in the best interest of you, this goes especially for those of you that depend on them to take care of the work from faraway. When it comes down to Financial Samurai’s decision it is what you value the most. Having a home that you have had for years and going through the process of getting another tenant and receiving the rental income and other risks that come with it. Or selling it and moving on to other forms of investing that are less restrictive such as investing in the market.
I must admit, as a property owner myself who self manages, I also get that knee jerk reaction whenever a tenant vacates – I just want to sell the property, and as I lean towards those thoughts I’m filled with calm. Finding a new tenant, although pretty easy, sometimes I think I can’t hack it anymore. That said, when they are in, that wave of calm comes over me again and I’m glad I didn’t sell.
A suggestion. I have a girl that works part time for me (self employed, and paid hourly) for managing my properties and it works brilliantly. I only hear from her if there is a problem she can’t sort out. I also have a builder who takes care of any maintenance below an agreed £ amount without bothering me.
I voted sell. The market looks good and you don’t need the hassle which is all I see tenants as.
We had tenants many years ago. They rented for about 5 years and in that time my parents never raised the rent (because they felt sorry for how little the husband earned), all the while performing maintenance on the house and taking them shopping every month (the tenants didn’t have a car). It was the cheapest two bedroom & tbk in the city with a chaffeur service to boot.
The tenants paid only for the house (electricity and water was included), so they used to invite the neighbours to cook and use all the water they wanted. When they left, the house was pretty trashed and we had to strip walls and floors.
But we’re grateful for small favours (that they packed up and left) because the govt. has changed the laws and now if you have a tenant, you can’t kick them out even if they stop paying rent. It is up to the owner to find the tenant an affordable place to their liking!
Definitely not worth the effort.
Wow! That’s awesome they got chauffeur service. What city was this rental property?
Easy.
Sublet your apartment for a month or two until your trip is over. Then you can find a long term tenant.
I’d love to have your problem ;)
How would you suggest I find the tenant when I’m currently in Europe and won’t be back until end of month? I did record a video tour though.
This is a hard choice. The finances and the desired life outcome are not entirely clear. Approaching it rationally may not be possible. Have your other goals changed? Do you still need/want $200K of passive income a year? Or has your baseline shifted?
I don’t need the $200k passive income anymore. It was just a goal I had in 2012. The reason is my online income grew far beyond what I thought it would grow to. So 100% of the passive income has just been saved. Of course the online business could all go away one day more easily than rental income. Thoughts now?
Hi Sam
Where are you in Europe? I am in Madrid following 2 weeks in Russia.
Here’s my POV and what I did related to the decision you are considering.
Rentals are a hassle when tenants give notice but usually no hassle after the new great tenant moves in. That being said I sold a rental condo a few years ago — condos are way more hassle than single-family dwellings even with a great PM, usually don’t appreciate as much, I can’t stand dealing with the strata corporation and just ignore it, and condo tenants are not as good as SF house tenants.
I was so glad to put the proceeds into the stock market (income of which is funding my travels for half the year). I quite enjoy managing my own financial investments and I can do that wherever I am. Meanwhile, my house in Vancouver has appreciated astronomically (I will never sell it although it is tempting when I work the numbers they come out on the hold side).
I still rent 2 smaller units in my house and live in a third unit. This means I can walk away any time to travel as the tenants are there to look after everything. I am extremely picky about tenants — my PM finds them but I always meet them myself. I left one unit vacant for 2 months last year while I was travelling. The income loss was mitigated by lower income tax (expenses remain same).
Re other sources of income. I find most passions become chores after 5-6 years. You are still going strong, but I can see other great bloggers burning out. I loved my consulting work but after 6 years, I just wanted no commitments. Now my challenges are travel logistics and I meet the most amazing people.
I’m in Prague now, ready to go check out the castle!
Nice job on Vancouver, a city even hotter than SF it seems! What is he industry making things so expensive? Or is it all foreign money? What is the value of your Vancouver home now?
I’m not enthusiastic about the stock market currently. But I may just buy California muni bonds with the proceeds.
What I love is blogging. The upside is massive and it’s fun.
Don’t forget to check out the 600 year old astronomical clock!
I love when you post Sam and I literally have the conversation with my wife about this same topic what feels like moments ago.
Some of the items that are similar include renting out the property as our tenants have informed us they will be leaving when the lease comes due in a couple months. While our strategy is not to sell today it most likely will happen next year. Our biggest dilemma is we have an older property and plan to move 2,000 miles away, while the rental income will be above average I can’t imagine not getting a few calls on fixing this and that. With time the house will need more fixing, especially one from 1912, while the age is common in Chicago I’m sure fixing and patching these homes are as well.
We won’t walk away with nearly as much money, but since we also live in this rental the profits will be tax-free. We certainly have a 5-year window to see if we can manage a property/property manager from long distance, but I can certainly see making a move and pivoting putting that money in an alternate passive income location as you mentioned.
The entire time we have owned this home we have essentially used it as a cash cow to pay down another rental and that milestone is on track for this year. Once we get reach the milestone, serious talks will be had about simplifying. For your situation, I would suggest holding the property for life, if we stayed in Chicago we would do the same. Based on your tone I think having someone deal with the property management/landlord details would be a better approach moving foward, simplify but don’t sell.
Where you guys off to 2,000 miles away? Chicago is a great city too. Nice job using the cash flow from one to pay down another.
Miami, FL area, wife has all of her family there.
First of all – if you really are serious about lending money at 5.5% I am interested. I am looking to buy another rental in the next two years to grow my real estate portfolio slowly and would be interested in working with you (seriously).
Second of all – I really think the answer to your quandary is to get a property manager. Yes I see you are asking “but who manages the manager?” and I get what you are saying. Ultimately if you want to de-stress etc. you should just sell the property. No doubt you could invest the money in an index fund and probably do just as well (or better). You could also lend some to me for 5.5% with guaranteed repayment (just saying:))
But I don’t really think it would be too bad to manage a property manager; especially on a valuable property such as yours. The front-end process of shopping for manager may take some time as you negotiate the best terms and lowest fee (I am paying 8% gross rent to mine) and so forth. I do absolutely nothing with managing my manager. All that happens is I get the money direct deposited and a statement each month. Everything else is handled. Its like magic. I am obsessed with property managers –
My experience with property managers has been so good and my adventures at being the landlord myself have been so bad that I will never manage a property on my own again. And hopefully I’ll never have to clean up drug paraphernalia from my property again either!
Interesting Post! thanks