Sam Dogen, who’s better known on the internet as the Financial Samurai, had an enviable problem. In 2005, he used his life savings to buy a single-family home in the Marina district of San Francisco for $1.5 million. Eventually he moved out and bought another home in San Francisco. That’s when he became a landlord.
He started collecting about $60,000 a year in rent from the Marina house, an important piece of his passive income strategy. But Sam got tired of being a landlord. He rented the property several times. Some of his tenants had late night parties. One group paid their rent late eight times.
Was selling the home the solution? As a 13-year finance veteran with an MBA from Berkeley, Sam had the skills to find the information to help him make an informed decision.
When the financial crisis of 2008 hit, he lost 35% of his net worth in 12 months. That’s when he started writing the Financial Samurai blog about personal finance. He says the blog started as “a cathartic way to make sense of all the carnage and ease the pain.”
When he eventually left his job in finance in 2012, he was generating $80,000 a year in passive income, plus income from the blog. Real estate had been part of his passive income stream. But after three years of being a landlord, he was fed up with his tenants. So he asked his readers what they thought about the idea of him selling his rental.
In June of this year, he decided to sell, and he reflected on all the factors that affected his decision in this post. We caught up with Sam to learn more about how he made the choice.
Your emotional relationship to your property changed. How important is a landlord’s emotional relationship to a property when deciding to sell or keep renting?
Financial Samurai: It’s best to have zero emotion when it comes to being a landlord. Emotion gets in the way of making better business decisions such as not screening thoroughly, being too forgiving on late rental payments, letting damages slide, and so forth. If you are not emotionally attached, you just see the numbers. Therefore, you make better economic decisions.
How do you define the point where renters are too much of a pain? Do you quantify how much of your time they require or the emotional toll they’re taking on you?
Financial Samurai: I make a self-assessment of where my stress comes from and how that matches up with my cash flow and assets. I found that most of my stress comes from managing rental property, yet my rental property wasn’t my top semi-passive income earner. Therefore, it wasn’t wise to be so weighted toward a rental property.
We love that your counteroffer included an excel spreadsheet of all the upgrades you’d done over the years to “make them feel like they were getting a good deal.” Are there other ways you think sellers can play to a buyer’s emotion?
Financial Samurai: Besides providing a list of all the upgrades and maintenance items in meticulous detail, it’s also a good idea to show the before-and-after pics, and also write a nice letter saying how much you’ve put into the house and how much they will enjoy living in the house. A potential buyer already has ideas in mind. But it helps if you paint a scene for them e.g. it was wonderful having breakfast on the east facing deck under the plum tree every morning.
Your decision to sell worked for you because of your other semi-passive income streams. Is a landlord’s overall financial health/income the most important thing for them to consider when deciding if they should sell?
Financial Samurai:Besides a landlord’s overall financial health and various income sources, a landlord should also consider their net worth composition and estate planning. I’m not a fan of having over 50% of one asset like real asset as a percentage of net worth. But I love the idea of owning real estate to act as a security net for my son if he needs a place to stay in San Francisco 22 years from now, or if he can’t find an ideal job early on, he can always manage our small real estate portfolio. Finally, when I pass, he will inherit the property at a stepped-up value based on current market value so there is no tax to pay.
Looking back on the sale, do you think you were being impatient? Are you at peace with the outcome?
Financial Samurai: I felt I was pretty patient because I tried to sell in 2012 and failed at getting an offer at my $1.7M asking price. So I patiently waited for five more years until my latest tenants gave me their 30-day notice, allowing me to test out the market in 2017. During the 45-day process, I also aggressively tried to find replacement tenants for the same amount of rent: $8,800/month. I got two offers for $7,500/month, and one offer from five guys for $8,300/month, but they bailed the morning of signing. Therefore, I feel like I exhausted all options at the time, and decided to focus on the numbers. If the true market rent had fallen to $7,500/month, that meant someone was willing to pay me slightly over 30X gross annual rent. Based on my Buy Utility, Rent Luxury strategy, I thought this was an extremely attractive offer. Therefore, I decided to sell the house for $2,740,000.
What did deciding not to be long-term bullish teach you about yourself?
Financial Samurai:I basically went from super bullish with one primary residence in SF, two rental properties in SF, and one vacation rental property in Lake Tahoe to one primary residence in SF, one rental property in SF, and a vacation rental in Tahoe. I’m still long-term bullish, I’m just not as bullish. Whenever you own two or more properties, you are considered long in the market. If you only own one property, you are neutral the market since you have to live somewhere or are just trading around. If you rent, you are short the market.
Having $815,000 less in mortgage debt feels wonderful. Not having to pay $22,000 a year in property taxes and deal with any maintenance expenses and tenant issues is an amazing feeling. And after the earthquake in Mexico and the hurricanes in the South and Eastern parts of the United States, not having to worry as much about a natural disaster is also a relief. I was truly going to sell my property for $1,000,000 less if someone gave me an offer in 2012. I thought the property market was going to slow down in 2015, but it only did for about 6 months before rising another ~20%. As a result, I felt it was time to take money off the table, simplify life, and reinvest the proceeds in purely passive investments.
Do you have more time to spend with your family like you hoped?
Financial Samurai: I do. The time I’ve been able to spend with my baby boy is priceless. I’ve been waiting years for this moment, and purposefully engineered my layoff from corporate America in 2012 in order to be a stay-at-home dad. They are only zero to five-years-old once, and then it’s off to kindergarten. Being able to work from home, and earn money online while being there for my family, is a dream come true. It took a while to figure out all the pieces, but I’m glad things are finally happening.
If I wasn’t able to earn income online, I probably would have held onto my Marina, SF rental house. But since 2009, I’ve discovered that online income blows rental income out of the water once you’ve developed a large enough audience. Online income is much more scaleable and so much more fun, too.