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It’s no secret that we have opinions about housing. You know, completely unbiased ones about how owning is stupid, how you should always rent instead of own, and how we got here by NOT buying a house?
But today, we’re going to do a surprising reversal, and spot light someone advocates BUYING property. For those of you who don’t know Financial Samurai, he retired from the corporate world by cleverly engineering his own layoff and building a passive income stream of $70-80K/year. Sam is one of the biggest hustlers I know, because not only did he survive 13 gruelling years of working on Wall Street, he managed to make even MORE money after quitting his job. If you want to become a hustler like Sam, check out www.financialsamurai.com where he blogs regularly about buying rental properties, stocks, bonds, and CD’s so you can do it too.
So without further ado, take it away Sam!
Owning A Million Dollar Property Isn’t What Made Me Rich
I’m the antithesis of the Millennial Revolution. Instead of renting my way to financial freedom, I decided to buy a $580,000 condo in 2003 a week after my 26th birthday. Don’t hate me. The dotcom bubble had just collapsed and I didn’t feel like watching my paper profits go POOF all over again. At least with real estate, I could find some utility!
Yes, I lived like a pauper the first four years out of college, sharing a studio with a buddy for two years, aggressively saving 50%+ of my after tax income, and always working late in order to take advantage of the free cafeteria food after 7:30pm (I got into my finance job at 5:30am). But it was worth it! I saved up about $150,000.
My whole plan was to enjoy my condo for at least a couple years and sell it for a tax-free profit up to $250,000 as a single guy. In the US, not only can you deduct the mortgage interest from your income to save on taxes, you also get $250,000 or $500,000 in tax free profits, depending on the appreciation of your home and your marital status.
Check out this chart that shows how much in gross profits you need to clear at each tax rate to match the tax free $250K/$500K profits in real estate.
Because I don’t enjoy paying taxes, I thought buying a property in San Francisco was a no-brainer. I didn’t want to pay more than $2,000 a month living in a dark one-bedroom rental with my girlfriend anymore. Instead, I wanted to have the long hours at work provide something better. And that something better turned out to be the two bedroom, two bathroom condo in Pacific Heights I purchased with a lovely view of the park from my living room.
Holding On For The Long Term
Instead of selling the condo after a couple years and taking profits, I decided to try my hand at land lording in 2005. The experience was trying at times, but I don’t regret it. The rent started at $2,100 a month in 2005 and is now at $4,200 a month in 2016. What seems expensive today will sound cheap 10 years from now.
The inflation interest rate paradox is the reason why we must continuously invest in stocks, bonds, and real estate. Kristy and Bryce decided to go all-in with a 60/40 portfolio of stocks and bonds. At the time, I decided to go 60% of my net worth in real estate, 30% in stocks, and 10% in risk-free assets given what just happened in 2000.
But it’s not just the rent that has increased over the past 10+ years. The principal value of the condo has also increased as well, despite the financial crisis in 2008-2009. Here is a chart I created, tracking my mortgage balance and property value as assessed by Zillow, USA, and neighboring condos that recently sold.
In 2015, when the mortgage was finally put to rest, this property alone was worth over $1M. It’s not like the asset did anything spectacular either. By growing at less than 5% a year for 13 years, the property’s value went from $580,000 to roughly $1,200,000 before taxes and fees. But due to leverage, the annual returns are much greater because I only put $120,000 down (~20%).
Through mediocre growth, leverage, and steady principal pay down, this property was one of the EASIEST 10X investments ever. There was never really any panic during the economic downturn because rents were sticky and the property still stood every time I drove by it on the way to play tennis. It basically did its thing. Contrast the feeling of holding stocks during the crisis, and the fear felt much more visceral.
Sticking With Things For As Long As Possible
The $1.2 million value of this property isn’t what made me rich. No, it was the motivation to keep working for eight more years that really provided a massive boost to my net worth.
If it wasn’t for buying this property in 2003, I would have probably left my ass-kicking finance job shortly thereafter because I was completely unmotivated to work from 5:30am – 7:30pm+ after the horrors of 9/11 happened. It felt so empty going to work to try and make more money out of money.
Sure, speaking to smart people about where to invest in the Asian markets and taking trips to China every year was exciting. But everything gets old after a while. I would have rather gone back to Hawaii, found a low-stress $30,000 a year job and lived on my grandparent’s fruit farm in the countryside.
Taking on a $464,000 mortgage at 26 supercharged my motivation. The last thing I wanted to do was get fired with so much debt. Instead, I changed from being an ambivalent worker to someone who really gave every effort to serve my clients well and build a strong internal support network in order to get promoted and paid.
Even though it’s nice to say our investments are what made us a lot of money, for the majority of us early on, it’s really our day job income that provides the biggest boost to our net worth. Because life is relatively good in North America, with free internet, cheap technology, a growing social safety net, and a relatively safe environment, so many of us have the option of not having to do what our parents did and work for 40 years.
We’ve become soft over time. And blogs about early retirement and traveling the world aren’t helping people stick things out long enough to see the flowers bloom.
Related: The Dark Side Of Early Retirement
Think Bigger Than Yourself
Financial independence is just one step in a long journey. Once you’re able to sustain yourself without having to work, I recommend thinking about other people. Those people could include your aging parents who’d love to see more of you and who may need financial assistance. Those people may also include financially struggling strangers who could use your help. The biggest reward I’ve discovered after achieving financial independence is the ability to help other people.
Your life and your outlook are guaranteed to change as you grow older. You might get sick of traveling one day, as I am, and wish to start a family. Or, you might find that you can’t stand seeing your spouse 24/7 and want to work in a field you adore. Whatever the case may be, I highly recommend building your net worth in a diversified fashion so you have as many options as possible.
About the Author: Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $200,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for fintech companies, and writing online to help others achieve financial freedom.
So there you have it! An example of someone who made it to Financial Independence WITH a house. What do you guys think?