Love_Hate_Relationship_With_Owning_Rental_Properties
00:00:00.000 | Hello, everybody, it's Sam from Financial Samurai.
00:00:02.640 | And in this episode, I want to talk about my love-hate
00:00:05.400 | relationship with being a landlord,
00:00:08.080 | owning physical rental properties.
00:00:10.940 | Because on the one hand, owning rental properties
00:00:14.520 | are one of the main reasons why I had confidence
00:00:17.120 | to leave work behind in 2012.
00:00:19.800 | Today, rental properties, real estate,
00:00:22.580 | generates about 50% of our current passive income.
00:00:26.500 | On the other hand, my rental properties
00:00:28.800 | are my main source of investment stress.
00:00:32.160 | It's not massive, massive stress,
00:00:34.640 | but whenever I do feel stress, it's
00:00:36.680 | now because of my kids when they're sick
00:00:39.400 | and because of my rental properties.
00:00:41.240 | There's really nothing else too much
00:00:42.920 | that stresses me out on a consistent basis.
00:00:47.320 | There are random things like health issues for my loved ones
00:00:50.760 | that stress me out.
00:00:52.040 | But everything else, there's not that much stress,
00:00:54.920 | except for with my rental properties.
00:00:57.380 | Whenever there is a tenant issue or a maintenance issue,
00:01:00.760 | my mood naturally sours.
00:01:03.740 | It's always these weird situations
00:01:05.940 | that always arise that are hard to predict.
00:01:08.880 | And it took me about 15 years to realize how to protect
00:01:13.440 | my mood as a landlord.
00:01:15.680 | Basically, I had to change the framing.
00:01:18.040 | Instead of seeing my rental properties
00:01:19.680 | as a source of passive income, a wonderful source
00:01:22.820 | of passive income, I moved towards it
00:01:25.160 | being semi-passive income.
00:01:27.560 | But this shift wasn't enough for me
00:01:29.600 | to feel better whenever some kind of tenant issue
00:01:32.280 | or a maintenance issue arose.
00:01:34.880 | So I took the framing a step further
00:01:37.320 | and changed it to see that my rental properties are actually
00:01:41.080 | a part-time job.
00:01:43.120 | As soon as I had this mental shift
00:01:45.040 | of seeing rental property ownership as a part-time job,
00:01:48.960 | things got better.
00:01:49.760 | My mental health became more positive
00:01:51.720 | because whenever I needed to spend time dealing with rental
00:01:54.160 | property issues, I just said, well, I
00:01:56.880 | haven't done anything for a while.
00:01:58.800 | This is a great part-time job.
00:02:00.560 | So when there is something to do, something to manage,
00:02:03.680 | or something to fix, it's just part of my job.
00:02:06.720 | And given I have pride in doing a job well done, like most
00:02:10.520 | of us, these issues tended to not bother me so much.
00:02:15.400 | It's kind of a similar situation about walking very far
00:02:19.080 | downtown in San Francisco.
00:02:21.560 | So in the past, I used to work downtown.
00:02:24.920 | And I would take analysts around to see clients.
00:02:28.040 | And the clients would be six blocks, eight blocks,
00:02:31.600 | sometimes 10 blocks away.
00:02:33.080 | Sometimes they're up on a hill.
00:02:34.840 | But because it was part of my job and the analyst's job,
00:02:38.240 | we just walked merrily for 15 to 20 minutes, no problem.
00:02:42.560 | But when I'm in downtown San Francisco,
00:02:45.240 | and I'm, let's say, meeting a friend,
00:02:47.360 | and I want to go to Union Square, which
00:02:49.360 | is like eight blocks away, I kind of am like, eh.
00:02:54.440 | What a far way to go.
00:02:55.840 | What a pain in the butt.
00:02:57.360 | Because it's not my job.
00:02:58.600 | So change the frame of mind in terms
00:03:01.280 | of owning rental properties as a part-time job.
00:03:04.640 | And I think you'll feel better.
00:03:06.680 | It's easier said than done if you actually do have a day job.
00:03:09.880 | Because if you have a day job, you're like, OK,
00:03:11.840 | owning rental properties is like a side hustle.
00:03:14.280 | And the society today, including myself,
00:03:17.080 | tells everyone you should have a side hustle to earn more money
00:03:20.200 | to achieve financial freedom sooner because you
00:03:22.160 | can save and earn more.
00:03:23.720 | Well, it's harder.
00:03:25.280 | It's harder to view owning rental properties
00:03:27.440 | as a part-time job once you've retired because it feels
00:03:30.920 | like you're going backwards.
00:03:32.160 | It feels like you're just going to go back and get a job.
00:03:35.120 | And you can never be free until you sell your rental properties.
00:03:39.520 | I get that.
00:03:40.320 | You just have to get over the hump.
00:03:42.720 | Maintenance issues, tenant turnovers,
00:03:45.080 | tenant issues will occur for as long
00:03:48.000 | as you own rental properties.
00:03:49.400 | So you're just going to have to get right with it
00:03:52.160 | and treat it as a part-time job.
00:03:53.960 | Just this August, I had my sister and boyfriend
00:03:56.320 | come to visit from New York City.
00:03:58.320 | They stayed at one of my rentals that used to be our old home.
00:04:01.960 | The first floor is vacant, which I use as an office
00:04:05.160 | and as a place for friends and family to stay.
00:04:07.320 | And it's worked out really great during the pandemic
00:04:09.840 | because I go there to escape.
00:04:11.440 | And I go with my boy to play.
00:04:12.680 | And we go to the hot tub.
00:04:14.200 | And the upstairs is rented.
00:04:15.760 | So supposedly, when my sister and boyfriend
00:04:18.000 | came in that night, they forgot to lock the side door.
00:04:21.680 | Or perhaps they locked it, but it didn't fully latch.
00:04:24.960 | And they thought they locked it.
00:04:26.560 | But there's no proof that they did or did not.
00:04:29.600 | 99.9% of the time, it's no big deal.
00:04:33.280 | Unfortunately, that night, a burglar
00:04:36.360 | went in through that side door and stole the upstairs
00:04:39.800 | tenant's $3,000 bike from the garage, which
00:04:43.680 | wasn't locked to anything.
00:04:45.800 | Now, the security cameras somehow
00:04:48.080 | didn't pick up anything.
00:04:50.000 | Nobody leaving or departing.
00:04:51.920 | So there's also no proof a burglar stole a bike
00:04:54.760 | because I didn't realize there was that fancy bike
00:04:57.120 | in the garage in the first place.
00:04:59.240 | And you just can't help but think, well, is this real?
00:05:03.120 | Or is this not?
00:05:03.760 | Nobody was injured.
00:05:04.600 | What's going on?
00:05:06.160 | The garage is a common area meant for a car.
00:05:08.760 | But my tenants use it to store a lot of valuable stuff there.
00:05:12.320 | We're talking $3,000-plus bike, thousands of dollars
00:05:15.920 | worth of skis, furniture, $1,000 of new tires, and more.
00:05:20.560 | I mean, it's crazy.
00:05:21.400 | It's like a storage area.
00:05:22.880 | When we used to live there, all we had in the garage
00:05:25.000 | was our car and paint cans.
00:05:27.400 | So we're minimalist in comparison.
00:05:30.160 | So am I responsible for the thief's actions?
00:05:33.400 | I think it's debatable.
00:05:34.920 | All I did was provide my sister and boyfriend
00:05:36.840 | a place to stay for a week instead
00:05:38.360 | of having them pay $300-plus a night at a motel.
00:05:42.040 | If you want to go to a hotel, it's like $600 a night
00:05:44.320 | here in San Francisco.
00:05:45.760 | So my good deed backfired.
00:05:47.760 | And they didn't offer to pay anything.
00:05:50.480 | And I didn't ask them to pay anything.
00:05:53.200 | So luckily, my tenant had renter's insurance,
00:05:56.120 | which I require for all tenants.
00:05:58.000 | If you're a landlord, please require your tenants
00:06:00.680 | to get renter's insurance.
00:06:01.960 | It's not that expensive.
00:06:02.960 | It's like $100 to $200 a year.
00:06:05.640 | So the bike, due to renter's insurance, was 100% covered.
00:06:09.680 | And that's amazing.
00:06:11.040 | So my tenant got a new bike.
00:06:12.360 | And the bike that got stolen was, I think,
00:06:14.320 | around three years old.
00:06:16.000 | Not too old, but not brand new.
00:06:17.920 | Not as good as a brand new bike.
00:06:19.720 | So I thought the ideal was over.
00:06:22.200 | But then my tenant asked me to pay for his $500 insurance
00:06:27.360 | deductible.
00:06:28.680 | And so at first, I was taking it back.
00:06:30.280 | I was thinking, are you kidding me?
00:06:31.740 | Really?
00:06:32.480 | I didn't feel responsible for a thief's bad actions.
00:06:36.080 | Bad things happen all the time.
00:06:37.560 | That's what life is about.
00:06:39.960 | If a thief stole something of mine from the garage
00:06:42.500 | because my tenants left the garage door open accidentally,
00:06:45.440 | which they sometimes do, I would just chalk it up to bad luck.
00:06:49.120 | It was my decision to leave things in the common space.
00:06:52.000 | Further, I've always paid my insurance deductible
00:06:55.000 | when something unfortunate happens to me.
00:06:57.480 | When I was a tenant a long time ago,
00:06:59.400 | there was a leak in the ceiling.
00:07:01.080 | And the leak leaked right on my laptop all night.
00:07:05.440 | What are the chances?
00:07:06.840 | Well, the leak ended up destroying my $1,800 laptop.
00:07:11.000 | So I filed a claim, paid the deductible, and got a new one.
00:07:15.280 | I didn't ask my landlord for money.
00:07:17.400 | I just chalked it up to bad luck and moved on.
00:07:20.720 | Maybe I should have, but it's just not my personality.
00:07:24.560 | I've always been very independent.
00:07:26.600 | And I readily accept that bad things happen all the time.
00:07:30.000 | Bad luck is a part of life,
00:07:31.880 | just like good luck is a part of life.
00:07:34.560 | Nor do I like to rely on anybody for help.
00:07:37.040 | I've written articles such as
00:07:38.360 | the new three-legged retirement stool called You, You, and You
00:07:42.560 | and how financial dependence is the worst
00:07:45.360 | and why couples should have separate checking counts
00:07:49.120 | and couples should always be independent
00:07:51.080 | in making their own money.
00:07:52.680 | Because you never know, the divorce rate is 50%.
00:07:55.680 | If you end up being a stay-at-home parent
00:07:57.400 | for 10, 15 years, you don't keep up your side hustles,
00:08:01.760 | your consulting, your skills,
00:08:03.400 | and then you go through a divorce,
00:08:04.960 | yeah, you might get a settlement from the divorce,
00:08:07.320 | child support, and maybe, maybe a place to stay,
00:08:10.560 | I'm not sure, but if you have no way
00:08:13.480 | of earning your own money or earning a livable wage,
00:08:16.480 | life is gonna be more difficult.
00:08:19.120 | The whole theme on Financial Samurai
00:08:21.720 | is financial independence,
00:08:23.320 | not financial dependence on someone else
00:08:25.880 | or financial dependence on the government
00:08:27.880 | or some random good benefactor.
00:08:29.880 | It's being independent
00:08:31.480 | so that you can take care of yourself.
00:08:33.560 | And if someone wants to help you out along the way,
00:08:35.520 | that is wonderful, say thank you, give back to them.
00:08:39.240 | But if nobody helps you, I want you to be okay
00:08:42.920 | because you didn't expect that help
00:08:44.480 | and you were able to figure things out on your own.
00:08:47.060 | To me, asking money from anybody feels wrong.
00:08:51.880 | It feels icky, especially if I have enough money
00:08:54.800 | to cover unforeseen circumstances.
00:08:57.760 | But what I realized from being a landlord since 2005
00:09:01.400 | is that not everybody thinks like me.
00:09:03.560 | Owning rental property makes you respect
00:09:05.800 | other people's points of view,
00:09:07.360 | and to be a good landlord, you have to be flexible
00:09:10.840 | and you have to compromise.
00:09:12.440 | So compromise is what we did.
00:09:14.880 | I offered to split the cost of the $500 deductible
00:09:18.480 | and he accepted.
00:09:19.640 | And this is a tenant who makes over $300,000 a year,
00:09:23.920 | probably over $350,000 a year.
00:09:26.160 | And so to me, that's interesting
00:09:28.920 | because if I made over $350,000 a year,
00:09:32.040 | I wouldn't have asked my landlord to pay a 500 deductible,
00:09:36.200 | which I think would have been my responsibility.
00:09:38.800 | But again, I understand where they're coming from
00:09:41.080 | because if I never had my sister and boyfriend
00:09:44.680 | come and visit, maybe the theft would not have occurred.
00:09:48.540 | So this story is another reason why
00:09:52.280 | I have this love-hate relationship
00:09:54.240 | with being a landlord and owning rental properties.
00:09:57.120 | Something random, bad, usually tends to come up.
00:10:01.600 | There's some kind of argument, a theft, something is damaged,
00:10:04.960 | and it just really bums me out.
00:10:06.480 | In another rental property,
00:10:08.080 | the tenant found a leak underneath the kitchen sink.
00:10:11.280 | And the kitchen sink was newly installed
00:10:13.400 | and remodeled in 2020.
00:10:15.340 | But lo and behold, when my handicap came there
00:10:18.160 | to swap it out and check it out,
00:10:20.280 | there were two big cracks on both sides of the P-trap pipe.
00:10:24.840 | Like what are the chances of that?
00:10:26.080 | It's only been two years, but I'm thankful.
00:10:28.560 | I'm thankful my tenant let me know
00:10:30.160 | because water damage is a big issue.
00:10:32.500 | So if you wanna build passive income
00:10:34.800 | and retire early with rental properties,
00:10:37.560 | you just really need to be in the mindset
00:10:40.040 | that bad things and issues come up all the time,
00:10:43.520 | and it is a part-time job.
00:10:45.880 | At least there's some lemonade to be made
00:10:48.340 | by writing a post, recording this podcast,
00:10:51.000 | and also I'm gonna update my future lease agreements
00:10:54.000 | to specifically say that tenants are responsible
00:10:58.160 | for their property in common areas.
00:11:00.580 | I thought this was standard, but apparently not.
00:11:02.800 | So if you have a lease, make that amendment,
00:11:05.320 | click over to the post.
00:11:06.280 | I've got a very thorough lease for you
00:11:08.120 | if you wanna use it as an example.
00:11:10.040 | I also made lemonade by figuring out ways
00:11:12.500 | to bolster the security of the rental property
00:11:15.800 | because safety at the end of the day
00:11:17.040 | is the most important issue.
00:11:18.800 | Funny enough, one security measure we agreed to
00:11:21.640 | of always locking the side door to the garage
00:11:24.440 | is not always being followed.
00:11:26.240 | About 25% of the time I come over and the door is unlocked.
00:11:29.880 | Another time I stopped by and the tenant's house keys
00:11:33.960 | and car keys were left in the front entrance
00:11:37.000 | for all passerbys to see.
00:11:39.560 | So it was a good thing I was there
00:11:41.000 | to take them out and notify them
00:11:42.780 | because otherwise what other mishaps may happen?
00:11:46.600 | So you can see how having to deal
00:11:48.640 | with these inconsistencies can be a real pain.
00:11:52.280 | Alas, such issues are part of the job of being a landlord.
00:11:56.560 | So you've just heard an example of a tough issue
00:11:59.240 | and why I don't like being a landlord.
00:12:01.280 | It's why I've limited my self-managed rental properties
00:12:04.560 | to three because any more than three, I just can't take it.
00:12:07.600 | So I highly recommend you discover what your limit is
00:12:10.480 | and don't surpass it because the joy you get
00:12:13.640 | from earning semi-passive income
00:12:15.960 | will soon become surpassed by misery
00:12:18.880 | if you own more than your limit.
00:12:20.680 | And if you wanna go past your own self-managed limit,
00:12:23.480 | then of course you can consider hiring a property manager.
00:12:26.420 | I've got a property manager in Lake Tahoe
00:12:28.280 | for a vacation property and it is wonderful
00:12:31.440 | not having to deal with anything
00:12:33.360 | and I'll gladly pay them the 25%
00:12:36.360 | of rental earnings as commissions.
00:12:39.040 | With a love-hate relationship, let's talk about the love.
00:12:42.360 | One of the reasons why I love owning rental property
00:12:45.320 | besides the income and the potential appreciation
00:12:48.320 | is that there are fewer exogenous variables
00:12:51.220 | that will negatively impact the rental income
00:12:54.020 | and the property's value.
00:12:56.380 | So we're almost three years into the pandemic
00:12:59.720 | yet China is still going through COVID lockdowns.
00:13:02.960 | They've got a zero COVID policy, folks.
00:13:05.600 | So if you get COVID or you're suspected
00:13:08.040 | of being in contact with someone in COVID,
00:13:10.120 | you're gonna be locked down.
00:13:11.320 | You've got like this QR code, you've got a scan
00:13:13.560 | and if it doesn't turn green, you can't go anywhere.
00:13:16.680 | If you look on social media, it's kind of terrifying
00:13:20.520 | to still have to be locked down in your apartment building
00:13:23.860 | and not go places for weeks at a time
00:13:27.000 | and it's almost 2023.
00:13:29.100 | So appreciate your freedom
00:13:30.760 | and if you wanna appreciate your freedom more,
00:13:33.160 | go and see what's going on in China.
00:13:35.800 | So because there's all these protests and riots,
00:13:39.280 | the S&P 500 sold off and you're thinking to yourself,
00:13:43.280 | man, really?
00:13:44.840 | The market has sold off because of this?
00:13:47.720 | I mean, what else is next?
00:13:49.320 | A terrorist attack, another COVID strain,
00:13:53.720 | government malfeasance and corruption,
00:13:56.580 | something like FTX collapsing
00:13:59.760 | where customer deposits are being used
00:14:02.740 | in the owner's hedge fund.
00:14:04.240 | I mean, there are all these exogenous variables
00:14:06.480 | that you cannot control
00:14:08.000 | that can negatively impact your stock's share price.
00:14:12.720 | And as a stock investor,
00:14:14.600 | you're more than likely a passive investor
00:14:17.320 | because you don't have a board, seed
00:14:19.200 | and you don't have massive percentage holdings.
00:14:21.360 | So you just gotta go for the ride, the good and the bad.
00:14:24.720 | And being a passive stock investor feels great
00:14:27.940 | when your investments are going up, right?
00:14:30.000 | You're just minting money and not doing a single thing.
00:14:33.420 | But sometimes you feel hopeless and angry and frustrated
00:14:37.040 | and you just wanna do something
00:14:38.200 | when your investments are going down.
00:14:40.160 | And unfortunately you can't do anything
00:14:41.560 | except for properly asset allocating
00:14:43.800 | based on your risk tolerance and your goals.
00:14:46.240 | So I love that with real estate,
00:14:47.720 | there are no supply chain issues in China
00:14:50.600 | or endless exogenous variables to worry about.
00:14:53.480 | In fact, severe COVID restrictions
00:14:55.180 | actually helped rental property owners
00:14:56.880 | because more people demanded and appreciated housing.
00:15:00.480 | Now, obviously there's a frustration
00:15:02.180 | regarding the Fed hiking rates aggressively
00:15:04.780 | and jacking up mortgage rates as well.
00:15:07.080 | But other than the local economy and interest rates,
00:15:11.520 | okay, the overall health of the economy,
00:15:13.560 | there aren't that many variables to worry about.
00:15:16.480 | Now, there can be natural disaster issues, right?
00:15:19.360 | And that is something that's, you know,
00:15:21.000 | act of God, you can't control it.
00:15:22.880 | But you can do something about it.
00:15:24.000 | You can buy homeowner's insurance,
00:15:25.880 | fire insurance, earthquake insurance.
00:15:27.840 | If you feel the risk is worth the premium
00:15:31.440 | or the premium was worth the risk,
00:15:32.920 | just go buy insurance and cover yourself.
00:15:35.180 | In conclusion, I do recommend most people
00:15:37.980 | follow the simple wealth building strategy
00:15:40.520 | of buying your primary residence to get neutral real estate.
00:15:43.500 | Do it as soon as you find out that you wanna be somewhere
00:15:46.580 | for at least five years, if not 10 years.
00:15:49.220 | And then after two to 10 years,
00:15:50.980 | rent out your home and buy a nicer primary residence.
00:15:54.420 | And if you repeat this process in your lifetime,
00:15:56.700 | you'll be able to build a healthy rental property portfolio
00:16:00.140 | to take care of you, your children,
00:16:02.900 | in retirement and beyond.
00:16:05.340 | Sticking to an appropriate asset allocation
00:16:07.700 | based on your risk tolerance, age, time and goals
00:16:11.340 | is very important.
00:16:12.780 | This way, money will seldom ever overtake your life
00:16:16.460 | so you can do more of what you want.
00:16:18.660 | Thanks everyone for listening.
00:16:20.020 | If you wanna invest in real estate 100% passively,
00:16:23.060 | check out Fundrise at financialsamurai.com/fundrise.
00:16:28.780 | F-U-N-D-R-I-S-E.
00:16:30.980 | The firm has over 3.5 billion in assets under management,
00:16:34.380 | over 400,000 investors, and it specifically invests
00:16:38.520 | in Sunbelt Heartland Real Estate
00:16:40.780 | where valuations are cheaper and rental yields are higher.
00:16:45.300 | And I do believe in the long-term thesis
00:16:46.900 | of investing in the heartland of America.
00:16:49.060 | I've been doing so since late 2016
00:16:52.340 | and I'm planning to continue to invest
00:16:53.900 | in the heartland of America for the next 10 to 20 years
00:16:56.980 | because I think it's one of the key
00:16:58.860 | long-term investment trends of our lifetimes.
00:17:01.940 | Thanks so much for listening and until next time.