Hello, everybody, it's Sam from Financial Samurai. And in this episode, I want to talk about my love-hate relationship with being a landlord, owning physical rental properties. Because on the one hand, owning rental properties are one of the main reasons why I had confidence to leave work behind in 2012.

Today, rental properties, real estate, generates about 50% of our current passive income. On the other hand, my rental properties are my main source of investment stress. It's not massive, massive stress, but whenever I do feel stress, it's now because of my kids when they're sick and because of my rental properties.

There's really nothing else too much that stresses me out on a consistent basis. There are random things like health issues for my loved ones that stress me out. But everything else, there's not that much stress, except for with my rental properties. Whenever there is a tenant issue or a maintenance issue, my mood naturally sours.

It's always these weird situations that always arise that are hard to predict. And it took me about 15 years to realize how to protect my mood as a landlord. Basically, I had to change the framing. Instead of seeing my rental properties as a source of passive income, a wonderful source of passive income, I moved towards it being semi-passive income.

But this shift wasn't enough for me to feel better whenever some kind of tenant issue or a maintenance issue arose. So I took the framing a step further and changed it to see that my rental properties are actually a part-time job. As soon as I had this mental shift of seeing rental property ownership as a part-time job, things got better.

My mental health became more positive because whenever I needed to spend time dealing with rental property issues, I just said, well, I haven't done anything for a while. This is a great part-time job. So when there is something to do, something to manage, or something to fix, it's just part of my job.

And given I have pride in doing a job well done, like most of us, these issues tended to not bother me so much. It's kind of a similar situation about walking very far downtown in San Francisco. So in the past, I used to work downtown. And I would take analysts around to see clients.

And the clients would be six blocks, eight blocks, sometimes 10 blocks away. Sometimes they're up on a hill. But because it was part of my job and the analyst's job, we just walked merrily for 15 to 20 minutes, no problem. But when I'm in downtown San Francisco, and I'm, let's say, meeting a friend, and I want to go to Union Square, which is like eight blocks away, I kind of am like, eh.

What a far way to go. What a pain in the butt. Because it's not my job. So change the frame of mind in terms of owning rental properties as a part-time job. And I think you'll feel better. It's easier said than done if you actually do have a day job.

Because if you have a day job, you're like, OK, owning rental properties is like a side hustle. And the society today, including myself, tells everyone you should have a side hustle to earn more money to achieve financial freedom sooner because you can save and earn more. Well, it's harder.

It's harder to view owning rental properties as a part-time job once you've retired because it feels like you're going backwards. It feels like you're just going to go back and get a job. And you can never be free until you sell your rental properties. I get that. You just have to get over the hump.

Maintenance issues, tenant turnovers, tenant issues will occur for as long as you own rental properties. So you're just going to have to get right with it and treat it as a part-time job. Just this August, I had my sister and boyfriend come to visit from New York City. They stayed at one of my rentals that used to be our old home.

The first floor is vacant, which I use as an office and as a place for friends and family to stay. And it's worked out really great during the pandemic because I go there to escape. And I go with my boy to play. And we go to the hot tub.

And the upstairs is rented. So supposedly, when my sister and boyfriend came in that night, they forgot to lock the side door. Or perhaps they locked it, but it didn't fully latch. And they thought they locked it. But there's no proof that they did or did not. 99.9% of the time, it's no big deal.

Unfortunately, that night, a burglar went in through that side door and stole the upstairs tenant's $3,000 bike from the garage, which wasn't locked to anything. Now, the security cameras somehow didn't pick up anything. Nobody leaving or departing. So there's also no proof a burglar stole a bike because I didn't realize there was that fancy bike in the garage in the first place.

And you just can't help but think, well, is this real? Or is this not? Nobody was injured. What's going on? The garage is a common area meant for a car. But my tenants use it to store a lot of valuable stuff there. We're talking $3,000-plus bike, thousands of dollars worth of skis, furniture, $1,000 of new tires, and more.

I mean, it's crazy. It's like a storage area. When we used to live there, all we had in the garage was our car and paint cans. So we're minimalist in comparison. So am I responsible for the thief's actions? I think it's debatable. All I did was provide my sister and boyfriend a place to stay for a week instead of having them pay $300-plus a night at a motel.

If you want to go to a hotel, it's like $600 a night here in San Francisco. So my good deed backfired. And they didn't offer to pay anything. And I didn't ask them to pay anything. So luckily, my tenant had renter's insurance, which I require for all tenants. If you're a landlord, please require your tenants to get renter's insurance.

It's not that expensive. It's like $100 to $200 a year. So the bike, due to renter's insurance, was 100% covered. And that's amazing. So my tenant got a new bike. And the bike that got stolen was, I think, around three years old. Not too old, but not brand new.

Not as good as a brand new bike. So I thought the ideal was over. But then my tenant asked me to pay for his $500 insurance deductible. And so at first, I was taking it back. I was thinking, are you kidding me? Really? I didn't feel responsible for a thief's bad actions.

Bad things happen all the time. That's what life is about. If a thief stole something of mine from the garage because my tenants left the garage door open accidentally, which they sometimes do, I would just chalk it up to bad luck. It was my decision to leave things in the common space.

Further, I've always paid my insurance deductible when something unfortunate happens to me. When I was a tenant a long time ago, there was a leak in the ceiling. And the leak leaked right on my laptop all night. What are the chances? Well, the leak ended up destroying my $1,800 laptop.

So I filed a claim, paid the deductible, and got a new one. I didn't ask my landlord for money. I just chalked it up to bad luck and moved on. Maybe I should have, but it's just not my personality. I've always been very independent. And I readily accept that bad things happen all the time.

Bad luck is a part of life, just like good luck is a part of life. Nor do I like to rely on anybody for help. I've written articles such as the new three-legged retirement stool called You, You, and You and how financial dependence is the worst and why couples should have separate checking counts and couples should always be independent in making their own money.

Because you never know, the divorce rate is 50%. If you end up being a stay-at-home parent for 10, 15 years, you don't keep up your side hustles, your consulting, your skills, and then you go through a divorce, yeah, you might get a settlement from the divorce, child support, and maybe, maybe a place to stay, I'm not sure, but if you have no way of earning your own money or earning a livable wage, life is gonna be more difficult.

The whole theme on Financial Samurai is financial independence, not financial dependence on someone else or financial dependence on the government or some random good benefactor. It's being independent so that you can take care of yourself. And if someone wants to help you out along the way, that is wonderful, say thank you, give back to them.

But if nobody helps you, I want you to be okay because you didn't expect that help and you were able to figure things out on your own. To me, asking money from anybody feels wrong. It feels icky, especially if I have enough money to cover unforeseen circumstances. But what I realized from being a landlord since 2005 is that not everybody thinks like me.

Owning rental property makes you respect other people's points of view, and to be a good landlord, you have to be flexible and you have to compromise. So compromise is what we did. I offered to split the cost of the $500 deductible and he accepted. And this is a tenant who makes over $300,000 a year, probably over $350,000 a year.

And so to me, that's interesting because if I made over $350,000 a year, I wouldn't have asked my landlord to pay a 500 deductible, which I think would have been my responsibility. But again, I understand where they're coming from because if I never had my sister and boyfriend come and visit, maybe the theft would not have occurred.

So this story is another reason why I have this love-hate relationship with being a landlord and owning rental properties. Something random, bad, usually tends to come up. There's some kind of argument, a theft, something is damaged, and it just really bums me out. In another rental property, the tenant found a leak underneath the kitchen sink.

And the kitchen sink was newly installed and remodeled in 2020. But lo and behold, when my handicap came there to swap it out and check it out, there were two big cracks on both sides of the P-trap pipe. Like what are the chances of that? It's only been two years, but I'm thankful.

I'm thankful my tenant let me know because water damage is a big issue. So if you wanna build passive income and retire early with rental properties, you just really need to be in the mindset that bad things and issues come up all the time, and it is a part-time job.

At least there's some lemonade to be made by writing a post, recording this podcast, and also I'm gonna update my future lease agreements to specifically say that tenants are responsible for their property in common areas. I thought this was standard, but apparently not. So if you have a lease, make that amendment, click over to the post.

I've got a very thorough lease for you if you wanna use it as an example. I also made lemonade by figuring out ways to bolster the security of the rental property because safety at the end of the day is the most important issue. Funny enough, one security measure we agreed to of always locking the side door to the garage is not always being followed.

About 25% of the time I come over and the door is unlocked. Another time I stopped by and the tenant's house keys and car keys were left in the front entrance for all passerbys to see. So it was a good thing I was there to take them out and notify them because otherwise what other mishaps may happen?

So you can see how having to deal with these inconsistencies can be a real pain. Alas, such issues are part of the job of being a landlord. So you've just heard an example of a tough issue and why I don't like being a landlord. It's why I've limited my self-managed rental properties to three because any more than three, I just can't take it.

So I highly recommend you discover what your limit is and don't surpass it because the joy you get from earning semi-passive income will soon become surpassed by misery if you own more than your limit. And if you wanna go past your own self-managed limit, then of course you can consider hiring a property manager.

I've got a property manager in Lake Tahoe for a vacation property and it is wonderful not having to deal with anything and I'll gladly pay them the 25% of rental earnings as commissions. With a love-hate relationship, let's talk about the love. One of the reasons why I love owning rental property besides the income and the potential appreciation is that there are fewer exogenous variables that will negatively impact the rental income and the property's value.

So we're almost three years into the pandemic yet China is still going through COVID lockdowns. They've got a zero COVID policy, folks. So if you get COVID or you're suspected of being in contact with someone in COVID, you're gonna be locked down. You've got like this QR code, you've got a scan and if it doesn't turn green, you can't go anywhere.

If you look on social media, it's kind of terrifying to still have to be locked down in your apartment building and not go places for weeks at a time and it's almost 2023. So appreciate your freedom and if you wanna appreciate your freedom more, go and see what's going on in China.

So because there's all these protests and riots, the S&P 500 sold off and you're thinking to yourself, man, really? The market has sold off because of this? I mean, what else is next? A terrorist attack, another COVID strain, government malfeasance and corruption, something like FTX collapsing where customer deposits are being used in the owner's hedge fund.

I mean, there are all these exogenous variables that you cannot control that can negatively impact your stock's share price. And as a stock investor, you're more than likely a passive investor because you don't have a board, seed and you don't have massive percentage holdings. So you just gotta go for the ride, the good and the bad.

And being a passive stock investor feels great when your investments are going up, right? You're just minting money and not doing a single thing. But sometimes you feel hopeless and angry and frustrated and you just wanna do something when your investments are going down. And unfortunately you can't do anything except for properly asset allocating based on your risk tolerance and your goals.

So I love that with real estate, there are no supply chain issues in China or endless exogenous variables to worry about. In fact, severe COVID restrictions actually helped rental property owners because more people demanded and appreciated housing. Now, obviously there's a frustration regarding the Fed hiking rates aggressively and jacking up mortgage rates as well.

But other than the local economy and interest rates, okay, the overall health of the economy, there aren't that many variables to worry about. Now, there can be natural disaster issues, right? And that is something that's, you know, act of God, you can't control it. But you can do something about it.

You can buy homeowner's insurance, fire insurance, earthquake insurance. If you feel the risk is worth the premium or the premium was worth the risk, just go buy insurance and cover yourself. In conclusion, I do recommend most people follow the simple wealth building strategy of buying your primary residence to get neutral real estate.

Do it as soon as you find out that you wanna be somewhere for at least five years, if not 10 years. And then after two to 10 years, rent out your home and buy a nicer primary residence. And if you repeat this process in your lifetime, you'll be able to build a healthy rental property portfolio to take care of you, your children, in retirement and beyond.

Sticking to an appropriate asset allocation based on your risk tolerance, age, time and goals is very important. This way, money will seldom ever overtake your life so you can do more of what you want. Thanks everyone for listening. If you wanna invest in real estate 100% passively, check out Fundrise at financialsamurai.com/fundrise.

F-U-N-D-R-I-S-E. The firm has over 3.5 billion in assets under management, over 400,000 investors, and it specifically invests in Sunbelt Heartland Real Estate where valuations are cheaper and rental yields are higher. And I do believe in the long-term thesis of investing in the heartland of America. I've been doing so since late 2016 and I'm planning to continue to invest in the heartland of America for the next 10 to 20 years because I think it's one of the key long-term investment trends of our lifetimes.

Thanks so much for listening and until next time.