My wife and I moved to San Francisco in 2001, and after 18 years, we finally decided we've had enough. Our plan now is to cash out of the tech IPO boom and move to Hawaii to semi-retire in our early 40s.
San Francisco has its perks, but once we became parents in 2017, our outlook started to fade. For starters, San Francisco has the lowest percentage of kids in the U.S., which means fewer family-friendly places, fewer first-time parents to interact with and fewer kids for our son to play with.
The public school system starting in kindergarten is based on a lottery system, so even if you pay property taxes, your child is not guaranteed a spot in your neighborhood schools. Most parents are forced to pay big bucks to send their kids to private school, but even paying $30,000 or more doesn't guarantee your child admission into the top-rated private schools.
We feel a tremendous burden to keep working so we can earn higher salaries only to keep up with the city's rising costs. That said, the only way to break free from this trap is to sell during the tech IPO boom.
Our priority is to reduce our ownership burden in California by as much as possible. While my wife and I aren't "techies," we do own several assets that techies may want to buy.
- A two-bedroom, two-bathroom park view condo in Pacific Heights: In 2003, at 26, I purchased my first property for $580,500. To come up with the down payment, I had saved 50% of my salary and 100% of my bonus each year from ages 22 to 26. My base ranged from $40,000 to $80,000 during this time period.
- A four-bedroom, three-bathroom home in the Marina District: In 2005, my girlfriend and I rented out our Pacific Heights property and bought a single family home for $1.5 million. It took everything I had to come up with the $304,000 down payment and closing costs. I actually had to get a bridge loan from my grandfather for two months because the house was for sale in December, and I wasn't going to get paid my bonus until February.
- A two-bedroom, two-bathroom vacation home in Lake Tahoe: In 2007, we purchased a Squaw Valley vacation property for $715,000. I thought I was getting a good deal because the seller had purchased it for $820,000 a year prior. Unfortunately, over the next several years, the property lost half its value due to the housing crisis.
Our goal is to sell the properties during the tech IPO boom. So far, Lyft, Pinterest and Zoom have all successfully gone public. After Uber's IPO, we believe it'll be the biggest catalyst for an uptick in San Francisco real estate demand given its estimated $100 billion market capitalization.
While my wife and I aren't 'techies,' we do own several assets that techies may want to buy.
If we're able to sell to one of the newly minted tech millionaires once their six-month lockup period is over, we would reinvest the proceeds into various passive income investments such as dividend stocks, short-term treasury bonds, venture debt and private equity.
Real estate arbitrage to the rescue
Cap rates in San Francisco are roughly 3% to 3.5%. Owning investment property in San Francisco is mostly about capital appreciation, not income generation. One could easily earn a risk-free 2.5% per year by investing in three-month treasury bonds today.
Here's our strategy:
- Sell our Lake Tahoe (estimated value: $450,000) and Pacific Heights (estimated value: $1,300,000) properties. After paying fees and taxes, we should have about $1,500,000 in net proceeds to reinvest.
- Reinvest 50% of the proceeds in AA-rated Hawaii municipal bonds once we move there. This will generate a tax-free yield of $22,500 (or 3%) per year in tax-free income.
- Invest the other $750,000 in real estate crowdfunding and and public REITs to take advantage of much lower valuations and much higher cap rates in the heartland of America. The heartland is seeing an influx of residents from expensive coastal city residents who realize they no longer need to be stuck paying $4,500 per month for rent or $1,500,000 for a median-priced home.
With a target 10% annual return due to much higher cap rates in heartland real estate, I expect the $750,000 invested in real estate crowdfunding to generate roughly $75,000 a year in gross income.
In other words, instead of generating only $50,000 a year in gross income a year from my existing San Francisco and Lake Tahoe properties, I could generate an equivalent of roughly $105,000 a year in gross income from the combination of municipal bonds and real estate crowdfunding.
A 6% blended return on the gross capital base with no maintenance or tenant issues sounds much better to me.
As of now, our retirement income currently stands as follows. By selling one or two of our rental properties, we hope to simplify life and boost our retirement income further.
Honolulu over San Francisco
My goal is to retire sometime this year, right after I hit my 42nd birthday. My parents, currently living in Honolulu, are in their 70s. If we don't move now, I know I'll regret not spending more time with them later on.
When we move to Honolulu, I plan to continue running Financial Samurai, the personal finance site I started in 2009. My wife and I will also be working on the third edition of our severance negotiation book, "How To Engineer Your Layoff: Make a Small Fortune by Saying Goodbye."
Although $3,500 a month sounds like a lot, it's still $2,000 (or 40%) less than what we spend on housing here in San Francisco.
My parents want to move out of their old four-bedroom house because they find it too large to maintain. My family of three would take over the house (rent-free) and spend about $3,500 a month paying for a fully-furnished two-bedroom, two bathroom condominium downtown near all the shops and restaurants for my parents to live in.
Although $3,500 a month sounds like a lot, it's still $2,000 (or 40%) less than what we spend on housing here in San Francisco.
With the remaining $12,000 plus a month in retirement income, we should have more than enough to live a comfortable early retirement lifestyle in Honolulu while raising children.
Living in San Francisco for more than 18 years has been a wonderful experience. We got lucky buying property when we did. Unfortunately, the city is simply too family unfriendly and too expensive today. We long for the simplicity and year-around warmth and sunshine of Hawaii.
It's time for us old folks to leave and make way for the next generation of hungry young capitalists. Here's to a tech IPO bonanza!
Sam Dogen worked in investing banking for 13 years before starting Financial Samurai, a personal finance website. He received a B.A. in Economics from The College of William & Mary his MBA from the University of California in Berkeley. Sam has been featured in Forbes, The Wall Street Journal, The Chicago Tribune and The L.A.Times.
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