Somewhere in the depths of the darkness that was the Spring of 2020—sandwiched somewhere between losing my primary source of income and my wife sanitizing the groceries on our front steps—I bought a house.

The first house I’ve ever purchased.

I’d never seen it before…

And I still haven’t.

…

…

I’m making my way to that house for the first time today, and I’ll live there for the next three months.

This is the bizarre story of how I made my first real estate investment—and a lifelong dream—come true.

Why invest real estate?

I am loose with my affections for place. While many people spend their lives toiling away in search of a person to love, a soulmate, I’ve always felt that same pull toward places… physical locations.

There are places that I immediately connect with. I seek these places out, and they are never far from my mind. And because of this, I’ve always had an interest in real estate.

It’s ironic to me that a lot of people—particularly in the tech industry—like to badmouth investing in real estate.

“There’s so much upkeep!” they whine. “You need to deal with tenants—plus, you’ll only ever make like a 30% return!”

If you look back over the annals of history, real estate is consistently one of the best investments you could ever make. It’s finite, people want it, and it’s only ever gone up in value in just about every location save for Chernobyl.

But beyond that, investing in real estate has always interested me because it’s an opportunity not just to deliver a financial return, but to dramatically enrich my life as well. I’m not much of a goal setter, but I’d like to own small properties in San Diego, Hawaii, and an island in Greece. If I can make that happen and bounce between these locations for the rest of my days, I think that would be wonderful fun.

I bought a modest two-bedroom condo near the beach in San Diego in 2016, which is where I live with my family now. And on June 25, 2020 I managed to close on as small two bedroom house in Pepeekeo, Hawaii. My end goal is to be able to spend a few months in each location each year.

Finally, as remote work became a reality for many more people I saw an opportunity. Warren Buffet famously said, “Be fearful when others are greedy and greedy when others are fearful,”—buying this house as we descended into Covid certainly a bit of my attempt to live that saying. While I’m not betting on a mass exodus out of cities, I do think more people than ever will be looking for long term rentals or generally to move and work from far more remote places.

I know, because I’m one of these people—and I know there are an awful lot more people like me out there.

Finding the right location

As I started exploring places where I might want to invest in property, all locations were on the table. A particular island in Greece was absolutely my first choice, but the weather is only favorable on the island six months per year—making enough rental income to cover my mortgage would be a problem. Beyond that, as a US citizen you can only spend 90 days at a time in the European Union—so the use I’d get out of the property myself was also somewhat limited. Managing a property half way across the globe was a final hurdle that nixed this idea (for now).

I love cities, but I live in a city so I was also looking specifically for more remote locations. This was also convenient, as I was working with a very limited budget and remote locations tend to be less expensive. I looked in the mountains of western Canada. I looked in the Blue Ridge Mountains in Georgia. I even looked at less populated areas here in Southern California, where I could use the property more and worry less about being far away. But the more I considered different areas, the more I kept coming back to Hawaii.

I’ve only actually been to Hawaii once—I went on a week long vacation to Maui a few years back. But the place was captivating, and if it’s anything, it’s remote. Very remote unless you happen to live in San Diego, where you can get a direct flight and be on-island in about six hours.

A few years back I’d happened across a blog post by a guy named Tynan who had bought a inexpensive condo on Hawaii’s Big Island near the city of Hilo. I don’t know Tynan—I’ve never said a word to him, but I’ve read some of his writing. He’s something of an OG of the digital nomad world, and he’s seen a lot of places. He had very favorable things to say about Hilo, and generally how affordable real estate on the Big Island can be. So I proceeded down that rabbit hole—rack one up for the connective power of the internet.

Honing in on Hilo

If you look at real estate in Hawaii at large, it is alarmingly expensive—certainly more than I was able to spend. But if you look at property on the Big Island specifically, you’ll be surprised by how inexpensive some of it is. You can buy literal mansions, in some cases, for just a few hundred thousand dollars. There are two reasons for this:

1. The Big Island is much bigger than the other Hawaiian islands. At about 80 miles across, it easily fits all the other islands inside of it—there’s just more real estate to be had.
2. The big island has active volcanoes. Most of the ridiculously nice properties that you’ll find at bargain basement prices are in “lava zones” that mean your property might get completely wiped out by lava flows. And you can’t get insurance. It happens. We’re talking $800M in property damage as recently as 2018.

“So you are a dumb ass,” you’re most certainly thinking now. But the more I started researching property on the Big Island, the more interesting this all became to me. And it quickly became apparent that one of the other benefits of buying real estate on the Big Island is exactly the danger of it all—the vast majority of mainlanders quickly get scared off by the prospect of a lava flow taking out their house.

But the Big Island has carefully mapped our lava zones that are rated from 1-9. If you’re in Zone 1 or 2, you can’t get insurance on your property and a volcanic eruption is a very real threat. But if you’re in the higher numbered zones, you’re actually quite safe. Residents of Hawaii generally laugh at all of this and find it an amusingly convenient way to keep mainlanders away.

As my interest in the Big Island heated up, I found what I thought was the perfect place. But my wife didn’t love it (she wanted a big porch) and I was a bit short on the down payment anyways—it was the one that got away.

At this point, I’d already become somewhat obsessed. Covid had started, and my nights were consumed with ripping through real estate listings. When our realtor sent us the listing on 2Kulaimano Rd in Pepeekeo, about 17 miles north of Hilo, I knew is was the place. I shared it with my wife, and she knew it immediately too.

Making the offer, financing the property, and the catastrophe that almost was

As I learned more about unique circumstances the Big Island presents (not just volcanoes, but tsunamis, invasive plants, and more) I recognized that it would be a really good idea to work with a local real estate agent who knew the island well. I found our realtor, Noelani Spencer, on Zillow. She had great reviews, responded to my initial email, and listened to what I was looking for. Then a few months later she reached out with what proved to be the winning listing.

The property was listed initially at $345,000. I knew that this was a bit high based on comps, but it was a pretty unique listing—an old plantation house that had been almost completely renovated. It was clear that the house was being flipped, which we confirmed by looking at Google Earth images of the property from a few years prior.

But I also knew that the square footage (668 square feet) was working in our favor—the property wouldn’t even show up in searches for a lot of people, and for others the square footage would scare them away. But this number also doesn’t reflect an addition that was made to the property, the carport, or the covered deck—which collectively make the property about 1,600 square feet of living space.

We had set a budget of $300,000, so I was set to make an offer in the $310,000-$315,000 range to see if we’d get lucky. I figured with the uncertainty that Covid had brought to our door, we might just catch a break.

Kelley (my wife) pushed hard for us to make a more aggressive offer—this was the one! We put in an offer at $330,000, figuring we’d probably lose out anyways with our best offer so far under the asking price. To our surprise we learned a few days later that our offer had been accepted, even though it wasn’t the highest bid. A personalized letter introducing our family had tipped the scales in our favor.

While we were a bit stunned, we were unbelievably excited—until the next afternoon, when I learned that I’d been laid off. My primary source of income had disappeared, and our house in Hawaii went right with it—without consistent income we wouldn’t be able to close the mortgage.

While this was all upsetting, it wasn’t lost on me that my house in Hawaii falling though while so many people were struggling with unemployment wasn’t really a big deal. I actually felt a bit of relief—OK, a lot of relief—not taking on a second mortgage during the uncertainty of that time might have been catching a break. But undeterred, I began looking for creative ways to still get the mortgage closed.

Before I finish that story, it’s worth noting how I saved up enough money for the down payment in the first place. In May 2020, I had been working on my own start-up for 3.5 years years earning about 50% of my earning potential throughout that time. You can read all sort of schemes in terms of how people raised the money required to invest in real estate, but my scenario was quite straightforward—albeit unusual.

While my wife and I have been together for 15+ years, we’re not technically married. Beyond that, I already had a mortgage in my name (for our current condo in San Diego) and we’d had twin boys the previous year that are technically my dependents. Couple that with fairly low income from working on my start-up, and I’d unexpectedly found a winning lottery ticket.

It turns out if (on paper) you’re a single dad with low income, two kids, and an existing mortgage the US government will take pity on you. My taxable income, simply put, was very low so almost all of the money that I’d prepaid in taxes the previous year was returned.

Because the house in Hawaii wasn’t going to be our primary residence (it’s technically a second home), the lowest amount I could possibly put down for a down payment was 10%—in this case $33,000. Because of my circumstance, I ended up getting a tax return of about $25,000 which is what made the entirety of this investment possible.

I wasn’t expecting this, but it’s what made the purchase possible. So I decided to put the money to work.

The real estate industry is rigged against entrepreneurs

As my work circumstances had changed, I knew that the mortgage was likely to fall through. The property was set to close on June 2, and my last paycheck was set to land on the final day of May. Because of Covid, income verification was required again on the closing date. I did everything I could to push the closing date up, responding to every request my mortgage broker sent my way almost instantaneously.

Unfortunately, it quickly became apparent that Peter from Quicken Loans was a dipshit and really didn’t care about helping me close my mortgage. In fact, the closing day came and went without Peter even communicating anything to me despite my constant attempts to reach him. It was without a question the worst customer experience I’ve ever had—I would strongly, strongly advise anyone against using Quicken Loans.

By the time Peter did contact me (days after our expected closing date), I had to come clean that my income had changed. That immediately ground the entire process to a halt. Because I wasn’t yet taking any salary from my start-up, I tried every reasonable avenue that I could think of to show enough income to close on the property. This included:

• Showing consulting income from a variety of clients that had been very consistent over the previous three years.
• Combining my income with my wife’s.
• Starting to take salary from my own company.

To my surprise, even when I told Peter that I’d simply begin drawing a salary from my own company I was told that wouldn’t allow me to qualify for the mortgage.

“You can’t just start paying yourself,” he quipped.

“Why not?” I shot back, to which he had no coherent response.

At the end of the day I accepted a job working for one of my buddies for a few pay cycles—long enough to prove the required income. But the circumstance made one thing clear—the mortgage industry is without question unfair to entrepreneurs. Someone needs to work on solving this problem!

Finding a tenant

During the weeks that I was battling with Peter and Quicken Loans, we put our realtor and the sellers through hell (sorry Noelani). Honestly, she must have though I was nuts as I kept pulling new sources of income from my own company, to consulting, to new jobs out of thin air. I’m sure she was surprised the day that she found out the deal would actually be closing.

But this time gave me an opportunity to also sure up that this was an investment we wanted to go through with. The monthly mortgage payment for the property is $1558, and I used this time to list the property online to see how much I could potentially rent it for.

I was quite worried that because of Covid, even if we did close on the property we wouldn’t be able to travel to it and we’d likely have a hard time renting it on an island as small in population as Hawaii. Much to my surprise I had over 15 tenants apply to rent the place within 24 hours of publishing the listing, with several offering as much as $2,000 per month. This increased my confidence and desire to close on the property that much more.

When the property finally closed on June 25, 2020, I already had a tenant lined up to move in on July 1. He’s a single guy that’s lived on the Big Island for 20+ years, who just happens to own a landscaping company. The property is out in the country with a fairly large yard and a whole bunch of fruit trees, so I struck a deal with the tenant where he pays less in rent than some of the other prospective tenants were offering ($1,600/month), but he maintains the yard. Little did I know, I’d found the best tenant ever—he almost completely re-landscaped the yard to make it easier to maintain long term.

Some notes on how I found and manage tenants:

• I used Zillow Rentals for the property listing (highly recommend).
• I used TransUnion Smartmove to run a background check on potential tenants (meh).
• I accept rent payments each month via Paypal (Paypal is lousy, but if the tenant sends money as a “Friends & Family” payment there are no fees).

Income & Expenses

Now that I’ve owned the property for over a year, here’s a breakdown of the income and expenses related to the property. In short, my expenses were $458 more than my income from the property in the first year that I owned it.

While that’s not any kind of remarkable performance, I’m breaking just about even on the place and have a really great and considerate tenant who loves the property. And for whatever it’s worth, the appraisal value of the property increases from $336,000 to $385,000 over the course of the year.

The $49,000 increase in value is definitely indicative of the real estate market at large—but particularly of interest in Hawaii right now.

Unexpected surprises

While this all may sound hunky-doory, I know enough about real estate investing to know that any property is going to come with some unexpected surprises—mine included. Because we bought the property site unseen, we had a very comprehensive inspection done on the place and we definitely had to address a few significant items post close that were surfaced by that inspection.

But more than anything, buying a property in an area as jungly and rainy as Hilo presents its own set of challenges. To be clear, we knew this was something that we had to consider going in—the Hilo area is one of the rainiest climates in all of the US. It drizzles on a daily basis, mostly in the morning, but it is an extremely wet and tropical climate where all vegetation grows fast.

There was about a three week period between when our mortgage was supposed to close and when it actually did, during which the property was left vacant. This was enough time for the yard and fruit trees to grow a bit out of control, and with the wet weather and humidity mold even started forming on the countertops.

In essence this just means that Hilo is not a great location if you’re looking for a low maintenance investment property. I found a great solution here in the form of a tenant that also owns a landscaping business, but that’s not going to last forever. The yard will likely require maintenance at least 3-4 times per month, so that’s an expense that we’ll need to plan for and cover by charging a higher rate in the future.

An unexpected offer and learnings on capital gains

After I’d owned the property for three months, an unexpected cash offer to buy the place landed in my email inbox—for $60,000 more than we paid to purchase the property. That offer was extremely tempting, and many people told me it would be ridiculously of me not to just sell the property—one I hadn’t ever even seen!—and pocket the profits.

Out of sight, out of mind… right? And how many opportunities do you have to make $60,000 in about 3 months without ever really lifting a finger?

Perhaps most interesting of all, the offer was from a person I trust and they wanted to do the transaction without involving a realtor. We found a lawyer who would file all the required paperwork and sign the title over to the new buyer for a whopping total of $285. But as I considered selling further, another concern popped up:

Short term capital gains tax.

Because I’d be selling a property I’d owned for less than a year, any profits would be subject to short term capital gains tax. That means they’d be taxed based on my normal income tax bracket (24%). However, this income would effectively push me into a higher income tax bracket (32%), although only income over a certain level would be taxed at that rate.

By contrast, if I held onto the property for over a year I’d pay long term capital gains tax of 15%. So at the end of the day I wouldn’t be profiting $60,000—I’d walk with much less depending on the timing of the sale. And beyond that, I wouldn’t have access to the cash until I received my tax return the following year.

A final option to consider would be a 1031 exchange, which would allow me to apply all of the profits tax free toward the purchase of another property assuming I found one within 3-6 months. This is another attractive option that we considered, and as of this writing all of these options are still on the table.

While that’s the case, the learning here is simply that a sale that may seem very profitable isn’t always as lucrative as it might seem—and there’s a lot of complexity in terms of tax rates that you need to consider. While the offer was very generous, I did not proceed with it—largely because I think selling the property would be short changing the property’s value long term, but even more so because I’d feel like a sell out.

We didn’t buy the place to sell it, and it’s tough to put a monetary value on a place that we may very well love spending time for years to come. But the prospect of pocketing $40,000+ while alleviating the potential headache of managing the place long term is still very compelling.

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That’s my story for now— I’ll be heading to Hilo and to live in the property for three months this August. I suspect the fun I will have in Hawaii will far outweigh the financial return from selling, as compelling as it may be.

I hope that by sharing all this, others can recognize similar opportunities to buy dream homes or investment properties with quite modest cash requirements. After all, this was quite literally only possible because of how little money I made and the fact that I’m not married. So much for the tax benefits of being married, eh?