Our $50K Duplex Is Worth $97K – Why? Part 2

This is the second (and last) post in a little mini series explaining how we calculated the updated market value of the duplex we bought for $50K. Here’s the outline of this little series in case you want to start at the beginning.

When we left off, we had seen that using just the price/sqft gave us implied an implied valuation around $90K. But since the title of the series says the duplex is worth $97K, clearly there’s something else going on here.

 

What Else Goes Into Valuing A Rental & What to Do Next?

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Moss in a tree at one of our favorite cafes was breathtaking this past weekend.

Step 3 – Consider What Else Goes Into A Property’s Value

Sometimes condition adjustments and square footage don’t tell the full story of what’s going on in the valuation. So step back and think about why someone would buy a duplex in a rental area. For the cash flow, of course. So let’s use that knowledge to our advantage to calculate the valuation another way – looking at the rental income generated by each of our comparables and then applying those averages to our own duplex.

We can use the same handy-dandy spreadsheet that we set up in Step 2, but instead of columns for the size and $/sqft, let’s change those to Gross Monthly Rent and Price/Gross Monthly Rent.

The best part about having MLS data from the realtor is that it all contains the gross rent that the units are currently earning. If we didn’t have that, we’d have to guesstimate based on factors like what street it’s on (some streets are rougher and a little cheaper), how many beds/baths, etc.

Here’s the updated table with the new info. (You can see duplexes in this area are currently priced so that gross rent is about 1.4% of the sale price. Some people will quote a rule of thumb that says gross rent should be more than 2% of the sale price to know you’re getting a good deal, but I tend to think that cuts it a bit too close for PoP comfort.  For our purchase, gross monthly rent was about 3% of the sale price we got.)

When we apply the mean/median of the Price/Rent ratio to the gross monthly rent that we earn at the PoP duplex ($1,500 which you can see on our Income Statement), we get implied valuations of $104K and $106K.

But wait, the PoP rent is much higher than the mean/median… is something funny going on?

Some of this is due to the fact that both of our units are 2/2’s and there is about a $50-$75 price premium in this neighborhood for a second bathroom. If I had shown the columns that showed the number of beds/baths, you can see that most of the comps are 4/2’s. That is, each unit is a 2/1 with two bedrooms and 1 bathroom. So the PoP duplex commands a price premium of $100-$150/month (for both units) there.

While our duplex’s neighborhood is a very “rental-heavy” area overall, there are pockets of owner-occupied single family homes, which tend to be more stable and give a bit of a spill-over affect in stability to the duplexes that are within a block or two. Part of that spillover of stability is that these streets generally rent units for about $50-$75 more than streets further away from these pockets. Our duplex is one block over from a pocket like this so we end up with another price premium of $100-$150 (for both units) per month.

Those two factors account for why the PoP rent is a bit higher than the central tendencies of the rent on our comps.

 

Step 4 – Average All Of The Implied Valuations

Averaging together all 4 of our implied valuations, we get:

( 86.7 + 92.4 + 104.1 + 106.3 ) / 4 = $97.4

Hence, our $97K valuation.

 

Step 5 – Keep An Eye On Pending Deals

Remember how I mentioned (in Part 1) that the realtor gave us a list of five deals that had closed in the last two months, as well as three more that are currently still “pending”? The “pending” sales means that those deals are under contract and are likely to close and be recorded in public record over the next two months.

The pending sales all had list prices towards the high end of the range of adjusted sale prices that our five comps had, so if the sales close anywhere near their list prices, they are likely to bring these averages up even more…. Which would increase our valuation yet again.

Valuing homes is an ever moving target, but we’re more accurate at $97K than we were when we had it recorded at $70K, so we’re pretty happy with the accuracy of that number for now.

 

Have you guys ever tried to do a market comparable analysis for your house? Think you’d be willing to give it a try now that you can see it’s not actually too hard?

 

22 comments to Our $50K Duplex Is Worth $97K – Why? Part 2

  • This is a great set of articles. For us, even though you’ve shown it to be quite easy (relatively!) – we just don’t need to because we have absolutely no plans to rent our place or sell it in the short term, so this type of analysis isn’t as useful.

    Bookmarked for the future – thanks!

    • Too true – these numbers only really matter in the tangible sense if we want to sell – but we like knowing our net worth to a decent degree of accuracy, so we go through and do this a couple times a year. =)

  • Would you consider selling your duplex, given its massive appreciation? Note that I have no idea what tax implications would affect you or anything. I was just curious if selling was on the table, given the large amount of appreciation.
    Anne @ Unique Gifter recently posted..Creative Cash Gift: Dollar Scavenger HuntMy Profile

    • Our “sell” number is a good bit higher than the current market value, partly because of taxes, and partly because we use another valuation method called Discounted Cash Flow (DCF) analysis that helps you to understand the present value of future cash flows. Since we have a good idea of how much cash the duplex will throw off in future years, we can use a DCF to figure out what the “present value” of that future cash is… The DCF is a cool concept, but pretty “mathy”… maybe I’ll do a post on it sometime after giving the blog a break from the hard numbers for a little bit =)

  • Really interesting info, thank you ! And I feel there is a lot of value to have your own bathroom in a rental; it can be very annoying to have to share!
    Gillian @ Money After Graduation recently posted..Guest Post: Financial Advice For College GraduatesMy Profile

    • Yeah, the double bathrooms definitely seem to be a selling point. College kids don’t like to share bathrooms (heck, I don’t like to share a bathroom with Mr PoP!) =)

  • Jonathan

    I think you’ve got some of your statements mixed up a bit regarding the gross rent as a percentage of sale price. Your table has a column called “Adjusted sale price / rent” and all the numbers are in the 7% range. But you refer to your gross rent being 7% of the sale price, and that rules of thumb say it should be more than 2% of the sale price. The number you’re calculating is the price/rent ratio (mentioned later), which is a number you would want to be as low as possible. If the rule of thumb is to have a rent of 2% or more of sale price (which I don’t think it is), then $1,500/$50,000 = 3.0% for your original purchase.

    • Jonathan – thanks for pointing that out. The 2% stuff was added in as an afterthought and I wasn’t thinking that I had calculated the ratios “upside down”. I corrected the table and statement so they follow the usual standard as Gross Monthly Rent/Sale Price – and the numbers look more reasonable taken in terms of the rule. Luckily my formulas were all accurate, so it didn’t change the accuracy of the valuation. =)

      Thanks for the keen eye and keeping us on our toes!

  • Thank you for the detailed info, I will do a valuation of my rental property. I rent the three rooms to three different people and get a higher price than renting the property as a whole, but still would take the whole property’s potential rate into account.
    Pauline recently posted..What Does Financial Independence Mean to You?My Profile

    • Yeah, I think you’re right that you would want to assume a rental rate that is in line with how someone else might rent it out. Where is your rental? This isn’t the one in Paris you just sold, is it? That seemed too tiny for 3 people!

  • I love hearing about your duplex adventures from one eared Billy to the financials. Even though the taxes go up somewhat for you, it must be nice to see the value go up.
    Kim@Eyesonthdollar recently posted..Can Once a Month Cooking Help Your Grocery Budget?My Profile

    • And the taxes actually won’t go up toooo crazily. We have a cap on taxable value increases in Florida. So our starting rate was based on our sale price of $50K, and the most they can raise the taxable value each year is 10%. So the taxes for us are still based on about $60K in taxable value instead of $97K. It’s a nice cushion since you know they won’t double from one year to the next.

      • Jonathan

        In California we have a cap of 2% annually which is great! Of course it does mean that for example someone who bought their house in the 70’s might be paying taxes based on a value of $90k where the property is today worth $900k. Similarly anyone who’s had a rental property for decades will be paying far lower taxes than the recently-sold rental next door, giving him more ability to be flexible on price.

        • The 2% cap does sound great – especially if it applies to investment properties, too! But I guess you guys make up for that generosity by paying state income taxes, which we don’t have in FL. But at least homesteaded properties are capped at the lesser of 3% or CPI, so it’s pretty reasonable.

  • I’m not sure I would want to do a property analysis on my house at the moment. Property prices in Australia are dropping like a rock at the moment :(

    The people who live behind us had an offer of $510,000 about 6 months ago and didn’t take it because they thought they could get more. Last week they told us they sold their house for $490,000 as they really wanted to sell and no one else was interested in buying.
    Glen @ Monster Piggy Bank recently posted..Opportunity to earn money on your blogMy Profile

    • I don’t know a whole lot about property prices in Australia – are you having a bubble burst like we went through in the US? Could be a great time to buy!! =)

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  • Thanks for the article. As I said earlier, I was avoiding this like the plague for my own house. But now I can attempt a good guesstimate as to what my house is worth.
    Justin@thefrugalpath recently posted..The Saver’s Tax Credit 2012My Profile

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