Real Estate Values Update – First, The Worst

Property valuation is an inexact science. It can look quite exact – especially when Zillow sends an email saying your Zestimate has increased $1,750 to $305,649 in the past 30 days.
screen-shot-2016-09-11-at-8-15-31-pmTrouble is, this is a classic example where precision does NOT equal accuracy.

But fret not!  A lack of total accuracy doesn’t mean that you shouldn’t keep an eye on the value of a property, especially if it’s a property you’re willing to sell or otherwise extract value from (as at least two of our properties are). It just means you should be comfortable with accepting a range of values, and if you need to narrow it down to a single number, use your best judgement about what number in that range to use, knowing full well it’s probably off somewhat.  With assets like these, the value can’t *truly* be known until it is sold.

Our Updates Are Overdue

It’s been more than a year since I updated the values of any of our real estate holdings on our balance sheet. But it’s getting to be about time to do so again since (by our best estimates) the values have started to shift in a non-trivial way.  All three properties are a bit too much to put in one post, so this is going to be spread out over 3 posts.

In elementary playground fashion, I have decided to present them in order as “investment successes” according to the elementary school playground song:

“First, the worst! Second, the best! Third is the golden turd!”*

Luckily, this order also happens to be the order in which we bought the properties, so if you prefer not to think about what a golden turd actually is, you can just think of the order as “chronological”. =)

Something to keep in mind when looking at these: We bought properties during the depths of the foreclosure crisis in one of the worst-hit metro areas in the entire country. As a result we’ve seen some pretty significant market value gains since our purchases and don’t expect these increases to be representative of what we’ll encounter in the future, either here or elsewhere.

Without further ado:

First – The Worst: Our House

Kitty PoP gazing out the front window of our little house.

Kitty PoP gazing out the front window of our little house.  He loves it and so do we!

Don’t get me wrong, I love our little house. From the outside, it’s a fairly plain looking grey rectangular box, partially hidden by an ENORMOUS TREE, but on the inside we’ve managed to make the most of our 1,100 sqft and really do love the space. We love the view out the back patio onto our lake. We love taking the occasional dip in the pool. We love our friendly, well kept, non-HOA neighborhood near the beach. But as a real estate investment, it has been our lowest performing asset. (Jim Collins would NOT be surprised.)

We knew the house needed a fair amount of work when we bought it from a fine gentleman** named Freddie Mac, but looking at the numbers in Mint, it’s also kindof amazing how much money we have put into it over the last seven years.  Here’s how those numbers have shaken out.

  • Purchase Price: $131K
  • Current Value: $269K (Comps put it closer to $279K, but given that we’re still not done with our renovation, a discount is still in order)
  • Increase in Value: $138K, up 105% over the last 7 years (a CAGR of 10.8%)

That’s not too shabby, but the S&P 500 has returned ~125% over the same period (according to DQYDJ’s spiffy dividend reinvestment calculator).  Plus there’s the fact that we’ve also had non-trivial carrying costs over the last seven years of ownership, to the tune of:

$106K = $29K (interest) + $12K (property taxes) + $65K (maintenance and improvements)

More than half of the $65K is our recent major renovations that are mostly complete, as well as the solar panels that we got installed in 2015 to provide our house with solar power. Those were by no means mandatory upgrades, but still… non-trivial to say the least. Another big chunk (~$18K) was spent in the first year we moved in on major neglected maintenance items by the previous owner like the rotting roof, the rotting siding, the A/C, etc.

One could argue that we had to live *somewhere* and we weren’t paying rent anywhere else for these last seven years. So that imputed rent is a benefit for us. And it is… but that value is a little squishier. The imputed rent for our house would probably have averaged somewhere in the $1,250/mo range over the last seven years ($105K)… probably more, even if we’re to believe what some houses in our neighborhood are asking for rent these days.

But I’m not sure we would have rented such an expensive place based on our previous very frugal leasing history. (Before this, the most expensive apartment either of us had leased was $775/mo.) Who knows, though? I’ve really enjoyed living in a nice, very safe neighborhood near the beach for the last seven years so maybe we would have upped our previous rent cap at some point. At best, I’d argue that for us the imputed rent mostly just cancels out the expenses associated with interest, taxes, and maintenance and improvements from an investment perspective.

All in all, our house hasn’t been a bad investment (which is pretty good for being “first the worst”), but we’re not going to assume 10%+ YOY price increases are going to continue indefinitely.


How has the value of your house changed since you bought it? Do you consider it to be an investment, a place to live, or somewhere in between?


* Mr PoP looked at me like I was crazy when I said this… what version of the “First the worst” rhyme did you have on your playground?
** Corporations are people, at least according to the Supreme Court and Mitt Romney.

27 comments to Real Estate Values Update – First, The Worst

  • Our house has been a terrible investment PoPs. As in, it’s worth almost exactly what I bought it for 11 years ago. The joys of Florida’s boom/bust economy. That being said…. I learned a valuable lesson. Unfortunately, Mrs. IS wasn’t here the whole time… that particular lesson is not particularly well formed. There were benefits to living here however. I was able to car for my dying mother and the house was very inexpensive to live in. Being a believer that one of the keys to happiness is always living below my means…. the purchase price was less than twice my annual income and would have cash flowed as a rental the entire time. Those were important factors to me, because they gave me flexibility and options. If I had to learn a lesson on a dumb house purchase, I’m glad I didn’t pay $500k :)

    That’s a long way of getting around to how I view a house. Essentially, I view our primary residence as a place to live. I struggle to call it an investment because it costs us money….rather than cashflowing.

    Income Surfer recently posted..Ask The Readers-Is Tax Prep Assistance Worth The Money?My Profile

    • What a difference 4 years made in buying real estate in Florida, huh? Sounds like you are one of the many (many many!) Floridians that bought right around the high point and are just barely seeing values approach their purchase price from a decade or more ago. If we had more money when we first moved to FL in 2006, we might be right there, too. =/

      Despite the gains that we’ve seen in the value of our primary residence, we really don’t view it as an investment. An asset, yes… but not really an investment the same way we see our other properties.

  • According to our most recent appraisal, after taking imputed rent, renovations, and carrying costs into account, our house has seen a ~9-10% return in value since last year when we bought it. I would be stunned if that actually continued.

    • That’s a solid return for a year, but I’m with you that I wouldn’t expect those kinds of returns to continue forever into the future. It’s just not sustainable long term.

  • First is the worst, second is the best, third is the one with (something that rhymes with best that I forget). We definitely didn’t say turd. Maybe golden chest or treasure chest?

    I don’t think of a primary home as an investment. It’s okay to cost money. It’s a purchase for you and your standard of living. I’m still pretty impressed your house went up in value so much. Ideally, in a stable market, houses shouldn’t skyrocket or divebomb in value, yes? Maybe slowly climb to match inflation.
    Leah recently posted..Solidarity in SolitudeMy Profile

    • haha. I googled the rhyme and it looks like “treasure chest” was another option for the “third”. As well as “hairy chest”. TBH, I’d rather a treasure chest than a hairy chest. Or a golden turd. =P

      You’re totally right that a stable market wouldn’t really have these kinds of real estate gains. Mr PoP and I were lucky enough to profit off major real estate instability in our area. My gut says the area is back to stability, but who knows if it’s on its way to overvalued again.

  • cory

    Several variations here in MN. hairy chest, hairy breast, saggy breast. But it has to rhyme with best like Leah said.

  • My place has increased in value by about 10% each year since I bought it, which has blown my mind. I remember a friend questioning the annual rent increases that I used in my planning figures and they’ve completely come true. I didn’t buy it as an investment – I bought it because it cost the same amount monthly to buy a two bedroom condo versus to rent a one bedroom apartment. Now I question this decision occasionally because I’m living in a piece of real estate that is worth over half a million dollars and would we really pay the market rent for this area? (Market rent would be about 2x what I currently pay.) This is why part of our mantra of figuring out how to live together has been “Is X cheaper than moving? If so, let’s do that.”
    Leigh recently posted..Being financially stable doesn’t make you betterMy Profile

    • RE values out there must be absolutely insane, since IIRC, you didn’t have the same huge drop that we had in FL. Our purchases were all made at ~60-90% off previous market values from a few years before, so seeing a boomerang rebound hasn’t been *too* surprising.

      And to some extent, we’re in the same boat questioning whether we would pay market rent to live in our neighborhood right now, since market rent is now probably in the neighborhood of 2-2.5x the PITI of our mortgage. We just saw a place around the corner ask – and i assume get since it’s no longer listed for rent – $3K/mo in rent, which seems insane. I just can’t see us feeling like it’d be worth renting a place that expensive, but by living here we kindof are. That said, after doing all this work to our house and really making it our own, I also never want to sell it!

      • Paying less than renting wouldn’t make me want to move. It would make me feel like I lucked out! It would be ideal to have a place that was cheaper to lie in than renting.

        Of course, giving my work/housing situation, that’s about the cheapest right now. We do sometimes debate getting other jobs, as I am almost positive that we’d get paid more elsewhere. But would it make up for free housing? There’s also so many other quality of life benefits, and we do enjoy our jobs, so here we stay. I just keep saving my pennies (albeit at a slower rate than you).

      • This: “after doing all this work to our house and really making it our own, I also never want to sell it!”
        (Not that we’ve done much work, but we have done a ton of little things.)
        Leigh recently posted..Being financially stable doesn’t make you betterMy Profile

  • First is the worst, second is the best, third is the one with the hairy chest! Oh, and zero was the hero. Funny how that silly rhyme sticks with me but I can’t remember what I did at work on Friday!
    Gwen @ Fiery Millennials recently posted..Rant N Rave: Conforming and Credit CardsMy Profile

  • had not heard that rhyme at all

    We bought our house for $265K 15 years ago and now it is worth probably $330K. If we had to do it over again, I think we’d go for something smaller (even in the same neighborhood) because the costs to cool and water and mow and insure (and occasionally clean) are pretty high. But not high enough to make up for the hassle of moving.

    Our property taxes are pretty high as well– I’d be perfectly happy if the value didn’t go up 10% every year because I don’t like our property taxes going up 10% every year. I do not think of the house as an investment at all.
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    • Mr PoP had never heard it, either! But the rhyme was definitely all the rage in my elementary school, I swear. =)

      Yeah, that stinks about your property taxes. Luckily property tax appraisal increases in FL are capped at 3% or inflation for homesteaded properties, plus we have a $50K homestead exemption. All that means that the taxable value of our house is ~$86K, even though the market value is easily 3x that amount, so our taxes haven’t screamed up the past seven years the way the value has.

  • sfmitch

    My home has appreciated 66% in the 5 years that I’ve owned it. I got lucky and bought a foreclosure property at the bottom of the market.

  • We bought the cheapest house we could find that we loved, which was $130k in 2009. To me, it’s not an investment. A house is a place to live with a loan attached to it. The goal is to make the loan payments as small as possible and pay it off as soon as possible. We’re down to $65k or so now.

    We bought in an up-and-coming urban area so we could hopefully have fun watching the turn-around happen. There’s a lot of investment going on now (we were a bit early) and that urban renaissance is finally getting going. This is a stable area and I’d expect it to match inflation, but I have no idea what the house is worth now, nor do I really care.
    Norm recently posted..Cheapskate Analysis: Should I Replace All My Light Bulbs With LEDs?My Profile

    • If it were worth 5x what you paid for it, would you sell and move elsewhere? If the answer is yes, at some level you do care and do track it… at least inasmuch as you know it probably hasn’t jumped 400% since you moved in, right?

      I’m definitely not saying that we view our primary residence as an investment vehicle, we don’t – if we did, we spent too much money on improving it! But we do check in on the numbers every once and a while to make sure they don’t change what we want to do with the property.

  • dandarc

    Friggin houses. The one you live in for sure isn’t a financial investment – if you manage to gain in excess of say an S&P 500 fund net of all the costs, you’ve gotten incredibly lucky.

    Maybe I’m just bitter – 2016 will now forever be known as the year the neighbors called the cops on our air conditioner. Until this morning, it was known as the year we replaced the sewer.

    • Why on earth did your neighbors call the cops on your A/C? Freaking ridiculous! And replacing the sewer line? Ugh! I can understand why you’re a bit down on home ownership today. =(

      I have no argument that we’ve been incredibly lucky with our real estate purchases, even though this one technically underperformed the S&P a bit. Though “lucky” is still a strange way for us to think about living in the epicenter of the foreclosure crisis. Folks around here didn’t really feel lucky back then and it probably stalled Mr PoP’s career and earning potential for a couple of years.

  • I’m fascinated by/and love real estate. It is popular to say that renting is the way to go. For some areas and circumstance, it may be a wise idea. I believe that buying a home can be a smart move too.

    One circumstance is in a rapidly appreciating area. Our neighbor pays $1350 to rent 800 square feet while our 1400 square foot home (since expanded to 1850) costs $1,100 per month (mortgage, taxes and insurance). I’m sure glad we didn’t decide to rent! Of course, identifying economic trends ain’t easy or everyone would be doing it.

    If you plan to do some of your own work, forced equity can be a great way to pump up that value too. We bought ours for $175,000, put between $75,000 and $100,000 into it, and I’m confident we could get north of $400,000. Again some of that is due to Boulder County going bonkers, but some of it is also due to my fancy travertine tiles and hickory floors.

    I look forward to expanding our real estate portfolio, maybe even in the Sunshine State!

  • Our home residence also classifies as our rental investment, purchased for ~200k, put in ~50k and just ball parking on the additional money put in but ~10k seems reasonable with appliances, furnace, and a few fix ups along the way. Beginning of 2016 realtor comp was ~385k and we just came across our 4 year anniversary. So 4 year estimated return of ~125K and that does not include any rental income, tax breaks, etc and comes to 48% increase.

    I’ve certainly had some thoughts about a potential sale and of course a move to FL and buying a Yellow BMW named Sunshine…..wait only some of that is true.
    Steven recently posted..Fantasy Football and Your MoneyMy Profile

  • Boy, that’s a loaded question. Everyone says that real estate in Denver is so hot… but our house has been on the market for probably six weeks with two price reductions. We currently have it listed for $40K more than we paid for it in March 2015.

    I bought it as a place to live, but now that Mr. FP and I are divorcing, neither of us can afford it. So we are hoping it will turn out to have been an investment. We put down very little; it would be nice to get our down payment back plus a little fresh start money. Fingers crossed.

    Rents are also pretty insane here. I want to own a place again when I can, not so much for the investment as just to have a place that is really mine, where I can have a garden and fix things up how I want them.
    Frugal Paragon recently posted..First Month of Solo SpendingMy Profile

  • I agree that the valuation of a house isn’t exactly accurate. I worked in valuation last summer and it was so obscure. If a private business held a lot of real estate assets, and that’s all they did, the valuation of the business would be the aggregate sum of all the real estate all discounted for lack of marketability. This is to pay less taxes but come on! That’s almost fake valuation, lowering the value as much as you can for tax purposes but increasing the value as much as you can for selling purposes.
    Finance Solver recently posted..Make the Most of Time and Achieve MoreMy Profile

  • “Third is the NERD with the HAIRY CHEST.” is the way I always heard it.

    I like your rule of thumb that holding costs are roughly equal to rental costs. It’s probably not too far off most of the time.

    Homes in our area are flat/down in value since we bought our home in 2012.
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