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.
Trouble 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
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.