Real Estate Values Update – Second, The Best!

As I mentioned in the first post in this little mini-series, it’s been more than a year since I updated the values of any of our real estate holdings and they have shifted non-trivially since then.  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! And 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”. =)

Catch up on Part 1 – First, The Worst – Our Primary Residence here.

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.

But for now, we’re on to…

Second, The Best – Our Duplex

The front of one of the sides of the duplex. What a looker, huh?

The front of one of the sides of the duplex. What a looker, huh?

We bought our duplex in late 2010 for $50K. (Feel free to read our series on that purchase starting here.) It’s got two units, each of which has 2 bedrooms and 2 bathrooms in just shy of 1,000 sqft of living space. Recently, similar properties have sold for anywhere from $165K – $200K. Units that are in good repair, have tenants in place, and have two bathrooms per unit tend to be on the higher end of the range.

Mr PoP keeps our units in pretty good repair, and we’ve gone several consecutive years with virtually no vacancies between tenants. Actually on our last turnover we had to ask our new tenants to wait a couple of days to move in to allow us some time to get a little work done before they moved in. That’s been our only real vacancy since 2013. And while the roof on our property is new (installed last year) and the AC units and other major appliances have mostly been replaced in the last 5 years, the vinyl siding isn’t the best looking (see above) and if we really wanted to sell it we’d probably want to spend a little money and time on landscaping to increase the curb appeal.

A duplex down the street from ours is structurally similar, but the condition is more similar to where ours was in 2010 when we first bought it. Kitchen cabinets are missing doors and drawers, no appliances to speak of, filthy and damaged sheet vinyl covers the kitchen and bathrooms, and the roof is looking like it’s nearing the end of its life. (Perhaps not coincidentally, it is a foreclosure like ours was.) They’re asking ~$177K for empty units that need a fair amount of work. While I’m not convinced Fannie Mae will get the full $177K they are asking on this place, it did go pending shortly after being listed, so they’re probably going to get quite close to that.  With that in mind, and sales of other units like ours that were in the $180-$200K range recently nearby leads me to this new estimate:

  • Purchase Price: $50K
  • Best Guess Current Value: $175K
  • Change From Purchase Price: $125K, up 250%, a CAGR of 25% in the 5 years, 7 months we’ve owned this place.

Over the same period, the dividend reinvested S&P500 returns have been about 85%, a CAGR of ~14.4%.
So why don’t we sell it and lock those gains in? Well…

In addition to some crazy market value appreciation that we’ve seen since purchasing ~5.5 years ago, we’ve also gotten some solid cash flow off the property in the meantime, specifically over $25K in EBTDA (earnings before income taxes, depreciation, and amortization – basically pre-tax cash flow) since then. In that time, we’ve also cash-flowed major improvements to the property, including replacing all the appliances, A/C units, and the roof. So the average cash flow for 2011 – 2015 represents about half of what we would expect in terms of annual pre-tax cash flow going forward.

To us, the ~$11K in yearly cash flow that we’ll likely see keeping this property is what makes it worth holding on to, rather than cashing out on that appreciation. It would take investments of about $275 – $367K to match that using a “safe withdrawal rate” of 3-4%.

Yes, maintaining this property does require some time on our part since we manage it ourselves, well mostly Mr PoP. So let’s say that part of this $11K is paying ourselves for doing the work. In the past, we’ve estimated that it’s roughly 60 (wo)man-hours per year to keep the place up. At a rate of $50/hour (our approximate average gross from our day jobs), that’s 60*$50 = $3K.

That still leaves $8K that we’re earning as an investment return and we’d need $200K – $266K to replace that at a “safe withdrawal rate”. We’re getting somewhere near the realm of possibility in terms of selling it, but we’re not quite there yet in our view.

 

Would you sell and lock in these gains, or keep the duplex as a cash flowing investment property?  

8 comments to Real Estate Values Update – Second, The Best!

  • sfmitch

    Definitely hold on to the property. Have a diversified income stream is a good idea. You could always hire a property manager – less income but no work.

    • We are pretty sure there’s some long term travel in our future, so if we do go ahead with that, we’ll have to get a property manager at a minimum for that time. I just always wonder what else in costs we’ll end up eating if they hire out more repairs, etc. =/

  • Nice write up. If I were in your shoes I’d be holding still. Then again you are getting close to the break point. Might be worth listing it to see if anyone is interested. Wouldn’t cost much to find out…

    • I think we’re still a ways to go before we are seriously looking at selling it, but if we get closer, we’ll have to see where we are emotionally with it then!

  • Wouldn’t you have to pay taxes on the sale? That should be counted in, yes? And like the first comment says, I agree that it’s good to have diverse income streams rather than popping everything in the market. It doesn’t seem like maintaining the duplex is arduous or something Mr. Pop strenuously dislikes.

    • Yes, we would have to pay taxes on the sale, unless for some reason we were rolling it into another real estate investment and could get away with a 1031 exchange. For tax purposes, it’d be nicer to sell it in a year when we don’t really have any (or much) earned income since our tax rate on the sale would be significantly less then. But that’s tough to count on.

  • mrplantingourpennies

    Mrs. PoP-I have an additional question!

    If we can buy duplexes for 177k, but think they are worth 275-367k in the market, why aren’t we buying more duplexes instead of continuing to invest in the market?

    • Itching for more lawns to mow, eh? =)

      We’ve talked about it, but I think it comes down to not wanting to put too many eggs in that basket, and not wanting to over commit our time to managing any more properties. When it came to buy our investment lot, we could have purchased a duplex for virtually the same price, but neither of us had the energy it would have taken to renovate it and get it rented at the time. =/