∙ Listing: 191 Chilton Avenue (1/1) 443 sqft – $479,000 [MLS] [Pacific Union]
∙ Listing: 59 Winfield (0/1) 437 sqft – $435,000 [MLS]
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∙ Listing: 191 Chilton Avenue (1/1) 443 sqft – $479,000 [MLS] [Pacific Union]
∙ Listing: 59 Winfield (0/1) 437 sqft – $435,000 [MLS]
$1000/sq ft for a tiny shack in Bernal. Time to buy!
That’s the land value, dontcha know?
Wow.. speechless. Can’t wait to see the spin on these.
How are these square footages measured?? I’ve seen 400-500 sqft studios and even taking into account the wide angle lens, these units (especially the one on Chilton) look to be at least twice their measurements. Or are these “model” homes made by Tamiya at 1:2 scale?
Over $1k per square foot? Hey, that’s Pac Heights pricing!!!!!
Both are RH-1, so no tear-down to build a nice duplex. And the Winfield place is on a lot less than 1800 sq ft, so not a lot of room to build out the existing structure.
Not exactly places for a “family”, although perhaps interesting for a single who wasn’t into a studio SOMA condo?
These are priced at dirt value. Perhaps last year’s dirt value but they are both in fairly good locations. It is odd however that neither listing lists the lot size. Its not like it is hard to compute how large these lots are since they’re rectangular. Both look to be about 25×75′
191 Chilton will be an interesting data point when it sells. Last sale appears to be for $189K in 1996. So a 13-year hold.
Let’s assume annual maintenance expense of 4% of the price, increasing at 2% inflation per year. If it sells at asking, the seller nets $455K assuming 6% commission. The total rate of return in this case will be 4.2% over a 13-year hold.
During the same time period, risk-free CDs have averaged about a 4.4% yield. Roughly equivalent.
I know this isn’t “primo SF,” and I’m not insinuating that they should have rented for 13 years and kept their money in CDs. Just challenging the notion that real estate is the best investment if you hold it long enough. A casual observer might say it nearly tripled in value over 13 years. And so it did. But it still wasn’t a great investment. It basically matched CDs.
I actually talked to the owner of the Winfield one a few months back when I was looking at renting the place next door which he also owns.
I never visited the place, but he was discussing it as an option vs. renting next door – and thought he’d price it at ~$560k or so.
It came on the market at $560k last year, then 540…then 500…. then $490… etc etc
Really curious to see where / if it goes.
The total rate of return in this case will be 4.2% over a 13-year hold.
you counting the cashed rent checks in that calculation?
^ also, assume they put 20% down in cash, not $189k in cash for the place. so try multiplying that 4.2% ROR by a factor of 5. average of 21% cash on cash return, and consistently over 13 years (not just for 1 or 2 lucky years in a bull stock market.) NOW THAT’S WHAT I’M TALKING ABOUT!
onsistently over 13 years (not just for 1 or 2 lucky years in a bull stock market.)
What is your basis for that statement? Isn’t it precisely a few lucky years rather than anything consistent? I also think the average stock investor is more sophisticated than the average mortgagee; home equity gains (especially recently, of course) tend to be especially luck-driven. But if you want to posit a high degree of wisdom and financial sophistication to someone who bought a shack in Glen Park in the 90s, be my guest.
Also (pretty important), this is just a listing price. It’s a 437 sq ft studio in Glen Park. $435k seems absurd to me. Really, buying it at all seems absurd to me.
Let’s assume annual maintenance expense of 4% of the price,
Isn’t that really high? I spend about 1% of purchase price per year on maintenance. I thought that was typical.
shza- the better word would have been “annualized.” but so what? how many “sophisticated” stock investors have been able to achieve 21% roi over a 13 year period? so yeah, the average SF home buyer in ’93 was pretty f*ckin’ brilliant. and that return was just okay- i turned a $16k initial investment into ~ $500k profit (brought in 94- sold in 05) for an annualized ROI of what, %285%. last time i checked my 401k stock portfolio hasen’t done nearly as well.
and yes, 1-2% for home maint. is plenty for a decent condition home (not 4%.)
$435k seems absurd to me
My custom evaluation spreadsheet for my situation comes out with a $2000/mo carrying cost, the magic of 5% fixed. 8% rates would knock the price down to $300,000 for that same $2000/mo carrying cost.
The back yard may be small, but it’s big enough for a medium-sized dog.
On zillow I see this place has a $10,000 assessed value for the land. Henry George weeps.
Could any of these dumps be “renovated” into a 2000 sq. ft. 3 BR / 2BA / 2 Parking with a nice landscaped yard? (And could the construction cost + land cost + permitting + hold time pencil out in any likely scenario?)
Jimmy, 2000 feet you could do that. RH1 is 75% lot coverage, plus on Windfield both neighbors are much deeper. So 25X70X.75 is 1312, do that on 2 stories less the garage (250sq. ft.) and lightwells and a front set back. 2000ish. Pencilling out is another story you’ll sock $800K into the permits/arch./build; and as we all know, owning never pencils out against renting and buying CD’s anyway.
So we’re talking $400 psf build cost?
So this is the question I’ve always wanted to know the answer to (quantitatively). If the average new home price in the USA is around $200k (for say 1800 sq. ft. house), how is it that the same structure (forget about the land value for a minute) costs 400% more in the county of San Francisco?
Are the Guatemalan framing crew paid $50/hr instead of $8/hr? Does the permit cost $300k? Are 2x4s $25 each in SF? What exactly am I missing?
OR, is it, as I suspect, that the contractor’s profit on construction of a 2000 sq. ft. house is approximately $400k.
$800 is my number for all the permitting etc., I used $250/ft by 2500 for the build. You build the garage and other non legal feet, but you don’t count it in the house. But to get at your questions here are some things;
SFPUC charge to upgrade this footage: $2000
School fee: $6000
And on and on; Permits are way more money.
New construction and developments which drive a lot of the county is way cheaper to build than remodel. You remove demo entirely often and it’s cheaper even when you do demo stand alone.
Foundations, framing, shear, etc. cost a lot here.
A lot of the country buys a house out of a catalog, or the developer does and removes the architectural and engineering costs.
Cast and copper plubming vs. PVC
Carpenters; If I don’t pay my carpenters a minimum of $26/hr. I have to match workers comp at 60%. So guys start at $26, the betters guys expect more (naturally) and the lead carps, foreman, supervisers, go up and up. On to of that you pay taxes to the city on them, pay for a few mill in liability (less I assume elsewhere), pay for time off, health care if your over 20 guys.
The lumber yards here pay SF rent and taxes so yes 2×4’s are more.
The quality expectation is higher
The painters, sheetrockers, electricians, etc. all live in the bay and pay rent/mortgage accordingly.
Construction office and storage pay for space in the city.
The list goes on and on and it adds up.
My custom evaluation spreadsheet for my situation comes out with a $2000/mo carrying cost, the magic of 5% fixed. 8% rates would knock the price down to $300,000 for that same $2000/mo carrying cost.
This is precisely why it seems absurd to me to buy this zero bedroom/studio shack. There are decent 2 BR top floor rental flats to be had for that same $2k/mo in Glen Park. Sure, having no downstairs neighbors is worth some premium, but not (to me anyway) a premium of giving up 700 square feet, 2 bedrooms, a garage, and a formal dining room. Not to mention throwing your down payment into a still-falling asset.
“so try multiplying that 4.2% ROR by a factor of 5”
Nice try, but too simplistic. If we assume financing instead of a cash purchase (as I did above), we also need to factor in the money they spent on P&I, net of the tax benefit. Easy enough to do at a high level.
First, let’s assume 20% down, with a loan at 7%, which is a decent long-term average for mortgages. Let’s also assume maintenance costs are 2.5% of the price, not 4%.
Outflows are as follows:
$37,800 for down payment.
$4,725 in maintenance, growing at 2% each year thereafter.
$12,200 per year in P&I, reduced to $9,100 per year for tax benefits (rough math). I’m ignoring property taxes to make it easier.
Upon sale, they net the $479K in proceeds, less 6% commission, less loan payoff of $128K.
Drum roll please….IRR = 5.0%. Did this in a hurry, so anyone feel free to check my math.
Honestly, gang…does anyone really believe residential real estate can yield double-digit cash on cash returns? Maybe if you ignore a large portion of your costs, I guess.
There are decent 2 BR top floor rental flats to be had for that same $2k/mo in Glen Park
Yeah, but you can’t own your average non-toy dog with that. Not really.
And of course this $2000/mo carrying cost will go down over time. By 2020 my monthly carrying cost will be closer to $1000.
Will rents still be $2000/mo in 2020? Maybe a lot higher, maybe a lot lower. Nobody knows. I sure don’t know if we’re looking at Japan-style deflation or Zimbabwe, or just mild 1970s stagflation.
Yeah, but you can’t own your average non-toy dog with that. Not really.
Wow, that’s an expensive dog.
does anyone really believe residential real estate can yield double-digit cash on cash returns?
you, too, are forgetting 13 years of rent checks.
$189,000 purchase price in year 1, $37,800 down.
Opportunity cost of $30,000 for the down payment (lost 5% compounding interest over 13 years)
~$70,000 in maintenance costs
~$80,000 in interest payments (assuming non-amortizing loan, 4% effective after-tax rate)
Property tax etc. of ~$30,000.
Receive $450,000 from COE, netting $260,000 over purchase price.
From this $260,000 deduct $205,000 in the above costs, and add $125K (~$1000/mo) in after-tax rental income for a net capital gain of $180,000 on the $37,800 put down, for cash-on-cash gain of ~15.5% pa.
Legacy Dude wrote:
> $4,725 per year in maintenance, growing at 2%
> each year thereafter.
It is obvious that Legacy Dude has never owned rental property (and probably never even owned a home) since most property owners with rental homes spend less than $500 per year on “maintenance”…
> Honestly, gang…does anyone really believe residential
> real estate can yield double-digit cash on cash returns?
> Maybe if you ignore a large portion of your costs, I guess.
Except for a few people that bought at bubble tops and were forced to sell soon after just about everyone that has ever bought, held and sold rental property in the Bay Area has received double digit cash on cash returns…
^ re: last paragraph: exactomumdo.
Of course the real question is if the next 7,10, 15 years (pick one) will do the same. As for bubble prices in SF, the next 6-18 months will be telling for apartment bldgs, as the lembis are forced (or their banks) to unwind and but property back on the market. 2-4’s will probably also mirror what the larger bldgs do, as they also sold for a premium (but 2’s may mirror the condo/sfh market more due to tangible condo conversion). SF’s commercial market will also be interesting to watch, as it tends to have less value distortions than residential and follows income streams more faithfully.
But I don’t expect huge discounting. I have talked to numerous SF investors and they are in it for the long haul. Still believe in the intrinsic values city properties have, and are interested in capitalizing on the discounts at the right time. Bottom line: many SF investors are quite wealthy from past acquisitions and have collevtively formed a pretty damn dedicated ‘perma-bubble’ (TM- me like that phrase!) Hence SF RE will only drop so far in value before an SF player will step in. These ain’t multiunits in Dallas (easy to find, almost always cashflow, rarely appreciate). Next year or two I myself may be tempted to make anoter acquisition.
^These ain’t multiunits in Dallas (easy to find, almost always cashflow, rarely appreciate).
You got that right. SF units will now be easy to find, never cashflow as rents decline due to fewer and fewer jobs, and will depreciate.
Thanks for setting me straight, gang. Here’s what I’ve recently learned on SocketSite:
– Homes never need new rooves, foundations, or bathroom/kitchen remodels. If you buy a 100-year old property like Chilton here, expect to spend about $1.36 a day on maintenance. About the cost of a daily snack from the office vending machine.
– Debt is perpetual and never needs to be repaid or amortized. And if you’re a 45 year old hipster calculating returns, your cost of debt is apparently 0.00%.
“you, too, are forgetting 13 years of rent checks.”
Actually, I wasn’t. But it’s irrelevant for the purposes of this seller’s IRR. Please read my earlier comments again: I’m not talking about buy vs. rent here, nor am I talking about pretending to run your own REIT or slumlording or this house vs. a portfolio of whatever. I’m simply talking about this particular seller’s IRR for owning this home for 13 years.
Now, if I make some UNreasonable assumptions – like only $500 annual maintenance expense each year, 6% interest on the loan over its life, and still ignoring property taxes – then I get 10.3% IRR over the period. But mortgage rates in July of 1996 were around 8.4%, and even a cheap white stove can cost $100. Property taxes, as Troy points out, were probably $25 to $30K over the period.
This is a basic excel exercise that anybody can do, so somebody else please calculate this seller’s true cash-on-cash return for living in this place for 13 years. I just don’t see how it was over 10%, as many of you suggest.
Ignoring rent makes no economic sense. Imputed rent is the primary advantage for owning your own residence. The great thing about imputed rent is that it is TAX-FREE. It is also misleading to include opportunity cost on the down payment and financing costs. So both Legacy Due and Troy are mistaken, IMO. I’ll use Troy’s estimates, not that I’m necessarily agreeing with them:
Buy for $189,000.
Maintenance and property tax is $100,000.
Imputed rent is $156,000. (~$1000/mo).
Net sale proceeds is $450,000.
That is, the owner started with $189,000 and ended up with $450,000 + $156,000 – $100,000 or $506,000 after 13 years. So his annualized return was 7.9%/year. This somewhat underestimates the true IRR, since the costs and imputed rent did not occur all at once at the time of purchsse, but rather were spaced over the 13 years, so the true IRR is likely somewhere between 8% and 9%.
The return cited is after-tax, due to the capital gains exemption for real-estate and the tax free nature of imputed rent. If owner is in the 33% combined state-federal tax bracket, then that 7.9% after tax return is equivalent to 11.8% pre-tax.
The return can be increased using leverage, but that is true for all investments. Of course, real-estate does have some special tax and cost advantages when it comes to leverage.
Personally, I think the shack was pricey even at $189,000 back in 1996. But if people were willing to pay that much back then (during a slump in RE values) then $479,000 is probably not unreasonable now.
Maybe it is a life style thing for whoever buys it. And keeps it like it is…they like to garden, they like small, they like a funky type of San Francisco housing that is going away…plus you can walk to Canyon Market and exercise in Glen Park Canyon…in other words the numbers don’t matter.
so somebody else please calculate this seller’s true cash-on-cash return for living in this place for 13 years
My numbers *were* from Excel, and included rather high maintenance costs (ie. new roof every year) and a rather low average rent of $1000. For owner-occupiers, that’s the value of the housing good — money saved instead of renting an equivalent property.
The actual cash return could easily have been twice my estimate.
But if people were willing to pay that much back then (during a slump in RE values) then $479,000 is probably not unreasonable now.
Rents determine the lower bound of prices, and in a perfect economic world would be the NPV of all future rents less costs.
Legacy Dude wrote:
> Thanks for setting me straight, gang.
> Here’s what I’ve recently learned on SocketSite:
You will learn a lot if you keep reading this site…
> Homes never need new rooves, foundations, or bathroom/
> kitchen remodels. If you buy a 100-year old property like
> Chilton here, expect to spend about $1.36 a day on maintenance.
> About the cost of a daily snack from the office vending machine.
I don’t know what a ”roove” is, but a pitched roof will typically last about 30-40 years and when the work is done it is a “capital” expense not a “maintenance” expense. I’m willing to bet that over 99% of the homes in the Bay Area have never needed any foundation work (and will not need any foundation work before I die). Bathroom and kitchen remodels are not something that you “need” to do (and most landlords don’t as anyone who has looked for an apartment or rental home can tell you). If a remodel is done like a roof it is a treated as capital expense. Most landlords don’t do kitchen and bath remodels because they are lazy. I have been putting in new kitchens and bathrooms in all my Sacramento rental units (IKEA cabinets, Home Depot tile and low end GE appliances) and the increased rent for the units with new kitchens and bathrooms typically pays for the entire remodel in under two years.
> This is a basic excel exercise that anybody can do,
> so somebody else please calculate this seller’s true
> cash-on-cash return for living in this place for 13
> years. I just don’t see how it was over 10%, as many
> of you suggest.
I thought that we were looking at this as an investment properly, not an owner user property… If you want to get an accurate cash on cash return you will need an accurate equivalent rent number for each month of the hold period (and it will be fair to assume that the owner did a re-fi every time rates dropped by 100bps)…
Tipster- you never answered my question in a previous post wrt asset protection/liability Insur: do you own investment RE?
I don’t understand all this talk about historical cash on cash returns in SF real estate, not to mention the various butcherings of basic finance principles by some posters (no need to really get into the specifics).
What is the conclusion? Sure, when you buy an asset at the beginning of a bubble, and you use leverage, you can get great cash on cash returns. If you had run the cash on cash historical returns on US stocks in 2000, you would have concluded that they were the true path to easy riches (many did conclude just that). And you didn’teven need to use leverage to generate compound double digit returns over 5, 10, 15, 20 or even 25 year periods!!
People thinking they are going to get double digit cash on cash returns on SF real estate going forward are as crazy as those poor fools who bet on the internet being a “game changer” for stocks. SF and residential real estate generally have been in a secular bull market (and final blowoff bubble) for 25-30 years, and are just beginning their turn in the past few. Good luck, folks!
^ What ru talking about? The Dow has done very poorly 2000-2009. Negative returns over 10 years. The 90’s were a double digit success story. And Internet stocks WERE a game changer. Lots of people profited nicely from amazon, google, etc.
Your opinion that SF RE is going to seriously deflate and stay low is strictly your opinion. Just as saying Internet stocks are bogus, you’re using a very wide brush on real estate. Sure there was a bubble, but lots of opportunities spring up from general bubbles.
We all have opinions, but sometimes you display a certain cockiness/certainty to yours which would be well served by a re-reading of nassim talenbs ‘fooled by randomness.’
^ taleb’s
LOL, 45YOH. Read my post more carefully, and you will see I said that if you had run the historical stock numbers in 2000 you would have concluded that stocks were the place to be to get rich. Not today. Definitely not!
I bet Taleb would see eye to eye with me on my general point about real estate that most people simply look at historical returns and project them forward, making no allowance or risk adjustment for possible forecast error. It is generally the bulls who display “cockiness/arrogance” about their forecasts. This can be inferred partially from the fact that SFR buyers (who are bullish – no one buys an asset to lose money) are generally paying 2 to 3 times the rental equivalent costs in most desirable parts of the Bay Area. They are in effect paying to take a risk, one which I think is generally poorly understood, and Wall Street loves them for it. At least I think that’s what Taleb would say – I know a few people who know him well so maybe I’ll ask 😉
You always want to relate these discussions to what you do, but they are not really applicable, at least not fully. By rehabbing more marginal properties, renting them out, sonetimes selling one, and generally operating a real estate business, you are doing something very different from most people with respect to their real estate assets. It’s sort of the way I relate to stock and financial markets – it’s a business for me, and the 2000s have been an almost unalloyed joy in the markets.
If you and I are smart about our respective businesses, we should be able to do at least ok in most environments. However, I believe that the typical real estate buyer in SF and the Bay Area has done very very poorly over the past 3-5 years (depending on specific situation/nabe, etc.). I think that dynamic is going to continue for years, until prices and/or income/productivity adjust to reflect an uncertain future asset path evolution. We’re not there yet, not by a long shot, so to be a bull is actually the arrogant stance because one is in effect saying that he knows the future – that it is going to be like the past. Very “un-Taleb” like imo, and I’ve read just about everything he’s written.
But in the end, perhaps that’s what buyers are really looking for. Recently, I came across a quote from legendary trader Ed Seykota that I hadn’t read since the very early 90s in Schwager’s Market Wizards (back when I was looking to get into the hedge fund world – almost a decade before it became “fashionable” I’d add):
“Everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.”
Again, good luck, folks!
hey, i agree that you and i are investing professionally as a ‘business’, which is different from your average home buyer and mutual fund picker. and hopefully we’ll be smart enough to capitalize on opportunities and minimize negative trends and unknowns 🙂 but taking off my RE business hat, i’ll highlight two 2 key points in favor of that average SF home buyer:
1- yes, prices have softened in SF and y2005+ buyers have probably lost some equity. but, and this has been said many times here, most people buy their house to live in it. if they need to sell and re-buy locally, their net loss will be mitigated by the lower price of the new property. and since most areas outside of prime SF have fallen in value much more, for those moving out of town, they may be ahead of the game- miami condo, anyone? (note that i’m viewing the high transaction costs of RE as a constant factor for purposes of this analysis.)
2- as for the relative high cost of housing in the bay area (SF in particular), there is a pretty direct correlation with existing bay area wealth and the balance sheet of new folks moving in. many families with modest incomes, but who have owned for a long time, are able to help other family members, or can cash out and retire nicely. many others have made money in company stock. i’m not just talking of ‘spectacular’ wins; how about the project managers at sun micro who all made hunderds of thousands and many brought nice homes (the poor soles that just kept that stock…well…it was a loooong way down post y2000!) and most of the newcomers to the bay are well educated/well paid. the massive high tech industry base here (as well as other diversified employment opportunities) have made it a magnet for well paid people. so yes housing is/was expensive here, but now there are some great prices in certain areas, and we know that people with modest means who were sidelined are looking now in vallejo, concord, etc. i’m just not seeing this state of affairs continuing to decline significantly, much less stay that way for years to come. macroeconomic growth policies and globalized production are not pointing in that direction.
as for taleb, what i like about ‘fooled by randomness’ is his literary approach to his concept as well as life, for ultimately they are one and the same. i have learned years ago that one’s drive for ‘success’ is derived more from one’s insecurities, and never ending need for status. i’m more interested in having control over my time, working for myself, travelling, and reading and absorbing life in my preferred environs. having a comfortable lifestyle and some economic security is also nice. my RE investments are my structure for doing so, but also partially serve as chips in this game called ‘professional investing.’ non of us make money with every move, but the game sure is fun, educational and certainly challenging. i try to keep it in that perspective, for i am not obsessed with making, say 5x my net worth in the next decade or two. i don’t need the money intrinsically; what i make i will use/donate, but that will be an organic growth evolutionary to concept of self. i like to remind myself that some of the eccentrics i see in the city (who often live off government disability insurance in conjunction with a killer rent control rent deal) can tool around the city, read at their leisure (maybe even blog on SS!), etc. and i ask, in essence, how far are we apart?
45yoh, good for you – sounds like you have it worked out. The whole control over time thing is important to me also, and although lifes current circumstances (recently married/kid on the way) have forced a slight rethink, I manage to avoid working too hard also (probably not worked a 40 hour week in 10 years).
I must check out that Taleb guy. Having known many ‘successful’ and driven people as friends and acquantainces over the years, I can confidently say they are generally some of the unhappiest people I have met!
So my husband and I actually went to look at 191 Chilton Ave yesterday thinking if it was viable to renovate and expand, it could be a good value since we currently rent and would like to stay in glen park.
Here are the specs:
The lot size is 2500 sf (got from city online property gis system) and the house is positioned far back on the lot so the front yard is much larger then the back yard. It is fully detached but the lot and house are very narrow. It basically needs to be renovated down to the studs with a 2nd floor added to be really livable for more than one person (only one person lives there currently).
There is no garage or off-street parking and it would be impossible to get a curb cut variance to add it because a fire hydrant sits right in front.
The house next door is on an irregular shaped, somewhat triangular, lot so that it’s front entrance, upstairs and downstairs windows (large-sized) are facing the front yard, right up to the property line, meaning the house could only be expanded out back and up because trying to include a lightwell for the neighbor’s windows on such a narrow lot is pointless.
So, we don’t think it’s worth trying to renovate/rebuild given the narrowness of the lot, the expense of adding a second floor, what we saw as the impossibility of any off-street parking, PLUS the fact that a fixer-upper house on the same street at 125 Chilton Ave, same lot size, 850sf, plus a garage, just closed for $425k on 3/17/2009:
http://www.trulia.com/homes/California/San_Francisco/sold/7137705-125-Chilton-Ave-San-Francisco-CA-94131
They already have a building permit (#200903264968) to do the following:
Rear addition & interior remodeling on 3rd. flr. 1st. flr.; 15′-3″ rear addition bedrm., bath, fam. rm. 2nd. flr.; 10′-0″ rear addition w/5′-3″ deck. 3rd. flr.; 22′-6″ rear addition master bathrm., bath & closet.
Cost: $180,000.00
Looks like it was a pocket listing since it never came on the market. If it had, my husband and I would have jumped on it.
“That is, the owner started with $189,000 and ended up with $450,000 + $156,000 – $100,000 or $506,000 after 13 years. So his annualized return was 7.9%/year.”
Uh, if the owner rented this place out for 13 years, didn’t he have to rent or buy another place for himself for that period of time? Doesn’t that drastically change that calculation or am I missing something….?
^ yes, you’re missing something. These calcs are done using the rental value as the income source to offset piti (mortgage, etc) expenses. It’s self contained. If you want to owner occupy, you’re in effect paying the rent to yourself. Otherwise, you will get a significant variance in cash on cash ROI for owner occupied vs rental units. (ie. At the end of the day you always have to pay to live somewhere…unless mom will take you back to your childhood room. you remember… the one with the leif garrett or metallica posters (your choice 🙂
Just catching up with these comments – surprising what a hornet’s nest this stirred up. In any case, I hear you guys on the imputed rent, but I think we’re looking at this 2 different ways.
First, I consider true cash-on-cash return as every dollar put in vs. every dollar taken out, accounting for time. Somebody lived here for 13 years and wrote a lot of checks. Down payment, P&I, taxes, maintenance, painting it green only to get bored and paint it blue 6 months later, whatever. The only payout is at the end, when it sells.
So again – Assuming 20% down, 1% annual maintenance (increasing at 2% per year), and 1% in property tax increasing at 2% per year. Mortgage is 30-year fixed, starting at 8.4% and being refi’ed every time rates drop 100 bps (eventually settling at 5.65%). For simplicity’s sake, P&I payment is reduced by 25% for interest deductibility. Payout at the end is $479K – 6% commission – loan balance of $123K. IRR is 6%, and this is levered.
But we all have to live somewhere, so for the cost/benefit of owning this vs. renting something equivalent, we add back in the imputed rent. This thing is kind of unique…but I assumed 1996 rent of $800/month, increasing at 2% annually, to finish around $1,000/month. In this case, the return from living here vs. renting something similar is around 16%, as Troy estimated.
Of course this is all sloppy math, since rents went up a lot around ’99 and then fell, we don’t know owners’ income/tax situation, etc. Plus in retrospect, this property may not have been the wisest choice for such a comparison given it’s priced at development value. But maybe the same could be said for the ’96 sale.
In any case, I agree with LMRiM that double-digit returns for just living in a home will soon become a vestige of the bubble years. This may be an interesting topic to revisit if more long-term apples pop up.
“That is, the owner started with $189,000 and ended up with $450,000 + $156,000 – $100,000 or $506,000 after 13 years. So his annualized return was 7.9%/year.”
Aha!
So we’ve learned that buying an asset at the bottom of the market and then selling it at the top of the biggest bubble in history is an excellent way to make money. Who knew?
Now we can do the experiment to see what happens when you buy at the top of the biggest bubble in history and then sell later.
It should be interesting.
^ well…the dude who brought this POS shack did not know apriori what would happen. Just as you don’t know how low SF RE will get, how long it will stay down and how high it will go up again. But they took that step and made some real dough! I’d say it was a brilliant move, even if their ROI was only double digits, where as folks like me maximized the sh*t out of the situation and got triple digit annualized returns. You’re always welcome to short the shiller index if you’re so confident.
well…the dude who brought this POS shack did not know apriori what would happen. . . . But they took that step and made some real dough!
Funny, on my calculation this person has made exactly zero dollars so far on this investment. Let’s see how much the shack actually sells for. Based on what I’m seeing and on geekgrrl’s comment I don’t think it’s going for anywhere near asking.
Couple of things…
This thread has shown how much mis-understood buy/rent comparisons are. Both Legacy Dude and mwsf made errors which would significantly distort the calc in favour of renting.
Secondly there has definitely been some backtracking from Legacy Dude. From
“Honestly, gang…does anyone really believe residential real estate can yield double-digit cash on cash returns? Maybe if you ignore a large portion of your costs, I guess. ”
to
“In any case, I agree with LMRiM that double-digit returns for just living in a home will soon become a vestige of the bubble years.”
Linked to that, I didn’t think we were in the bubble years anymore?
Diemos himself says that the owner is
“selling it at the top of the biggest bubble in history”
?
Fact is, the double digit returns would have been even higher if he had sold earlier – certainly in 08,07,06,05 and probably much sooner also – it’s not like he had a really small window to achieve these returns in.
But having been confused on another thread stating that 08 was the peak it appears many think we are still in the bubble, and even at the top of the bubble.
Confused.
^ I agree with your perspective. Some just try too view these matters in the most negative light possible. But I appreciate their efforts- keeps me on my toes (and for free too!)
Perhaps I should focus on being more explicit to avoid being accused of “revisionist history” going forward. I do not believe that residential real estate can yield sustained double-digit returns to owners/occupiers, even over long periods of time. Period. Landlording is a different story, obviously. I’m talking about “buy, sell, repeat, retire.”
Real estate moves in long cycles, economic environment notwithstanding. If you buy before the mother of all bubbles, and sell a year or two after the zenith, you’re going to do well. Buy at/near the peak and sell a year or two after the zenith, you don’t, as Socket’s apples show. But what about holding through a cycle?
If Chilton sells at asking price (which likely includes intrinsic value plus the development option here), the owner will do relatively well over a 13 year hold. Let’s wait and see what it goes for.
But if prices really are going back to late 90s levels, then we should start seeing 10-year holds where people lost money in real terms, or ended up with paltry returns even when imputed rent is factored in. I’ll gladly admit that I’m wrong if it doesn’t happen. Let’s keep checking the apple cart.
The sale of 191 Chilton Avenue closed escrow today with a reported contract price of a little over five ($510,000).
The list price for 59 Winfield has been reduced to $399,000.
The MLS listing for 59 Winfield has gone from “In Escrow – Firm” (i.e., all contingencies have been waived) to “Withdrawn.”
The MLS listing for 59 Winfield is once again active at $399,000.
The list price for 59 Winfield has been reduced $20,000 (5%) to $379,000.
Even with the reduction, the Winefield property is still not worth it.
We read over the Easement agreement for this property and there is a height restriction, so as not to block the neighbor (and current owner’s property). It’s capped at 18 feet from the lowest point in the foundation of the current structure and includes but not limited to: the peak of the roof, decks, antennas, HVAC vebts, AC units, solar panels, flags, vegetation, etc.
So it would be nearly impossible to expand the 437 square foot structure.
Clever. So the current owner bought an adjacent property that had its view imperiled by 59 Winfield (a peril that was priced into the adjacent property, natch). Then the owner of both properties wrote an easement agreement with him/herself to remove the peril. Net cost zero dollars. A perfectly legal way to protect a view.
Now they are seeking a buyer for 59 Winfield who either does not care about or does not notice the implications of the vertical easement.