I had a really big revelation this weekend regarding the rental property in CA. I wanted to share it, I doubt it’s a new perspective but it was a new to me perspective.
I have been debating about whether to keep or sell a property I inherited in California. There are pros and cons to both decisions, but a decision needs to be made soon because my renter is leaving in January.
I was trying to determine long term gain of the property if I decide to keep it. To look at the future, I looked at the past.
There are some assumptions at play here, but even being very cautious, the numbers kind of blew me away.
My mom bought the place in 1976 and lived there for 2 years before moving in with my dad in another town. She bought the place for $45,000. This property has been in the family for 35 years.
I assume there was a mortgage, so here are the assumptions:
Assuming she put 20% down, she had a mortgage of $36,000.
Assuming she had a 10% mortgage interest rate (I heard that rates were in the double digits in the 80’s. I’m not sure about late 70’s.
Assuming it was a 15 yr mortgage (I have heard the 30 yr mortgage is new?) She paid $78,080 total for her condo. Taxes are fixed at $1200 per year so in 35 yrs she has paid $42000 in taxes. In total, the place has cost her $120,080 plus HOA fees.
She has rented the property for 33 years. Rent goes up so I have no way of knowing what she has charged through the years. Right now the property nets (after HOA fees) $1250 a month. I’ll assume her rental income has averaged a net of $800 a month.
$800/month x 12 months =$9600 year. $9600 x 33 yrs = $316,800.
The property has brought in $316,800 and cost $120,080. Over the years, my family has had a $196,720 income boost from the property. And then on top of that- it has appreciated to a value of about $440,000! So with realtor fees and closing fees and fix up fees, we’ll say the property will net $400,000 after the sale.
So with the property equity and rental income, this little condo has given my family $596,720!!
Is my math right on this? Is my line of reasoning correct?
And I do understand there were vacant months where no money came in, things broke, needed repair. But even rounding down to $500,000. Whoa! That is serious money!
Now I can better understand why long term real estate can be so lucrative for long term investments!
Seeing the long term return on investment numbers are a bit more crazy than just considering how the monthly amount might impact/help your budget.
In this case, it pays to be patient with the real estate market.
Calculated the Return on Investment for the California Rental Property
November 21st, 2011 at 04:23 pm
November 21st, 2011 at 04:34 pm 1321893269
Yes, your numbers are correct. From our perspective, our parents have homes several times what they paid for them. Of course, you can factor inflation, but Bay Area real estate is far beyond normal inflation. Anyway, no one in our family has rentals, but Great Grandma is paying $3000/month to rent a *closet* while folks maybe pay $3000 per YEAR in property taxed and insurance. There is so much paid off real estate in the family that we will likely inherit some at some point. So, clearly I see the gains they have made in real estate.
As an aside, one reason I have absolutely no desire to own a rental is I Watched my best friend's parents buy a property for like $50k, sell it for $500k, and rent it for 20 years or so in between. The renters trashed the place and would not leave - long eviction process. They said it was the *worst mistake* in their entire life. They actually moved into the property afterwards to make it primary home and shelter it from tax, and they lived right by our condo, so we saw a lot of what they were going through. That sure left an impression on me. We could have kept our condo and rented it for a small fortune, monthly, but decided it wasn't worth the potential downfalls. (If all that money could be such a horrible mistake???).
I have always looked at rentals from a long-term perspective. I am starting to realize why the short-term rental market is so attractive to investors where I live now. Rents are high and housing costs are low. But I think for the long run home prices will probably fall further, or merely stagnate. So to me, doesn't seem like a great investment. I suppose after living in the Bay Area, I have high expectations for great real estate investments? Maybe unrealistic expectations? So - yeah - just to say - your parents hit the real estate lottery so to speak. As did ours. I wouldn't expect to be able to re-create that without a hell of a lot of luck and good timing though.
November 21st, 2011 at 04:37 pm 1321893437
November 21st, 2011 at 04:40 pm 1321893622
November 21st, 2011 at 04:42 pm 1321893775
November 21st, 2011 at 05:33 pm 1321896834
Personally, I would take the money and run.
November 21st, 2011 at 05:57 pm 1321898251
November 21st, 2011 at 06:31 pm 1321900304