From buyers to sellers, perhaps there’s something to be said for openly managing expectations (and plugging in):
“SocketSite has been helping me feed my San Francisco condo obsession. With our condo now sold, I believe I’m cured. So, I want to say thank you and farewell. [Editor’s Note: As we said, for the most part.]
My illness and its cure:
We bought a high rise condo “north of California Street” in 2004, planning to hold and perhaps downsize and move there in 10 years or so. Both of us had very much liked the building since the 1970s, and leapt when this unit became available. About a year ago, our plans changed, and we decided to sell, summer 2007 being our first opportunity. Our hand isn’t being forced by interest rate adjustments or the like. Nor are we leaving San Francisco. We simply decided we have other things we’d rather do with the money.
We’ve been expecting unpleasantness for San Francisco condo sellers for some time, so the decision to sell filled me with anxiety, and SocketSite has helped support me as we prepared to go on the market.
Conclusions (others’ mileage may vary): 1. Our agent is a goddess, and earned her commission and then some. 2. We were fortunate, i.e., 12 days on the market, closed in 20 days, compound annual growth rate was something more than 6.5% (that’s not fabulous but — in the light of the market — we’re happy). 3. Other agents’ feedback was that our building’s relatively high HOA charges ($8.50/sq. ft./year) were scaring away a greater than expected proportion of otherwise interested shoppers.
Thanks again and best wishes.”
Our pleasure (and thank you). Now about being “cured” and that all too frivolous farewell…
∙ The Kind Of Email We Love To Get (And An Odeon Question) [SocketSite]
Ah the mythical second homeborrower, decides “we have other things we’d rather do with the money.” How long before others decide property taxes, HOA’s, and idle square footage is a good investment?
“Compound annual growth rate was something more than 6.5%” I think the term “something like” means the seller might or might not have included 2x REALTOR, commissions. The waste of time and money spent furnishing a second home. The closing costs for financing. Three years of HOA, and property taxes. I am sure there are a few more expenses for the list.
Congratulations on getting off the train early.
Congrats on selling and getting top dollar in 2007 rather than 2006 or 2005. 6.5% is pretty good growth considering all you had to do was live in it.
Can you provide us the calculation based on cash on cash return? i.e. 20% downpayment is a 32.5% return one year, but what was the CAGR over 3 years? I can’t do the math. Alternatively, what was your proceeds divided by your downpayment for your total return. Looks like you’re up 21% in 3 years, and therefore up over 100% on a 20% downpayment, and 200% on a 10% downpayment no? Furthermore, the gain is tax free, which means the gross gain is closer to 130% to 200% on a 20% downpayment? Cost of ownership is about 70% cancelled out by the cost of not renting a similar place.
Congrats again. Any more details would be insightful to the many stand byers here.
Curious:
these are good questions… it is some of the stuff that people don’t think about when they “invest” in RE. They simply take the sale price, subtract the purchase price, subtract the RE commission fees, and call that the “profit”. (clearly inaccurate)
A few quibbles though:
1) “Looks like you’re up 21% in 3 years, and therefore up over 100% on a 20% downpayment”
Incorrect. You’re making the same mistake the original post may have made. That’s not how you would calculate cash on cash return here since you are neglecting holding costs, which are significant.
The purchaser would put down 20%, but then would pay PITI payments for 3 years as well. That must be calculated when deciding cash on cash return, especially since it is a second home.
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2) “Furthermore, the gain is tax free, which means the gross gain is closer to 130% to 200% on a 20% downpayment?”
again, incorrect. Gross gain is gross gain, regardless of taxation. I assume you mean “net gain”?
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3) “Cost of ownership is about 70% cancelled out by the cost of not renting a similar place.”
where do you get this number? was it from your calculations?
cost of ownership isn’t 70% cancelled by renting a similar place if it is a SECOND home.
On a second home it will likely cancel quite a bit less than 70%, unless you’re getting income from the property when you’re not there. (the original post doesn’t clarify this).
If you ARE getting rental income while not living there, then the home does not qualify as a primary residence and then the $250,000/$500,000 tax exemption on primary homes is lost, AND you have to pay taxes on your rental income.
Even on a primary home, cost of ownership of buying vs renting is highly variable (may be more or less than 70%) depending on:
-interst rate of home loan
-insurance rates
-property tax rate
-HOA fees
-your marginal income tax rate (after factoring in the standard deduction)
-the rate of return the equity in the house could be earning elsewhere. (like CDs or stocks etc)
-cost to rent equivalent lodging.
all off the top of my head.
But this post highlites how difficult it really is to assess RE performance as it is more than just simply subtracting the sale price from the purchase price!
re-reading my last post, I realize I too made a partial error in my description:
“If you ARE getting rental income while not living there, then the home does not qualify as a primary residence and then the $250,000/$500,000 tax exemption on primary homes is lost, AND you have to pay taxes on your rental income.”
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The rule states that a home must be used as a primary residence for 2 of 5 years previous to the sale of the home to qualify for the tax exemption.
The OP bought this house 3 years ago.
Thus, s/he could have bought the home, lived in the residence for 2 of 3 years, and rented it out for 1 year (getting income) and still quaify for the tax exemption.
s/he would have to pay the applicable landlord taxes during the 1 year of renting it out, but would not lose the captial gains tax exemption so long as s/he lived in the unit as his/her primary residence for 2 of the 3 years.
sorry for confusion.
Wow. You guys are hard core. Assuming the 6.5% was calculated correctly, wouldn’t you have been better off purchasing and holding a no load S&P index fund over the last few years?
Good points ex SF-er.
The other assumption is, if we were to compare vs. renting and ‘investing the difference’ is that 100% of one’s income ‘saved’ from not owning went to investing. With a negative savings rate, i don’t know many who save the difference AND invest, let alone save the difference.
A lot of interesting points here. I definitely invest in index S&P funds. But performance varies, just like the real estate market. There is no reason it can’t be negative 10% in any year.
Also, a rental property can be lived in for the last two years before the sale to avoid the tax on gain. And the capital gains tax is only 20% anyway, so no big deal to take that hit. I’d much rather have 80% of a few hundred k gain than nothing!
Of course a balanced investment in diverse assets is best, but in terms of real estate a person who did an interest only loan and borrowed to the absolute limit was the total winner during, say 2002 – 2006. I certainly wish I bought a much more expensive place since my increased gain on sale would have far outweighed increased costs.
But now we are back to reality, so the rule of buy a desirable home in a desirable neighborhood still applies.
How about assuming you had a down payment? You could have invested that in the stock market instead of purchasing and made a pretty good return.
cb650 – yes, like real estate, the stock market will have its ups and downs. And coincidentally, if you hold onto your portfolio, just like real estate, you will come out ahead in the long run.
But if you compare the stock market to real estate over a long period, the S&P has trounced the real estate market. From the period of 1980 to 2004, homes have appreciated 247%. S&P has shot up over 1000%. I think that’s a much sweeter deal.
BTW…if you are looking for a citation for the appreciation/return numbers, it was from Forbes.
This buyer/seller claims to have never lived in the property but rather wished to perhaps “move there in 10 years or so”. The ‘stock market vs. real estate market’ debate is old, so I won’t add anything to that discussion. (I personally like both, but have been out of RE since 2006.)
If anyone bought in 2004, they probably made money. I bought in 2004, sold in 2006. The asset price increased 27% between transactions. Most of that appreciation occurred between 04-05 (probably 2/3). Far less occurred 05-06 and, looking back, I think that almost none has occurred 06-07. My YOY gains were higher that this person’s but I didn’t stick it out the extra year. I suspect I’d be at about 27%/3 or less had I sold now.
Please don’t bash me for simple math here. I know exactly what my returns were considering agent fees, taxes, cost of capital and opportunity cost of investing elsewhere. I’m just making a point about the declining rates of return over the last 3 years, in my experience.
“But if you compare the stock market to real estate over a long period, the S&P has trounced the real estate market. From the period of 1980 to 2004, homes have appreciated 247%. S&P has shot up over 1000%. I think that’s a much sweeter deal.”
Plus, there’s no HOA, property tax or maintenance costs! Or worries about fires, vandalism, theft, etc.
Agreed that if you plan to buy, hold, and sell, RE is incredibly risky and generally not smart in the long run (there have been obvious bursts of appreciation in short periods to buck the trend). But that is not the only way to invest in RE. Buying to rent can provide a good source of cash flow — something that is generally not available in the stock market where, except for a few % in dividends perhaps, you don’t see any cash until you sell (maybe years later). But as has been oft-discussed here, buying to rent at current prices in SF makes little sense unless you are a very sophisticated buyer, marketer, and manager of multi-unit buildings (e.g. the Lembi family).
“From the period of 1980 to 2004, homes have appreciated 247%. S&P has shot up over 1000%. I think that’s a much sweeter deal.”
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I will take the RE bulls side for 2 points. (gasp!)
1) don’t forget leverage.
it is true that RE has not traditionally outperformed the stock market in terms of appreciation.
however, you can use leverage with RE that you CANNOT use with stocks. (even buying stocks on margin you can only borrow up to 50% and then are in constant fear of margin calls)
But in RE, you could theoretically have INFINITE leverage if you put 0 down and do a 100% loan as example!
that said, leverage works both ways- increased gains on the way up (in percentage terms) and also increased losses on the way down (in percentage terms).
curious brought up the leverage aspect in his/her post above, although s/he oversimplified the math due to holding costs… but leverage can be a POWERFUL friend to the RE investor
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2) Positive cash flow
IF you can purchase a place for positive cash flow, then your returns are again amplified, because you are getting paid to own the property while it pays itself off! This, too, is a powerful weapon in the RE investor’s strategy.
The problem: it is very difficult anywhere in America to find a positive cash-flow property. Most investors are feeding an alligator each month hoping for appreciation.
The stock equivalent of “positive cash flow” is the dividend. (for a while I was getting almost 15% per year dividend for some of my Canadian Oil Trusts, aka “Canroys”)
I’m the author of the e-mail.
First, I object to Mr. Ester’s calling us “mythical” second home borrowers. I prefer “legendary.” Second, we didn’t expect our ownership of this condo to pencil as an investment. And it didn’t. What I didn’t say originally was that we used the unit to help house a family member at a particular level of comfort, and you can’t put a price on that. Well, actually, I could put a price on that, but only if I wanted to get kicked out of bed for the night or a month.
The 6.5% per year number simply compares our 2004 purchase price to our 2007 sale price, expressing the 20%+ increase in terms I saw others using in a contemporaneous thread. I thought it might be an interesting data point, along with the fact that the agents were surprised by the extent to which shoppers were squicked by the HOA dues (assume a 1000 sq ft unit, and you get to more than $700 per month).
Forgive me for not going into greater detail with the specifics, but we never considered this a simple investment, and now I really don’t want to calculate the full extent to which it wasn’t. We had non-economic reasons for doing much of what we did and when we did it and, dammit, I’m going to keep telling myself that.
I do think this worked out for us as well as, and perhaps better than, could be expected in the Summer of 2007. And to all you real estate agent bashers out there, I really and truly credit our agent for that.
[Editor’s Note: Ah hah! We knew (were hoping) you wouldn’t be able to stay away for long. But seriously, thank you for the additional insight (not to mention great perspective and very good humor). Cheers.]
I agree, thanks for the follow up “Very Happy”…
and congrats on getting out.
I have done the exact same thing (purchasing a house for a family member) and you’re right, there are more important things than money.
And it’s better to end up selling for 20% more than you bought for, than 20% less than you bought for!
“Very Happy” – I agree with the legendary part. I sense an honest sense of relief at getting out as well as you did. Thanks for the follow-up.
It’s is great to see so many parents buy and sell property for their relatives or sons and daughters. Good too see the older generation giving back and helping out the new.