Funny about Money

The only thing necessary for the triumph of evil is for good men to do nothing. ―Edmund Burke

Real estate as investment

Yesterday I followed open-house signs to a foreclosure in the Windsor Square district, a gentrified enclave of 1930s and 1940s houses tucked behind the gourmet grocer at Central and Camelback. The house, a pretty little money sink in the very best part of the neighborhood—as far away from any of the main drags as you can get—had bankrupted a speculator who’d fixed up it handsomely and imagined he could sell it for $600,000.

At 1,900 square feet, it was cobbled together from a tiny 1949 structure with a couple of additions, both of which appeared to have been professionally designed and built. the result left the two original dwarf-sized bedrooms free to be used as offices or game rooms, while a big new master bedroom with a gigantic walk-in closet and handsome bathroom looked out into the backyard.

The buyer would need to install a stove, dishwasher, and fridge, but BFD: you usually end up having to buy those for any used house. The backyard needed a cleanup: Gerardo, $150. One nice thing about it—very nice, in Phoenix’s vintage central-city neighborhoods—was that it had a functioning two-car garage in excellent condition.

I wanted it.

Unfortunately, the bank already had an offer of $300,000, more than I could reasonably expect to clear on the sale of my present home and so, since I’m not going into retirement with a mortgage on my residence, out of my price range.

But…wow. If someone is “stealing” an old jumbled-together house out of bankruptcy for three hundred grand, then the truth is, the downtown house M’hijito and I are upside down on was a good buy. It’s only about five blocks away from Windsor Square, within walking distance of the much-touted light rail and of the very fancy gourmet store and all the very fancy restaurants and shopping around it. Eventually, young professionals who want to live near Central and Camelback will notice, and when they do, they’ll start to drive the prices up in our area.

I really love houses of that vintage. They still have the lath-and-plaster walls with their rounded corners and thick block or brick exteriors. They retain some of the charm of still older houses, but they’re not as decrepit as the property in the Willo and Coronado districts. Personally, I could live very comfortably in our downtown house, and in fact, given half a chance, I will.

If and when M’hijito decides to move on, lured away by a better job, graduate school, or a wife, I plan to buy the downtown house by selling my house, paying whatever we owe on the mortgage, and reimbursing him for his investment in the house. If that happened today (which it won’t), it would put $30,000 or $40,000 in my pocket, and I’d end up with a much-desired smaller place, no pool to have to tend, and a sweet environment built to our taste.

The real estate market, even in beleaguered Phoenix, is pretty clearly bottoming out. My house has never lost value, and in fact has gained value at about 3 percent a year since 2004. That means that within the next year or two, as employers start to hire again (we sincerely hope!), my house will start to increase in value and demand will rise markedly. The central areas are always in demand, and as gasoline prices rise, demand follows in lockstep.  Meanwhile, the principal on the downtown house’s mortgage isn’t going anywhere…meaning that its payoff “cost” drops as inflation rises and the sale price of my house goes up.

In a few years, about when I expect my son to experience some sort of life change that will have him wanting to move up or out, I should be able to clear about $50,000 or $60,000 by selling my house. If the price of my house rises to $300,000 (about what it should be worth in five years), the difference between my selling price and the mortgage principal on the downtown house will be about $90,000. So I can easily pay off that principal, fork over $30,000 or $40,000 to my son and still have a significant amount to add to the retirement fund. If I die before he’s ready to move on, he’ll be able to sell my house for enough to pay off the mortgage and pocket at least $50,000, or else rent the downtown house for enough to cover the mortgage payments and move into my place. Or…who knows? Rent or sell them both!

Considering that my initial investment in my first paid-off house was $100,000, that’s not a bad return. Of course, it doesn’t count the amounts we’ve put in to renovating and improving the three houses or our down payments and interest gouges on the downtown house. I’d guess those costs would come to a little over a hundred grand, all told. So we’re looking at a $90,000 gain on about $200,000 invested over 15 years…not too bad, considering that the amount invested also put a very pleasant roof over my head and got my son out of a dangerous firetrap.

Could we have made more in the stock market? Maybe, absent the Cheney-Bush economic melt-down. But we each still would have had to live someplace, requiring us to pour rent or mortgage interest down the drain.

So…while I don’t think real estate is a great investment—and we know it certainly isn’t risk-free—as long as you’re in a buy-and-hold mode, it’s probably not as bad an investment as it seems just now.

Author: funny

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  1. Pingback: Carnival of Personal Finance #217: The French Money Quotes Edition — Almost Frugal- a frugal blog

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  3. I think real estate investors get into trouble when (A) they leverage too much and (B) they buy properties that don’t generate a sufficient revenue model. For example, people that buy a second home and then rent out their first home frequently get into trouble because they don’t know what they’re doing and don’t get enough rent on their house to justify it as a rental. Multi-family properties are definitely the way to go!

    • @ American Banking News: That is a very interesting comment! That’s pretty much what I’ve suspected about the possibility of hanging onto my paid-off house and using some poor renter’s payments to cover a mortgage on a second home: huge potential for a b-a-a-d idea.