Carragee Consulting

I want a mulligan for my summer

Not to worry though there are pricing lessons to be learned from my house sale:

1) Financing options/ Interest rates matter

When I bought the house in 2020 rates were 2.25% for single family homes and 2.75% for a multi-family — pricing in higher risk of default.

Now rates are hovering around 7.21% which means for the same house value ($629k) the estimated payment is $4661 instead of $3294 to finance 80% and pay property taxes and insurance.

2) Terms and conditions matter

Some FHA loans have a clause allowing a new buyer to assume the balance of payments on our mortgage at the same rate we got. In Canada and the UK apparently some mortgages are also transferable — meaning the seller could keep the same loan and apply it to a new property!

3) There are many ways to measure value

As a homeowner you measure value in emotional terms/aesthetics, your commute to work, the quality of the schools, walk score etc.

As an investor you value current cash flow, future expected appreciation, level of effort to administer and maintain the property and the tenants. In Palo Alto rents are proportionally low compared to house values because they appreciate so fast. In MN rental properties are appreciating, but generally not faster than inflation so they need to cash flow sooner to be worth investing in.

4) Opportunity Cost are Real

Comparing your investment to the next best alternative is important to do periodically. You may experience a good return on invested capital (what you put in), but not a good return on equity (what it’s now worth) compared to the now available options of investing in an alternative.

5) Time has value

Just as a vacant apartment costs money, an extended sales cycle (multiple showings, trading documents, negotiating Ts & Cs). A good deal now may be better than the perfect deal later and so the first offers received may have extra potential to be accepted — that said, most single family homeowners overvalue their current property due to the endowment effect (it’s mine so it’s nice) and the sunk cost fallacy (all their repairs are just keeping the baseline value, not adding incremental).

6) Taxes are important to manage

Your net profits can be quite different from your gross due to taxes. If a homeowner in the US occupies their home for 2 out of the last 5 years they aren’t subject to any capital gains tax on up to $250k for an individual!