A lot of our clients are asking if this is a good time to upgrade..
Let’s say the clients have been eyeing up a nice 5 bedroom, 2500 square foot home that has a current market value of $450k, and they currently live in a tiny 3/2 with only 1,400 square feet that has a current market value of $300k.
Forget all about what they paid for their current property, and what it might have been worth in 2005. It is what it is. And what it is …. Is too small…. The kids are all on top of each other, and mom is going to do something really bad if they don’t get a bigger home.
But Dad is still concerned about the fact that the home did have more value on 2005 and maybe just wants to stay put until the value returns.
So they turn to us for some answers.
To answer that question I put on my financial adviser hat and pulled out my handy dandy financial calculator.
First we have to pick a number for the appreciation potential of these properties. And in today’s crazy financial world that might not be so easy. But if we go back far enough and then calculate the averages over a long period of time, we’ll find that that 5% is about what you can expect for a long term real estate investment.
Next we have to assume that both the small home and the larger home are well within the norm for the area, so we can expect them to both follow the market in terms of appreciation.
Let’s say our clients would net $75k after everything if they sold their home today, and that would be their total down payment for the new home. At 5% per year, after 10 years, the current home would yield a 252% return on that $75k. But what is even more interesting is that the larger home would yield a whopping 377% ROI.
How can that be? Simple math; 5% of $450k compounded over 10 years is a heck of a lot more than 5% of $300k compounded for that same period. In fact it is over $100k more……
Even more interesting is that the current house would have just returned to the 2005 value at the end of the 10 years, and by that time the kids are grown and gone…..
So if you are wondering if you should upgrade or wait until the value returns to your property, just do the math; you might find that moving up now is the right financial thing to do.
Dick Boren
Broker/Branch Leader, Realtor ® , ABR®, ePro®
CENTURY 21 Select Real Estate
Dick and Melissa Boren
(916) 289-8449
dickandmelissa@borengroup.com
