Investing in Real Estate

(Part 2)

 

Key economic indicators give me every reason to expect that over the next two years the Chapel Hill home will experience an increase in value of 10 percent or more. Not only are the Chapel Hill public education system and city infrastructure top-notch, as mentioned in the home’s real estate listing, but the local economy is very strong. According to the United States Bureau of Labor Statistics, the annual average private-sector hourly wage in the Chapel Hill metro area has steadily increased from $20.28 in 2007 to $26.84 in 2013 (through October)—a growth rate of 32 percent. The city of Chapel Hill is also home to the main campus of the University of North Carolina, which has experienced record growth in enrollment over the past five years and is consistently recognized as one of the nation’s top five public universities, attracting faculty and staff from all over the world. Not only will the demand for housing increase—the North Carolina Office of Budget and Management projects a population growth rate in the Chapel Hill metro area of more than 17 percent between 2010 and 2020—but the budgets for home purchases will increase as well. And the assumption that Chapel Hill’s growth will be reflected in its real estate market prices is supported by the city’s recent real estate trends: the median sale price of 3-bedroom homes in Chapel Hill took a tumble in 2011–2012, according to Zillow, and has so far recovered about 30 percent of the drop. The market just experienced a small bust, and is in the midst of a predictably strong recovery. If by the fall of 2015 the market has fully recovered to even Zillow’s lower-than-average January 2011 numbers, the median sale price per-square-foot of a 3-bedroom home will be $166—a more than 10 percent increase over the median October 2013 prices detailed earlier.

Two factors support my decision to hold the property for two years and invest in renovations: 1) the rental market and prices in Chapel Hill will offset many of the costs associated with holding a property, and 2) renovations on this particular property will reap huge returns in the sale price.

According to the 2010 United States Census and the three most recent American Community Surveys, more than half of the occupied homes in Chapel Hill are rentals, and according to the city’s 2010 Residential Market Study, the market rental rate for a 3-bedroom home in Chapel Hill is $1,383. That means that even a $160,000 mortgage on a $200,000 purchase price (calculated on a 30-year term at 5 percent fixed-interest) could self-support in rental wages, accounting for a reported 1.58 percent annual property tax rate in Chapel Hill/Orange County, North Carolina, and an annual allowance of $3,000 for regular property upkeep and repairs. Because I would purchase the home with cash, I’d be earning profit from the rental, to the tune of $17,419.65 (calculated as 18 months’ rent less property tax on the $125,500 list price and a $3,000 annual repairs allowance, with six months reserved for renovations during which the home would be in non-rentable condition).
An additional investment of $50,000 in key home renovations could significantly increase the Chapel Hill property’s true value. The home needs new appliances and some updates to the yard, and I would like to invest in top-of-the-line appliances as well in new interior and exterior paint, new vinyl windows, new laminate kitchen flooring, a new granite kitchen countertop, new carpeting and light fixtures throughout the home, and full remodels of both bathrooms. The per-item allowances would be budgeted as follows:

Item
Budgeted Allowance
Appliances: Refrigerator
$1,500.00
Appliances: Oven with gas range
$2,000.00
Appliances: Dishwasher
$650.00
Appliances: Washing Machine and Dryer
$1,400.00
Landscaping updates
$1,500.00
Interior paint, done myself, 20 cans
$400.00
Repaint kitchen cabinets, done myself, 3 cans
$60.00
Exterior paint, professional hire
$1,200.00
Vinyl windows, 17-count
$2,380.00
Kitchen flooring, laminate, 500 square feet
$2,495.00
Kitchen counter, granite
$3,000.00
Kitchen sink, double-bowl
$250.00
Carpeting, 900 square feet
$2,700.00
Light fixtures throughout home
$5,000.00
Bathrooms: Shower tubs
$750.00
Bathrooms: Laminate flooring, 350 square feet each
$3,493.00
Bathrooms: Marble coutertops
$1,200.00
Bathrooms: Toilets
$500.00
Bathrooms: Sinks and faucets
$500.00
Repaint bathroom cabinets, done myself, 3 cans
$60.00
Incidentals and unaccounted-for labor
$15,000.00
Sub-total
$46,038.00
Sales tax (7.5 percent)
$3,452.85
Total
$49,490.85

In the fall of 2015—two years after purchasing the home in cash for $125,500, and after the real estate market has recovered by 10 percent to January 2011 prices, and after significant renovations to the property—I believe I could easily sell the Chapel Hill home for $338,640, the projected median sale price of $282,200 ($166 per-square-foot for a 1,700-square-foot home) increased by 20 percent for the property’s turnkey condition. Less the purchase price and the $50,000 cost of the renovations, plus the rental income of $17,419.65, the total profit would be $180,559.65—an outstanding 143.9 percent return on my initial investment. And that is assuming that Zillow’s price data—the lowest I found—is the most accurate, and assuming that the real estate market merely recovers to 2011 prices rather than surpasses them, and assuming that the rental rate I can charge for the newly-renovated property in 2014–2015 is still even with the 2010 market average; the true return on my initial investment could be even higher.

 

 

Investing in Real Estate