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Friday, 10 October 2014 00:00

The best investment decision ever?

Written by  Steve Vallejos
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This is an interesting question that came up when we completed a Backyard Home in Walnut Creek earlier this year. What started out as a plan to house his mother on site with them turned out to be the best investment decision he’s ever made. Our client was reviewing his assets with his financial planner upon completion and was shocked when he and the planner realized that they just turned a portion of his assets into something that has at least four times the benefits of what it was doing prior to building the Second Unit.

To understand this we need to look at the first pieces of the puzzle. Bradley had two things going for him when he started down this journey. He had a home with a lot that had space for the additional structure and he had the money sitting in his investment portfolio. All he needed was someone qualified to help him with the design and building process. What he did not realize was that this simple addition to his property just made him one the most savvy real estate investors around.

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If you look at a traditional investment portfolio of most Boomers and early Gen-X’ers you will see that real estate is typically limited to their main home. Some have a second home, but it’s traditionally a vacation property or timeshare. The remainder of the portfolio is usually held in their IRA, 401K and stocks. For the most part these investments are pretty straight forward when it comes to gains & losses over a period of time and don’t offer any other contributions other than the periodic gains.

When Bradley added the second unit to his property all he thought he was doing was moving money from one asset to another. What he found out after completion was that he had just opened the door to these additional benefits by doing this:

  • Property value increased upon completion (ranges from 2-20% over cost, depending on location and size)
  • Increased return on annual gains through real estate (usually double digit gains for Bay Area)
  • Added depreciation option for new unit (ranges from $10k-$20k annually over 10yr period)
  • Added revenue stream for unit as rental (possible $1400/mo income)
  • Created optional retirement home for owner while renting out the main house (possible $4000/mo income)

Even if we made the assumption that Bradley was a great investor and his portfolio was in the 10-15% annual return rate, which is almost impossible given the roller coaster market over the last 10 years, that $100,000 he rolled over to build the second unit would have gained $10,000 to $15,000 this year. By building the second unit he immediately increased the value of his expenditure by 8% since the appraised value exceeded the cost to build by that much as soon as it was completed. He can now expect to exceed the traditional gains of his non-real estate investments by moving the money over to real estate, plus he can write down some of those gains through depreciation, and pick up another $16,800 annually in rents for the little unit, or $48,000 annually if he moves into the unit and rents out the main house. Since the rental market is less volatile than stocks I think it’s safe to say the return averages overall would stay much higher if we include the rents into the basket of earnings . All this without really spending a single dollar, since he just moved his money from one asset to another. Sounds like the best investment decision to me! Maybe I should change my title?

Steve Vallejos
Investment Guru
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Valley Home development Corp.

Read 234185 times Last modified on Sunday, 26 October 2014 23:40
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