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A good question to consider with major assets in a portfolio…

Would I buy at current prices?

Like most real estate in Colorado, Boulder capital values have been on a 7-year upswing. According to Zillow, the capital value of where we live is $2.5 million, up 36% since the start of 2020. The only way to describe how this value feels is “too high”.

One way to consider capital values is to express them in terms of cash flow and time => with real estate, the proxy is cost to rent.

With our current address, comparing rental costs with gross capital value…

• $3,000 per month rental => 69 years equivalent
• $4,500 per month rental => 46 years equivalent
• $6,000 per month rental => 35 years equivalent

With the run-up in prices, homeowners have been rewarded for properties that are larger than their needs. Like-for-like rental, doesn’t look too crazy right now. However, we could easily fit ourselves into a location that’s 40% smaller than where we live at present (implying a gross yield of less than 2%).

On to the next example…

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In 2021, some friends exited the Boulder real estate market. Their net sales proceeds (after taxes and agent’s fees) equate to ~100x their first year rent in their new location.

Worth repeating: they are taking a century of rental-equivalent off the table.

Put another way: by selling into this market they can do the following (in current dollars):

• Cover their future cost of living on a joint-life expected basis;
• Put their kids through college;
• Buy an apartment as a hedge against future rental rates; and
• Treat future earned income as fully discretionary.

Compelling, especially if your house is the primary asset in your balance sheet.

They aren’t “set” by any means: inflation, illness, increased spending or investment losses might derail their plan. However, the asset sale greatly reduces their financial stress and buys them a tremendous amount of time.

Stress, time and the risk of ruin.

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Another example, vacation properties.

The house we rented in Vail (2019/2020) is valued at more than 100x the rental we paid. The condo we rented in 2018/2019 sold for 50x annual rental.

There’s never been a better time to rent assets you don’t need. 😉

If you own assets in secondary locations, or are considering buying, then the above calculation is a useful one to consider. The numbers above are using gross rental figures. From the landlord’s point of view, the net rental income would be tiny (relative to capital).

Also consider the benefits of being variable…

Rather than lock in a single location for the winter, I’ve decided to try an AirBnB season. I booked in 22 days of skiing, the dates tie to school holidays => Vail, Telluride and Jackson.

Adding a bit of airfare, gas and mileage… total cost will be $15,000 to use properties with an average value of ~$1 million. VTSAX dividend yield is 1.25%.

By not owning, it was cost-free to change strategy.

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Other questions I like to ask:

• Assume things go well and this asset doubles in price (again), who’s going to buy?
• What’s going to drive the next doubling in value?
• Where’s my family exposure: (a) benefiting from the next doubling; or (b) harm from the risk of a halving?

Who’s going to buy? A smaller place in a great neighborhood is much easier to sell than the best place in that neighborhood. The top places in Boulder are now selling for around $5 million. Who’s going to buy when the market goes to $10 million? Might “ability to purchase” create headwinds for appreciation in the market?

Prime Colorado real estate benefits from buyers coming from “even more expensive” markets. Boulder remains a great place to land from one of our coastal Metros. City-based housing markets benefit from local economic growth.

Vacation-markets, at 50-100x gross rental income, are reliant on continued balance sheet appreciation for the Top 1% of society.

A comparison I follow in Colorado… Boulder rental property (house with land, no HOA) vs Vail vacation property (condo w/o land rights, HOA). In the last recession, I tracked this comparison in Arizona – unfortunately, I bought condos down there instead of houses.

What’s going to drive the next doubling? See the chart at the top of this post => there’s been a multigenerational tailwind due to declining interest rates. Every store I enter, and every manager I talk to, gives multiple examples of tight labor & inflationary pressures.

Negative real interest rates might keep the party going for a bit. With Social Security COLA adjustments over 5%, it seems nuts to buy into property that’s trading on 50-100x rental income.

Family exposure. For me this is kind of like the “who’s buying” question.

If you’re a double-income family with a diversified portfolio then sticking 10-15% of assets into a vacation market is a different choice than a single-income family with 90%+ of assets tied up in a mortgaged home. The context of the choice is worth considering.

One final point, despite living at 5,500 feet (and training year round up to 14,000), I don’t sleep well above 9,000 feet. For many, ability to sleep at altitude changes as we age.

Climate, altitude, neighbors, convenience, community, quality of local schools/governance… good reasons to rent locally before you buy.

Hope this helps.