As appeared in the Mammoth Real Estate Times, Spring 2001 edition.
Q: While recently getting ready to re-finance my home and
tri-plex, both of which are located in Mammoth, the appraisal for my
home reflected a more than doubling in value in the past five years
while my tri-plex only went up about 20%. How can that be?
A: One of the phrases we used to hear around Mammoth after
Intrawest came to Town was "when the tide rises so do all of the
boats". In your case, one of your boats rose a little more than the
other one. If you've followed my train of thinking over the years you
would know that I am a student of looking at the different segments
of the Mammoth market and differentiating between them. I do that for
exactly the reason of your question. Market conditions effect
segments of the local market differently.
One of the segments that your tri-plex falls into is that of
investment property. Among other things, properties "held for
investment" have different tax treatments and lending guidelines.
Unlike residential property, especially the resort residential
properties we have here in Mammoth, people who purchase investment
properties don't develop any emotional attachment to their
properties. Instead they are interested in their return on
investment. Unlike a home that someone is going to live in, it
usually takes a significantly larger downpayment to purchase an
investment property. The lenders just see it as a greater risk. The
investor wants a return on that downpayment (as opposed to having the
cash in a more passive investment like a money market account, CD, or
whatever) as well as wanting a return on the time, effort and expense
to operate and maintain the property.
Every investor has their own criteria for assessing the
return. Most assess their "cash-on-cash" return. Basically, for the
cash they have in, what kind of cash do they get out. There are other
things to consider like management and maintenance costs, tax
advantages, etc.. But most serious investors really want to know "at
the end of the day" how much cash is coming back from the cash they
put in. Any investment that doesn't bring back more cash than just
doing something passive and relatively safe rarely make any sense.
In the past couple of years apartment rents have risen by
approximately 20%, some more and some less. Basically, the value of
your apartment building is up 20% because of that increase. Again,
most investors have their own criteria for return and value, and
appraisers establishing values for the purpose of refinance tend to
be on the conservative side.
Compare this with another major segment of investment
property in Mammoth-commercial property. Demand has filled a good
deal of the vacancies that existed five years ago. As it did,
commercial landlords tried to push lease rates upward to increase the
cashflow and subsequently the values of their properties. Now we're
seeing more commercial vacancies again. While the economy is good in
Mammoth, businesses can only afford to pay so much rent in a seasonal
economy. Over the years many successful, national chains and
franchisees have come and looked at Mammoth and backed away. It is an
entirely different demographic situation, one that is a negative for
Mammoth. While coming here and doing business is attractive, they
want to do business 365 days a year, not three months on and three
months off. That fact impacts the value of commercial property for
investors. The commercial development in the Village and the
Mountain's continued push into the food and beverage business will
change those values too. And let's see what electric rates do.
But in your case your home does not attain "highest and best
value" as a rental producing property. Resort residential properties
are a different segment and have different characteristics. In
Mammoth, where the supply is limited, demand has driven prices up.
Baby boom demographics are real and Mammoth has plenty to offer this
group of affluent buyers. The tax law changes pertaining to the sale
of primary residences has added to the market movement.
Lately, people have expressed concern over recession and
remember 10 years ago when California's recession drove prices in
Mammoth to some incredible lows. There is a big difference today
because of demographics-instead of a two lane highway of people who
desire to have and can afford a home in Mammoth, now it's a six or
eight lane highway. And lets not forget the influence Intrawest has
on maturing Mammoth as a mountain resort community as well as things
like the amazing synergy created by cheap ski passes. So five years
ago the value of your home was down and your tri-plex was holding
steady because rents were pretty good. Now demand for your home is
greater than the increase(demand) in your rents. The past five years
have been very interesting-but hang on, things have only just begun.
RE/MAX of Mammoth
Mammoth Real Estate Guide