Investor's Rental Home Soars In Value to Over $1 Million

Investor's Rental Home Soars In Value to Over $1 Million

By Jane Hodges

The investor: Jacqueline Janssen, 61, began investing in real estate in 2000 to reduce her holdings in the stock market. The executive recruiter has purchased eight properties in northern California and Hawaii over the years. She lives in Marin County, Calif.

The property: The octagonal home is in Dillon Beach, Calif., and was built in 1976. It's on a bluff with ocean views. The residence has three bedrooms, three bathrooms and a fireplace. The house includes a 400-square-foot garage for two small cars. Dillon Beach overlooks Tomales Bay and is popular with seasonal and full-time renters. The community is about 30 miles from Petaluma, Calif.

Purchase price: $450,000. Ms. Janssen bought the property with her son, Evan Blacksea, now 25, in 2000. She placed a 20% down payment and financed the purchase with a 30-year fixed-rate mortgage.

Additional investment: $150,000. Ms. Janssen "totally gutted" the property immediately after buying it and tacked on an 800-square-foot addition with two bedrooms and two bathrooms. The property has new plumbing, electrical systems and walls, and expanded window and deck space with views of Tomales Bay.

The strategy: "I try to make sure my properties break even," says Ms. Janssen, referring to her average yearly cash flow (the profit from rental income after factoring in mortgage payments, mortgage interest, taxes and insurance). She alternates between renting the property out monthly and leasing it to vacationers on an even more short-term basis. She made a monthly profit of $800 (after paying her mortgage, taxes and insurance) during a two-year period when the home was fully rented and broke even during intermittent periods of short-term rental, she says.

Pitfalls: Renting to both short-term vacationers (typically with a three-night minimum) and long-term tenants was a strategy that worked for a while for Ms. Janssen, but she shifted her focus in 2005 to mostly annual renters. Using her home as a short-term vacation rental seemed potentially more profitable, but she found that overseeing the property (and hiring maid service, etc.) was more time intensive. "Short-term renting can be more lucrative if you have the time to stay on top of it," she says.

The transaction: Ms. Janssen plans to keep the home, even though its market value has surpassed $1 million -- a bench mark at which she'd consider selling in the past. The combination of cash flow and her home's price appreciation make the property a solid investment, she says. The house is now worth $1.2 million (or 166.7% more than its value at the time of her purchase) per a local real-estate agent, and is valued at $1.05 million, or 133% more than its value at purchase, per Zillow.com. Marin County water-view property is popular, and her house's proximity to a deer nature preserve would hinder additional residential construction that would obstruct the home's view, Ms. Janssen says. Despite some price fluctuations, home values in Marin County have steadily increased over the past year -- even now when California's housing market is seeing volatility.