I received a financial analysis of undergrounding from a Realtor in Manhattan Beach just hours after I published my Undergrounding ROI article. I had not heard of him before I received his email, which was forwarded to me by a mutual acquaintance. Bob Sievers, the author of the email, holds a degree from USC in business/finance and has two decades worth of Wall Street trading experience. He has in-depth (so to speak) experience in undergrounding in Manhattan Beach. Here is his analysis:
UNDERGROUNDING INVESTMENT PRO FORMA RETURN
I do not yet know the cost of the project as the bids are not yet public. I have a pretty good idea that the average half lot should be around $30,000. For the sake of the investment analysis, I will use that assumption. In no way should one consider the assessment as an expense which does not yield a return. Instead, the assessment should be looked at as an INVESTMENT since there is not only an aesthetic and safety benefit, but also an ECONOMIC benefit. Using other Manhattan Districts as well as other cities, Balboa Island for one, one could reasonably expect an average 10% increase in property values at the completion of the project.
Because El Porto has far more wires than virtually any of these other locations, I believe this will prove to be a very conservative estimate. I have heard some detractors say only the alley streets will benefit. While I do expect the alleys to benefit more (and likely pay more), the entire feel of the neighborhood will greatly improve. As the saying goes, a rising tide lifts all boats. I cannot tell you how many home buyers tell me they do not want to look in El Porto because of the wires. They never mention the factory or the parking lot. Always the wires. When property prices rise, rents rise. This is great news for absentee owners who will get both a property value increase AND increased rental income. Certainly enough to offset the cost.
THE NUMBERS
The average half lot property in El Porto is close to $2m. Some are as low as $1.3m (dirt value half lot) and as high as $9m (new construction Strand). However, the majority of properties fall in the $1.7-2m range. For the example, I will use a property valued in today’s market at $1.7m.
At completion, given an average 10% bump in property value, a $1.7m duplex returning $6k a month total rent would result in $170,000 increased equity and $600 bump in rent. Using a $30k assessment and a $3-5k cost of hooking into the system, let’s look at the outlay and corresponding returns on those outlays or better put, invested dollars.
1350 sq ft lot example:
Year 1 payment $2000 (166 per month)
tie in cost $4000
Total year 1 investment $6000
Year 2 payment $2000
TOTAL years 1,2 investment $8000
Project completion at year 2 equity increase $170,000
2 year return on investment = 21x or 2100%
But…. that’s not all. I am sure you are thinking, but wait, I still have to pay 18 more payments. Yes you do. And your investment continues to produce returns.
First, consider the added $170k in equity. As the whole property increases in value over the next 18 years and beyond, so does the incremental increased value. The $170k will appreciate at the same rate as the rest of your property. Given a 5% annual increase (over the long term, year to year may vary) that $170k increasing at 5% returns an average of $8500 increasing each year due to compounding. This, while your payment remains the same in 2019 dollar value.
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