Value not always obvious

Question: I have owned a few rent houses for many years. As they get older, the price I could get for them decreases. But I am able to collect steadily higher and higher rents over the years. How do I decide if I should sell?

Answer: You are asking a question about value.

One day, a Rolls Royce drove into the parking lot of a small bank in Manhattan. A well-dressed man got out of the luxurious car and walked into the front door of the bank.

The president of the bank jumped up and enthusiastically greeted the man, who informed the bank president that he wanted to borrow $1,000 for 30 days and he wanted to leave his Rolls Royce luxury automobile as collateral.

Puzzled, but not wanting to offend a new customer of this man's obvious wealth, the president loaned the man the money and took the keys to the Rolls.

For thirty days, the bank president kept the Rolls in his personal garage and even had it washed and waxed before returning it at the end of the 30 days.

Thirty days later, the rich gentleman came back into the bank, repaid the $1,000 and the $10 interest. Curiosity got the best of the bank president, and he asked, "Sir, why did you insist on leaving me the Rolls Royce as collateral for this loan?"

The rich man replied dryly, "I had to go to Europe for a month, and anywhere else it would have cost me $40 a day to garage my car. Here, it only cost me $10 for the whole month."

Now, that's what I mean by value! You have to look beyond the obvious.

When it comes to investing, the concept of value is distinct from other issues that usually come up, like "what does it cost?" or "what interest rate does it earn?"

When assessing the intrinsic value of an investment, ask yourself the question, "In the big picture, what will this investment do for me, both now and in the future?"

For the rich guy, borrowing the $1,000 and leaving the Rolls was a great value, not for the loan itself, but for the additional benefits (not having to pay the $40 a day parking fee elsewhere) it provided him.

In your situation, you must not only look at the market price of the rental units. You must look at the income they produce for you, how much the cost to maintain and what your time is worth for that maintenance.

I've seen plenty of instances where rental units may not fetch much on the open market, but they throw off monthly rent checks to their owners like clockwork. And most of the time, the rental income is extremely high as a percent of the price of the unit (15% to 20% is not unusual).

For example, if you know you can sell your rental unit for $50,000, but it is paying you rent each month which net out to $700, I have news for you: you will have a difficult time finding an income source which will regularly pay 15% or more.

In addition, there may be certain tax benefits that come your way through the ownership of the rental units. These must also be factored in to the "value equation."

If you owned a business, you would not simply ask, "How many widgets did we sell last month?" You would also need to know how much those widgets cost you to manufacture, as well as your other operating costs. In doing so, you are really asking, "What is the value of being in the widget business?"

This kind of "e-value-ation" is appropriate for any kind of financial decision: buying a house, leasing a car, opening a savings account, investing in a stock or insuring a loved one.

Don't just ask, "What does it cost?" Look for the value.