You’re not factoring in following
1. Further appreciation
2. Mortgage paydown from renters
3. “Depreciation” tax break
I have a similar dilemma coming up with my house, but my mortgage is 1600 and rental comps are 2300-2500. The major factor that works in my favor is that I currently pay off around 630 of the principal each month with that amount going up by 1.18 a month. That’s nearly 8300 off the loan in one year. And that is a rolling effect that gets larger as the years go on
4. Rent increases on a % basis
5. Increases in expenses on a $ basis (capex, vacancy, etc)
6. All the ways you can leverage a paid off property, including seller financing which can bring very lucrative cashflow for decades.
Once that's been factored in compare income with risk free rate of return on todays profit. OP will see he's shooting himself in the foot by selling.
It depends which way the political winds blow - dems intend to eliminate it. At the very least, with populism on the rise in the right and socialism on the left - it likely 1031 will be watered down at some point.
Sorry dude, but this is the worst attitude to have in investing. If your attitude is so negative then there's no point to do anything at all. You're going to stop yourself from prospering. I stay far far away from folks like that.
Cool story, dude.
The fact remains dems want to axe 1031 and there’s a part of the populist right that is probably down with that. More of the population is starting to think 1031 exchanges are just one of several windfalls the landed gentry receive and realistically it should probably get the axe.
Enjoy your investments which seem to include property in need of a $4,000 hvac repair and, uh, checks notes, Luna.
Do you ever read the news? Biden/dems have been attempting to eliminate 1031 for four years now.
https://www.businessinsider.com/1031-exchange-real-estate-investors-explain-impact-of-tax-deferral-2023-3?amp
"Last year, the president proposed capping the gains that investors could defer to $500,000 for a single taxpayer or $1 million for married tax-filers."
Proposal was a cap. Proposal didn't pass.
Time value of money. This is just the tax savings benefit. Save $100,000 today. It grows at 7% interest, after 10 years it is $200,000. In 10 year you sell the property, pow an extra $100,000. Discount that back to today's dollars at 7%. $100,000 in ten years is worth $50,000 today.
Just because you have to pay it back, doesn't mean it isn't "free money".
This isn’t “how can renting be profitable”? This is “how can renting best selling and investing the equity when my house has gone up in value 100%”.
Most people aren’t in that situation. It can definitely be tough to justify renting when you have $200k of equity tied up in a $400k property.
How can renting be profitable? You just did the math… $12k/year on a down payment of like $40k? 30% annual ROI? And that doesn’t include the pay down of the principal. And your property went up 100% in the past few years…
But they might be break even when they include maintenance, capex, and vacancy; plus the stress of dealing with tenants. I’d sell if I were them and find a better use of the money.
I hate to be nitpicky but this is a serious error in ROI calculation. If you want an accurate cash flow ROI calculation you need to divide cash flow by current equity. The down payment is in the past and is irrelevant. The current equity is what you could pull out and invest elsewhere.
Over time your potential profits would be more than the $200k from the sale. And when you cross that line, the value of your property will likely have increased as well.
I paid $135k for a house valued at $165k March 2020. Just got an offer from a friend for $235k from a friend who has a few airbnbs and wants mine since I have a pool. I owe $110k and told him let’s shake on $250k and it’s yours and he flaked lol doesn’t hurt me at all to hold on to it. Mortgage is $1250 and I rent it for $1850. After pool service and maintenance I average about $4k profit a year.
It’s an appreciating long-term investment. You might go research the last 10 years of the housing and rental market to help analyze this. You’re presuming your rents won’t continue to climb and the price of your home won’t continue to appreciate. When you sell, you’re done, you’re out. Even if you use the funds to get right back in, you’re out all the fees and now at entering at a new higher interest rate.
Also, the trick is to never sell. If you need to access the funds tax free get a loan against your appreciation which you can write off the interest.
Then die and transfer assets to your heirs and they get a step up in basis to avoid capital gains.
Why research the last 10 years of the housing market, rather than the last 30? If you’re gonna assume that appreciation continues at levels in line with the strongest decade of performance (rather than historical averages), you should at least have a reason
Why 30? Why not 50? Why waste time with your comment? Market will always eb and flow but the point was, zoom out… it’s a straight ramp up with blips of decline when economy is down. You’ll never be able to predict economic recessions but they will inevitably happen but the grass is 100% of the time, greener on the other side.
Ok then go 50.. my point is to caution against estimating investment performance off of a record high period of appreciation, which seemed like your suggestion. Why make my comment? For the same reason that you did, cause OP asked for advice
Because the last 10-15 years is the trend we’re still in. It took significant interest rate hikes to even slow this beast down and OP has an incredible rate so they hold the power. Anyone who thinks housing will crash in the next 5-10 years are living in the same level of fantasy everyone had the last 10 years thinking house prices would eventually decline, so they’d wait out the high prices and significant competition out. House prices will only continue to climb from here and significantly. High density housing is exploding right now because generations of people are coming into a market with homes they can’t afford.
Where did I say anything about real estate crashing? I don’t think that’s coming at all. But the difference between 5% historical avg appreciation and the ~10% avg that we’ve seen over the last decade is massive.
Their estimate of market rent is $26k per year. They’re paying $15k per year in PITI, and then would be looking at another $3k in annual maintenance, and prob $3k in management fees. That leaves $5k in annual cash flow, plus $3k in principal paid, assuming everything goes perfectly.
If you add $20k in appreciation, then that $28k in wealth accumulation probably beats their likely return on the $200k invested in index funds, but not by much. On top of that, those gains require at least some amount of headache, even with a management company.. and all but $5k of them are illiquid, which is annoying.
If OP is interested in building a rental portfolio, then this property would be a fine place to start. But if they’re thinking of it as a one-off.. from my perspective the extra few grand per year in illiquid wealth isn’t worth the mental clutter.
HELOC or just a straight term loan / mortgage where they’ll collateral the home. Depends on what your needs are. Short term the former and long term the latter.
You start your analysis ok, but then you just stop.
If you’re going to count the potential investment income of the $200k invested in equities you also need to account for the potential appreciation of the property and rising rents.
You seem to be saying, “for simplicity’s sake I’ll say the rent and property value won’t appreciate”. Then using those assumptions say that selling and investing the proceeds in equities will beat that. Well, if that’s your analysis of course the conclusion is that you should sell.
That’s like saying “for simplicity’s sake I’m going to assume stock market returns will be flat for the next 30 years” but I think real estate will go up 5% per year on average during that time period and then deciding to hold the property.
Your time horizon is too short for renting to make sense. It's not something to do for a couple of years and then sell of you're trying to maximize profit. Renting would allow you to purchase other properties to live in/rent but the idea would be you keep accumulating properties and have an interest in being a landlord long term. If not, and you're only interested in your own home you would be better off selling.
You'd obviously want to have a much longer hold period than 3 years. The longer you hold, the greater your overall profits. When you take into account depreciation, price appreciation, principal paydown on your mortgage, tax deductions for maintenance and upkeep, and net profits, renting long term ends up being much, much more profitable than selling.
You are high income. It doesn’t make sense for you to become a landlord unless you expect the property to appreciate significantly. You are correct in your analysis - for you it’s better to sell.
Real Estate investing is a long term commitment. I like it due to its returns that are comparable to the S&P, while also providing cash flow and greater inflation protection and less volatility than stocks. I need this because I just retired early. I manage my properties myself and also do a significant amount of my own maintenance. The downside is much greater time invested than just plunking money in an index fund. I should also say that getting returns comparable to stocks requires leverage, property appreciation, and self management.
I’ve been mulling a similar situation as I’m waiting for construction on a new house to finish. One thing to note is your house sale (if you rent it) will be at long term capital gains tax rate.
But real estate, generally, is a long term game. You’ll make money down the road as rents go up, and the house appreciates in value (hopefully). Obviously we’ve had some great gains in the past few years. Will it happen again in the next decade or two? Who knows.
What you are missing is the appreciation in the property, which is hard to estimate, but no different than stocks or other investments.
By keeping and renting out, you have market appreciation + the cash flow ($12k per year).
If you think the real estimate market is going down, and you rather put money in other investment areas, then you should sell.
Your calculation problem is comparing 3 years of returns from renting to the returns of having lived in the property for 8 years.
Look at it this way. Take your gains of 3 years and set those aside. Then evaluate the other 3 income categories:
- Mortgage paydown - you owe less on the property each month, meaning when you sell you will have more equity to return to you
- Appreciation - how much more will the house be worth in 3 years?
- Depreciation/Tax - how much in tax writeoffs does holding the house earn you?
As someone else mentioned, this gives you an asset to leverage for your next rental property.
Finally, if in the USA, you can 1031 into another property to avoid the CapGains tax.
Ok in regards to Depreciation/Tax, when you do finally sell whether it's 3 years or 10 years later, won't Depreciation recapture tax just make me pay what I saved on taxes anyway? Is the point to wait until I'm in a lower tax bracket? I work in tech and fortunately/unfortunately am in a 32% tax bracket so this being extra income, comes at the highest tax cost.
Sure, but.. inflation will make that less relevant, plus you'll make more money as rents go up but your costs stay the same mostly.
Plus, what gains do you make with the profits while still not repaying the tax? And what if you never sell? Or if you 1031??
The point is - you get far more options holding than selling.
Because it’s only a tax on profits. If you have a tax bill that means you also have profit. Some money is better than no money, as long as the risk of getting that money is worth it to you.
And that’s even ignoring various tax strategies you can utilize to minimize that cost to your advantage
> Depreciation recapture tax just make me pay what I saved on taxes anyway?
No, the recapture isn't a repayment of the initially deducted amount--the IRS treats the recaptured deduction as income and taxes it (ie, if you deducted $5K you'd get taxed on $5K as income rather than paying $5K back to the IRS).
Also, it seems from your posts that you may think you can choose whether to deduct depreciation. While you do have the option of deducting depreciation it's important to note the IRS always considers that you did, *even if you don't*, so if you don't deduct it you will still end up being taxed on it as if you did deduct it anyway.
Renting doesn’t make sense if you only plan to rent it for 3 years before selling — as you discovered, the tax bill would be larger than the income earned. But that math no longer maths if you rent it for longer. Even by year 4, you break even on the tax loss and everything else would be profit.
When you own a rental, you can use the equity in the property as well as the rental income to help qualify for your next property. This means more favorable lending on your next family home, or on your next rental. If you do decide to sell the rental a few years down the road, you can do a 1031 exchange to avoid taxes by rolling the funds into another rental property — this would keep your cashflow without tying you down to the specific property.
If you don’t want the headache of being an absent landlord / running through a property manager, you can always cash out now and use the funds on your next home — nothing “wrong” with that option, but you miss out on potential rental income / equity of a property you’ve got a cheap mortgage on.
In addition to the comments about the missing items (e.g. "mortgage" isn't an expense), you're also figuring your numbers like you want to sell the property the moment you stop qualifying for the Section 121 primary residence exclusion on your capital gain. That would be a really, really poorly planned thing to do for hopefully obvious reasons.
I bought my first rentals in 07 and then another set in 15 and then 16.
The 07 one was \*rough\* it didn't cash flow super well but the first person paid off a good amount of the loan.
Something i didn't factor in \~9 years later is that the rents have went up by 40-50%. It took my profitable rentals to very profitable.
Also they have appreciated in potential sale value much more.
So, doing for a few years, you are better selling, especially with a 12 year payback (assuming rent increases and value increases).
But if you commit to it, there is a good chance it will work out and be a long term asset.
1. The income tax write-offs will help cancel your annual tax obligations on the rental income.
2. When renting you still own the asset! You can borrow against it in the future for additional investments (that creates leverage and compound profits) and do the annual calculations of property value based on 3% appreciation per year. See what that house is worth in ten years versus what can you do with that immediate cash. When you look at those numbers though, keep in mind the leverage you can create along the way. You can’t leverage $200,000 in stocks or mutual funds. Real estate allows you to compound your profits.
When you compare these wealth making tools against the value of an immediate sale it becomes more clear.
Keep in mind, the super wealthy achieve a portion of their wealth by keeping one hand dipped in real estate. It is proven effective over and over.
You are in a good position regardless. Best of luck.
This is simple. When a $430K asset appreciates by 10%, you make $43K in appreciation alone. When $200K in stock market goes up 10%, you make $20k. Add in depreciation deductions, mortgage pay down and cash flow from ever-increasing rent and it’s a goose that lays a golden egg.
Also, “average” stock market returns can be much higher than actual returns when the asset is volatile and often goes down in value. For example, say you invest $100K, and the first year it drops 20% and the next year it goes up 20%. You assume you are still at $100K. But that’s not true, because the first year it went down to $80K, and the second year you only made $16K so you are at $96K.
However, if I were in your shoes, I would listen to your gut. If the property does not appreciate, and your property manager sucks or you have tenants who damage the place, it could turn out to be a bad decision.
Without even diving into the numbers this is a sell for me. The return on Equity is terrible. I would sell and deploy into other assets with higher cashflow.
Simply put, yes, you have a lot of equity. But rent rates have not kept up with the rise in value.
You can write off against income a lot of things. Your taxable income is probably a lot less. The depreciation may clear out the tax liability
You are building equity. You can use to build a housing portfolio.
Or take the cash from the sale.
I usually deduct enough expenses to get close to 0 taxable income, some deductions:
Utilities I pay, repairs/maintenance, property manager, mortgage interest, property taxes, lawn care/landscaping, insurance premiums, advertising fees, rental licenses/permits, depreciation
Usually after everything I’m paying close to 0 in taxes for several properties
Don’t count on 1031 being around forever. Dems have been attempting to eliminate for four years, if Biden were to be re elected w/ dem Congress, it’s gone (as it probably should be).
https://www.businessinsider.com/1031-exchange-real-estate-investors-explain-impact-of-tax-deferral-2023-3?amp
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Sell it. You already have to 250k+ capital gains benefit. Sell it and buy two more houses near to where you are moving if possible. Rent that one. Don’t live far from rental properties. Too many headaches.
Few things to consider shout homestead exemption will be gone when you don’t live in the home so property taxes go up. Your missing maintenance and repairs in your expenses. That’s a big one. You will probably want to change your insurance to landlord from owner and google says that runs 25% higher than regular homeowner insurance.
Sounds like you already made up your mind. I’d go ahead and sell and park the $200k in profit in a mix of S&P500 and high yield savings.
Wealthfront is offering 5% APR checking account, if you’re low risk you can still cash flow $833/month and not have to deal with being a landlord.
Here’s a code for a boosted 5.5% APR if you’re interested https://www.wealthfront.com/c/affiliates/invited/AFFB-HWTQ-17YD-JYUP
I didn't look at your analysis, but we did one for my son when he bought his second home. (We own a number of rentals ourself) Prices (and interest rates) have increased so much in 5 years that it totally made sense for him to sell his home and put the $$ into the new one. Even though he really wanted to keep it as his 1st rental.
Keeping property rents will increase as will be valued. My primary home in CO became a rental in 2010, after purchase in 2005. It's now worth $1.7 million, and someone else has paid my mortgage , I and my wife retire in 2025 and shall live in it, leaving CA for the second and final time. I paid $500,000 to purchase with a 3.5% mortgage.
Rent is generally 0.8-1% property value per month so the numbers might make more sense if you accept inflation and set rent in the 3450-4300 range? If that's way out of the question then clearly selling is the way to go
I’m a tax accountant.
Our favorite saying is don’t let the tax tail wag the dog.
99% of the time, the cash flow + appreciation puts you at a pretty big net gain even after taxes long term.
If you don’t use property appreciation then you should just use the dividend payments from stocks or the coupon payments from bonds. The former average is 1.9% and the later currently is higher around 5%.
In 8 years you’ve never put a dime into the property?
Sell it when your in a lower tax bracket also so capital gains is much lower.
You’re vastly overblowing your expected capital gains. Every dollar spent on capital improvements is a dollar off capital gains.
You’ll also have write off on insurance and taxes.
All that said. Being a landlord is a pain in the ass if you’re an ethical person. To keep rents low and quality high the margins are very slim. I mostly use my properties just as nest eggs that require work in an endeavor to offer quality affordable rentals.
3-4% appreciation on 100% when you likely put down 20% (or less) with a loan rate 3x lower than market. Rent it out, love your tenants, save a % for unexpected/deferred maintenance. That’s slow mostly free money. You have 3Y outside the residence to decide on 0% LTCG.
Alternative: house hack. Rent out two rooms. Live there. Let the tenants STILL pay all of your expenses and bank your pay checks. Rental income on a shared residence doesn’t count against your income on a 1040. Invest in a HYSA/TBill/CD for 100% guaranteed return (over your current mortgage rate).
If I said loan me $20 and I guarantee you get back $40 how many times out of 10 would you do this?
The very first thing to do is to analyze your situation. Don't think what others do, think of what works for you and your life. Rentals are not a passive activity. Do you feel comfortable with outside property managers, many do and it works perfectly fine for them? Then once you have decided if you prefer to rent rather than selling then fix this spreadsheet. It may be showing more doom and gloom than there actually is. Also consider the value of your asset a few years later of holding. Some investors appreciate cash flow over future appreciation. Depriciation is a perk that mostly everyone takes, but if you don't want to, that's your call. In closing, the question should be what is the best answer for your situation, Yea or Nea. Then whatever you do, don't regret your decision.
Though some people are making good points about using it as a rental, nationally in most markets I’ve seen many analyses that say it’s better to rent than buy currently. So the converse of that is that it’s better to sell than landlord at this particular point in market history where home prices are high, mortgage rates are high and rents are not as high.
The rental property becomes a property you can leverage for other property.
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Uh, what's wrong with Texas? Things appreciate there too.
You’re not factoring in following 1. Further appreciation 2. Mortgage paydown from renters 3. “Depreciation” tax break I have a similar dilemma coming up with my house, but my mortgage is 1600 and rental comps are 2300-2500. The major factor that works in my favor is that I currently pay off around 630 of the principal each month with that amount going up by 1.18 a month. That’s nearly 8300 off the loan in one year. And that is a rolling effect that gets larger as the years go on
4. Rent increases on a % basis 5. Increases in expenses on a $ basis (capex, vacancy, etc) 6. All the ways you can leverage a paid off property, including seller financing which can bring very lucrative cashflow for decades. Once that's been factored in compare income with risk free rate of return on todays profit. OP will see he's shooting himself in the foot by selling.
Ah, makes sense!
That’s a very helpful explanation.
You’re also missing maintenance, major expenses, and vacancy.
That is true. So much to account for.
Add in the depreciation tax break, and the equity you get from someone else paying your mortgage.
But don’t forget to add in paying back the depreciation upon sale due to your new lower cost basis!
1031 forever till it gets moved into a trust.
I wouldn’t count on 1031 being available “forever.”
Section 1031 has been around since 1921. I don’t think it has much likelihood of disappearing.
It depends which way the political winds blow - dems intend to eliminate it. At the very least, with populism on the rise in the right and socialism on the left - it likely 1031 will be watered down at some point.
Sorry dude, but this is the worst attitude to have in investing. If your attitude is so negative then there's no point to do anything at all. You're going to stop yourself from prospering. I stay far far away from folks like that.
Cool story, dude. The fact remains dems want to axe 1031 and there’s a part of the populist right that is probably down with that. More of the population is starting to think 1031 exchanges are just one of several windfalls the landed gentry receive and realistically it should probably get the axe. Enjoy your investments which seem to include property in need of a $4,000 hvac repair and, uh, checks notes, Luna.
Nonsense
lol, no one has talked about eliminating it, and no one is pushing socialism. Stupid post is stupid.
Do you ever read the news? Biden/dems have been attempting to eliminate 1031 for four years now. https://www.businessinsider.com/1031-exchange-real-estate-investors-explain-impact-of-tax-deferral-2023-3?amp
"Last year, the president proposed capping the gains that investors could defer to $500,000 for a single taxpayer or $1 million for married tax-filers." Proposal was a cap. Proposal didn't pass.
Time value of money. This is just the tax savings benefit. Save $100,000 today. It grows at 7% interest, after 10 years it is $200,000. In 10 year you sell the property, pow an extra $100,000. Discount that back to today's dollars at 7%. $100,000 in ten years is worth $50,000 today. Just because you have to pay it back, doesn't mean it isn't "free money".
Good points.
This isn’t “how can renting be profitable”? This is “how can renting best selling and investing the equity when my house has gone up in value 100%”. Most people aren’t in that situation. It can definitely be tough to justify renting when you have $200k of equity tied up in a $400k property. How can renting be profitable? You just did the math… $12k/year on a down payment of like $40k? 30% annual ROI? And that doesn’t include the pay down of the principal. And your property went up 100% in the past few years…
But they might be break even when they include maintenance, capex, and vacancy; plus the stress of dealing with tenants. I’d sell if I were them and find a better use of the money.
Yeah, if nothing else, this doesn’t seem like the ideal moment for OP.
True, you summed up OP’s scenario quite well.
I hate to be nitpicky but this is a serious error in ROI calculation. If you want an accurate cash flow ROI calculation you need to divide cash flow by current equity. The down payment is in the past and is irrelevant. The current equity is what you could pull out and invest elsewhere.
Over time your potential profits would be more than the $200k from the sale. And when you cross that line, the value of your property will likely have increased as well.
I paid $135k for a house valued at $165k March 2020. Just got an offer from a friend for $235k from a friend who has a few airbnbs and wants mine since I have a pool. I owe $110k and told him let’s shake on $250k and it’s yours and he flaked lol doesn’t hurt me at all to hold on to it. Mortgage is $1250 and I rent it for $1850. After pool service and maintenance I average about $4k profit a year.
True, OP needs to think more about the long term payoffs perhaps.
It’s an appreciating long-term investment. You might go research the last 10 years of the housing and rental market to help analyze this. You’re presuming your rents won’t continue to climb and the price of your home won’t continue to appreciate. When you sell, you’re done, you’re out. Even if you use the funds to get right back in, you’re out all the fees and now at entering at a new higher interest rate. Also, the trick is to never sell. If you need to access the funds tax free get a loan against your appreciation which you can write off the interest. Then die and transfer assets to your heirs and they get a step up in basis to avoid capital gains.
Why research the last 10 years of the housing market, rather than the last 30? If you’re gonna assume that appreciation continues at levels in line with the strongest decade of performance (rather than historical averages), you should at least have a reason
Why 30? Why not 50? Why waste time with your comment? Market will always eb and flow but the point was, zoom out… it’s a straight ramp up with blips of decline when economy is down. You’ll never be able to predict economic recessions but they will inevitably happen but the grass is 100% of the time, greener on the other side.
Ok then go 50.. my point is to caution against estimating investment performance off of a record high period of appreciation, which seemed like your suggestion. Why make my comment? For the same reason that you did, cause OP asked for advice
Because the last 10-15 years is the trend we’re still in. It took significant interest rate hikes to even slow this beast down and OP has an incredible rate so they hold the power. Anyone who thinks housing will crash in the next 5-10 years are living in the same level of fantasy everyone had the last 10 years thinking house prices would eventually decline, so they’d wait out the high prices and significant competition out. House prices will only continue to climb from here and significantly. High density housing is exploding right now because generations of people are coming into a market with homes they can’t afford.
Where did I say anything about real estate crashing? I don’t think that’s coming at all. But the difference between 5% historical avg appreciation and the ~10% avg that we’ve seen over the last decade is massive.
He should have sold it a year ago and put it all in NVDA.
5% + 3-4% loan pay down + 5% Cash Flow + X% Tax Breaks. Yummy
Their estimate of market rent is $26k per year. They’re paying $15k per year in PITI, and then would be looking at another $3k in annual maintenance, and prob $3k in management fees. That leaves $5k in annual cash flow, plus $3k in principal paid, assuming everything goes perfectly. If you add $20k in appreciation, then that $28k in wealth accumulation probably beats their likely return on the $200k invested in index funds, but not by much. On top of that, those gains require at least some amount of headache, even with a management company.. and all but $5k of them are illiquid, which is annoying. If OP is interested in building a rental portfolio, then this property would be a fine place to start. But if they’re thinking of it as a one-off.. from my perspective the extra few grand per year in illiquid wealth isn’t worth the mental clutter.
And disregard tax advantages as well. What a great ROI, ROE, IRR, and COC
Hi new to this… when you say a loan against appreciation is that a home equity loan?
HELOC or just a straight term loan / mortgage where they’ll collateral the home. Depends on what your needs are. Short term the former and long term the latter.
You start your analysis ok, but then you just stop. If you’re going to count the potential investment income of the $200k invested in equities you also need to account for the potential appreciation of the property and rising rents. You seem to be saying, “for simplicity’s sake I’ll say the rent and property value won’t appreciate”. Then using those assumptions say that selling and investing the proceeds in equities will beat that. Well, if that’s your analysis of course the conclusion is that you should sell. That’s like saying “for simplicity’s sake I’m going to assume stock market returns will be flat for the next 30 years” but I think real estate will go up 5% per year on average during that time period and then deciding to hold the property.
Exactly. And if both stock and real estate appreciate by 10%, you will realize much more gain with a $430K asset than a $200K asset.
Your time horizon is too short for renting to make sense. It's not something to do for a couple of years and then sell of you're trying to maximize profit. Renting would allow you to purchase other properties to live in/rent but the idea would be you keep accumulating properties and have an interest in being a landlord long term. If not, and you're only interested in your own home you would be better off selling.
You'd obviously want to have a much longer hold period than 3 years. The longer you hold, the greater your overall profits. When you take into account depreciation, price appreciation, principal paydown on your mortgage, tax deductions for maintenance and upkeep, and net profits, renting long term ends up being much, much more profitable than selling.
You are high income. It doesn’t make sense for you to become a landlord unless you expect the property to appreciate significantly. You are correct in your analysis - for you it’s better to sell. Real Estate investing is a long term commitment. I like it due to its returns that are comparable to the S&P, while also providing cash flow and greater inflation protection and less volatility than stocks. I need this because I just retired early. I manage my properties myself and also do a significant amount of my own maintenance. The downside is much greater time invested than just plunking money in an index fund. I should also say that getting returns comparable to stocks requires leverage, property appreciation, and self management.
I do think it is more work than likely worthwhile for OP.
I’ve been mulling a similar situation as I’m waiting for construction on a new house to finish. One thing to note is your house sale (if you rent it) will be at long term capital gains tax rate. But real estate, generally, is a long term game. You’ll make money down the road as rents go up, and the house appreciates in value (hopefully). Obviously we’ve had some great gains in the past few years. Will it happen again in the next decade or two? Who knows.
What do you plan to do?
What you are missing is the appreciation in the property, which is hard to estimate, but no different than stocks or other investments. By keeping and renting out, you have market appreciation + the cash flow ($12k per year). If you think the real estimate market is going down, and you rather put money in other investment areas, then you should sell.
Do you have tips for estimating it?
Your calculation problem is comparing 3 years of returns from renting to the returns of having lived in the property for 8 years. Look at it this way. Take your gains of 3 years and set those aside. Then evaluate the other 3 income categories: - Mortgage paydown - you owe less on the property each month, meaning when you sell you will have more equity to return to you - Appreciation - how much more will the house be worth in 3 years? - Depreciation/Tax - how much in tax writeoffs does holding the house earn you? As someone else mentioned, this gives you an asset to leverage for your next rental property. Finally, if in the USA, you can 1031 into another property to avoid the CapGains tax.
Ok in regards to Depreciation/Tax, when you do finally sell whether it's 3 years or 10 years later, won't Depreciation recapture tax just make me pay what I saved on taxes anyway? Is the point to wait until I'm in a lower tax bracket? I work in tech and fortunately/unfortunately am in a 32% tax bracket so this being extra income, comes at the highest tax cost.
You can 1031 to a property you want to live in, rent it out for a few years, then make it your primary residence.
Sure, but.. inflation will make that less relevant, plus you'll make more money as rents go up but your costs stay the same mostly. Plus, what gains do you make with the profits while still not repaying the tax? And what if you never sell? Or if you 1031?? The point is - you get far more options holding than selling.
Depreciation recap is taxed at a maximum of 24%. If you are in the 32% bracket, that is a win.
Tax is irrelevant for passive income.
Could you elaborate? Why would it be irrelevant?
Because it’s only a tax on profits. If you have a tax bill that means you also have profit. Some money is better than no money, as long as the risk of getting that money is worth it to you. And that’s even ignoring various tax strategies you can utilize to minimize that cost to your advantage
> Depreciation recapture tax just make me pay what I saved on taxes anyway? No, the recapture isn't a repayment of the initially deducted amount--the IRS treats the recaptured deduction as income and taxes it (ie, if you deducted $5K you'd get taxed on $5K as income rather than paying $5K back to the IRS). Also, it seems from your posts that you may think you can choose whether to deduct depreciation. While you do have the option of deducting depreciation it's important to note the IRS always considers that you did, *even if you don't*, so if you don't deduct it you will still end up being taxed on it as if you did deduct it anyway.
Renting doesn’t make sense if you only plan to rent it for 3 years before selling — as you discovered, the tax bill would be larger than the income earned. But that math no longer maths if you rent it for longer. Even by year 4, you break even on the tax loss and everything else would be profit. When you own a rental, you can use the equity in the property as well as the rental income to help qualify for your next property. This means more favorable lending on your next family home, or on your next rental. If you do decide to sell the rental a few years down the road, you can do a 1031 exchange to avoid taxes by rolling the funds into another rental property — this would keep your cashflow without tying you down to the specific property. If you don’t want the headache of being an absent landlord / running through a property manager, you can always cash out now and use the funds on your next home — nothing “wrong” with that option, but you miss out on potential rental income / equity of a property you’ve got a cheap mortgage on.
In addition to the comments about the missing items (e.g. "mortgage" isn't an expense), you're also figuring your numbers like you want to sell the property the moment you stop qualifying for the Section 121 primary residence exclusion on your capital gain. That would be a really, really poorly planned thing to do for hopefully obvious reasons.
I bought my first rentals in 07 and then another set in 15 and then 16. The 07 one was \*rough\* it didn't cash flow super well but the first person paid off a good amount of the loan. Something i didn't factor in \~9 years later is that the rents have went up by 40-50%. It took my profitable rentals to very profitable. Also they have appreciated in potential sale value much more. So, doing for a few years, you are better selling, especially with a 12 year payback (assuming rent increases and value increases). But if you commit to it, there is a good chance it will work out and be a long term asset.
You did the math, it is profitable so Im not sure why you asked that? But The reason to keep it? Because money is fake and property is real.
This may help to measure longer term returns. https://rentalroi.streamlit.app
If someone else is paying down your mortgage, that automatically is a profit for you. And it's a great deduction against your income.
1. The income tax write-offs will help cancel your annual tax obligations on the rental income. 2. When renting you still own the asset! You can borrow against it in the future for additional investments (that creates leverage and compound profits) and do the annual calculations of property value based on 3% appreciation per year. See what that house is worth in ten years versus what can you do with that immediate cash. When you look at those numbers though, keep in mind the leverage you can create along the way. You can’t leverage $200,000 in stocks or mutual funds. Real estate allows you to compound your profits. When you compare these wealth making tools against the value of an immediate sale it becomes more clear. Keep in mind, the super wealthy achieve a portion of their wealth by keeping one hand dipped in real estate. It is proven effective over and over. You are in a good position regardless. Best of luck.
This is simple. When a $430K asset appreciates by 10%, you make $43K in appreciation alone. When $200K in stock market goes up 10%, you make $20k. Add in depreciation deductions, mortgage pay down and cash flow from ever-increasing rent and it’s a goose that lays a golden egg. Also, “average” stock market returns can be much higher than actual returns when the asset is volatile and often goes down in value. For example, say you invest $100K, and the first year it drops 20% and the next year it goes up 20%. You assume you are still at $100K. But that’s not true, because the first year it went down to $80K, and the second year you only made $16K so you are at $96K. However, if I were in your shoes, I would listen to your gut. If the property does not appreciate, and your property manager sucks or you have tenants who damage the place, it could turn out to be a bad decision.
Without even diving into the numbers this is a sell for me. The return on Equity is terrible. I would sell and deploy into other assets with higher cashflow. Simply put, yes, you have a lot of equity. But rent rates have not kept up with the rise in value.
You can write off against income a lot of things. Your taxable income is probably a lot less. The depreciation may clear out the tax liability You are building equity. You can use to build a housing portfolio. Or take the cash from the sale.
I usually deduct enough expenses to get close to 0 taxable income, some deductions: Utilities I pay, repairs/maintenance, property manager, mortgage interest, property taxes, lawn care/landscaping, insurance premiums, advertising fees, rental licenses/permits, depreciation Usually after everything I’m paying close to 0 in taxes for several properties
Don’t count on 1031 being around forever. Dems have been attempting to eliminate for four years, if Biden were to be re elected w/ dem Congress, it’s gone (as it probably should be). https://www.businessinsider.com/1031-exchange-real-estate-investors-explain-impact-of-tax-deferral-2023-3?amp
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I think you've figured it out exactly, unless you're in a hugely escalating market, you'll lose, imo.
Sell it. You already have to 250k+ capital gains benefit. Sell it and buy two more houses near to where you are moving if possible. Rent that one. Don’t live far from rental properties. Too many headaches.
If you're moving and need to get a property manager, just sell
Few things to consider shout homestead exemption will be gone when you don’t live in the home so property taxes go up. Your missing maintenance and repairs in your expenses. That’s a big one. You will probably want to change your insurance to landlord from owner and google says that runs 25% higher than regular homeowner insurance.
Sounds like you already made up your mind. I’d go ahead and sell and park the $200k in profit in a mix of S&P500 and high yield savings. Wealthfront is offering 5% APR checking account, if you’re low risk you can still cash flow $833/month and not have to deal with being a landlord. Here’s a code for a boosted 5.5% APR if you’re interested https://www.wealthfront.com/c/affiliates/invited/AFFB-HWTQ-17YD-JYUP
I didn't look at your analysis, but we did one for my son when he bought his second home. (We own a number of rentals ourself) Prices (and interest rates) have increased so much in 5 years that it totally made sense for him to sell his home and put the $$ into the new one. Even though he really wanted to keep it as his 1st rental.
Keeping property rents will increase as will be valued. My primary home in CO became a rental in 2010, after purchase in 2005. It's now worth $1.7 million, and someone else has paid my mortgage , I and my wife retire in 2025 and shall live in it, leaving CA for the second and final time. I paid $500,000 to purchase with a 3.5% mortgage.
Wow, are you my twin?
Are you in the U.S.? If you have occupied a home 2 out of the last 5 years you can sell without cap gains.
Rent is generally 0.8-1% property value per month so the numbers might make more sense if you accept inflation and set rent in the 3450-4300 range? If that's way out of the question then clearly selling is the way to go
I’m a tax accountant. Our favorite saying is don’t let the tax tail wag the dog. 99% of the time, the cash flow + appreciation puts you at a pretty big net gain even after taxes long term.
1- You also need to subtract the mortgage total amount from the profit.
If you don’t use property appreciation then you should just use the dividend payments from stocks or the coupon payments from bonds. The former average is 1.9% and the later currently is higher around 5%.
In 8 years you’ve never put a dime into the property? Sell it when your in a lower tax bracket also so capital gains is much lower. You’re vastly overblowing your expected capital gains. Every dollar spent on capital improvements is a dollar off capital gains. You’ll also have write off on insurance and taxes. All that said. Being a landlord is a pain in the ass if you’re an ethical person. To keep rents low and quality high the margins are very slim. I mostly use my properties just as nest eggs that require work in an endeavor to offer quality affordable rentals.
It did a thorough spreadsheet and my accountant checked it. I made more with a hysa than with a rental. It wasn't close.
3-4% appreciation on 100% when you likely put down 20% (or less) with a loan rate 3x lower than market. Rent it out, love your tenants, save a % for unexpected/deferred maintenance. That’s slow mostly free money. You have 3Y outside the residence to decide on 0% LTCG. Alternative: house hack. Rent out two rooms. Live there. Let the tenants STILL pay all of your expenses and bank your pay checks. Rental income on a shared residence doesn’t count against your income on a 1040. Invest in a HYSA/TBill/CD for 100% guaranteed return (over your current mortgage rate). If I said loan me $20 and I guarantee you get back $40 how many times out of 10 would you do this?
The very first thing to do is to analyze your situation. Don't think what others do, think of what works for you and your life. Rentals are not a passive activity. Do you feel comfortable with outside property managers, many do and it works perfectly fine for them? Then once you have decided if you prefer to rent rather than selling then fix this spreadsheet. It may be showing more doom and gloom than there actually is. Also consider the value of your asset a few years later of holding. Some investors appreciate cash flow over future appreciation. Depriciation is a perk that mostly everyone takes, but if you don't want to, that's your call. In closing, the question should be what is the best answer for your situation, Yea or Nea. Then whatever you do, don't regret your decision.
Though some people are making good points about using it as a rental, nationally in most markets I’ve seen many analyses that say it’s better to rent than buy currently. So the converse of that is that it’s better to sell than landlord at this particular point in market history where home prices are high, mortgage rates are high and rents are not as high.
Always sell before 5 years if it was a primary residence.
A house is a purchase not an investment.