Rent out vs Sell with models

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finance_learner
Posts: 16
Joined: Mon Aug 14, 2017 12:44 am

Rent out vs Sell with models

Post by finance_learner » Wed Sep 20, 2017 12:56 am

All,

I have the Rent out vs Sell (current primary residence) question. I've never been a landlord and we thinking about a move to a new city. Our current and expected future income are such that we are able to max out on our 401K and IRA each year and have a decent amount left over for taxable account investments. I found the Rent out vs Sell with model at https://www.journalofaccountancy.com/is ... ellit.html quite helpful although I'm not sure that all the terms are set to the correct numbers (default for "Est. Repairs & Renovation (in today's dollars)" is $100K. I copy 2 scenarios below and both suggest to me that while the rental is the financially more favorable decision, it isn't by a huge margin ~80K max. For peace of mind and liquidity, it may be better to sell? Do my assumptions in the model make sense? Do my conclusions from the model make sense?

Thanks!


Scenario #1
Assumptions
Acquisition Date of House
House Cost, including land 500,000
Amount Allocated to Land 50,000
Down Payment Percent 50.00%
Amount Financed 250,000
Mortgage Rate 3.40%


Assumptions Made Today
Years into Mortgage 2
Decision Horizon - years 5
Past Real Estate Returns 10%
FMV of House 677,600
Market Depression Factor 4%
Selling Price of House 650,496
Real Estate Commission Rate 5%
Return on Alternate Investment 3.00%
Mortgage Payoff amount (if different from amortization schedule) -


Assumptions Made About Future
Estimate Future R/E returns 4%
Estimated Value of House 824,404
Annual Rental Income (as percent of estimated fair value) 5%
Beginning Annual Rental 33,880
Annual Rent Increase Percent 2.0%
Est. Repairs & Renovation (in today's dollars) 20,000
Depreciation Period 27.5
Estimated Annual Costs to the Lessor (See Sch A below) 13000
General Inflation Rate 4%
Property Management Fee 10%
Discount Rate 3%

Tax Assumptions
Taxpayer Assumptions
Tax Rates
Federal State & Local
Marginal Tax Rates: 28% 6% 34%
Capital Gains 15%
Depreciation Recapture 25%


Schedule A - Estimated Annual Costs to the Lessor
Real Estate Taxes 6000
Estimated repairs and maintenance 7000



Fifteen Year Mortgage
Mortgage Term 15
Mortgage Payment 1,988

Net Present Value of:
Rent Decision 398,575
Sell Decision 367,596

The Data Suggest that
Renting the Property is Preferred

Amount of the Benefit 30,979



Thirty Year Mortgage
Mortgage Term 30
Mortgage Payment 1,242

Net Present Value of:
Rent Decision 383,443
Sell Decision 349,091

The Data Suggest that
Renting the Property is Preferred

Amount of the Benefit 34,351

Scenario #2

Assumptions
Acquisition Date of House
House Cost, including land 500,000
Amount Allocated to Land 50,000
Down Payment Percent 50.00%
Amount Financed 250,000
Mortgage Rate 3.40%


Assumptions Made Today
Years into Mortgage 2
Decision Horizon - years 5
Past Real Estate Returns 5%
FMV of House 617,400
Market Depression Factor 2%
Selling Price of House 605,052
Real Estate Commission Rate 6%
Return on Alternate Investment 4.00%
Mortgage Payoff amount (if different from amortization schedule) -


Assumptions Made About Future
Estimate Future R/E returns 7%
Estimated Value of House 865,935
Annual Rental Income (as percent of estimated fair value) 5%
Beginning Annual Rental 30,870
Annual Rent Increase Percent 2.0%
Est. Repairs & Renovation (in today's dollars) 20,000
Depreciation Period 27.5
Estimated Annual Costs to the Lessor (See Sch A below) 14000
General Inflation Rate 3%
Property Management Fee 8%
Discount Rate 3%

Tax Assumptions
Taxpayer Assumptions
Tax Rates
Federal State & Local
Marginal Tax Rates: 28% 6% 28%
Capital Gains 15%
Depreciation Recapture 25%


Fifteen Year Mortgage
Mortgage Term 15
Mortgage Payment 1,988

Net Present Value of:
Rent Decision 402,182
Sell Decision 318,374

The Data Suggest that
Renting the Property is Preferred

Amount of the Benefit 83,808



Thirty Year Mortgage
Mortgage Term 30
Mortgage Payment 1,242

Net Present Value of:
Rent Decision 387,497
Sell Decision 299,869

The Data Suggest that
Renting the Property is Preferred

Amount of the Benefit 87,628

Niam
Posts: 83
Joined: Tue Jul 12, 2016 12:18 pm

Re: Rent out vs Sell with models

Post by Niam » Wed Sep 20, 2017 12:59 am

Not an expert, but I assume you'd get more $$$ for your house if you sold it with models instead of renting it out.

CurlyDave
Posts: 753
Joined: Thu Jul 28, 2016 11:37 am

Re: Rent out vs Sell with models

Post by CurlyDave » Wed Sep 20, 2017 3:08 am

finance_learner wrote:
Wed Sep 20, 2017 12:56 am
...The Data Suggest that
Renting the Property is Preferred...
This statement is just plain not true. A correct statement is: "the results of this particular model suggest that renting is preferred". You have no data at all on renting.

I have 4 or 5 decades of experience (both good and bad) with being a landlord, and I now own 12 rental units. The current ones are multi-family, but I started with single family houses.

The features that make a house a good rental are very different than those that make a good owner-occupied home. And, being a landlord is a business not a convenient decision based on moving to a different city.

Managing a rental from a remote location is virtually impossible, and hiring a property manager will eat up any potential profit.

* * * * * * * * *

DW and I have done well in rental real estate, and I encourage anyone inclined to try this avenue of wealth generation to go for it. BUT, I think if you want to own rental property, you would be far better served to sell your existing house and divide the equity into two parts. One part for a down payment on a home in your new location, and a second, smaller part for a down payment on a rental in your new city.

A good rental is much more spartan, very plain, and probably much smaller than the house you want to buy for your family to live in. And, you want to gain experience as a landlord where you can drive by your rental property periodically and keep an eye on it.

All the mathematical models in the world are not going to help you when a pot farm sprouts up in the backyard of your rental, especially if you are in a different city. What does the model say you do when the nice family you rented to lets a cousin with unruly kids and 3 dogs move in with them because they were evicted from their previous rental? If you are in a different city, you don't even know it happened until well after they have acquired squatter's rights.

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