If you self-manage your rental and you’re thinking of selling it you have other options. You could hire a property manager as well. We break down all the data on a real-life example…

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Show Transcription:

00:00 Hey everybody. Welcome back to another episode of Rent Prep for landlords. I’m your host Eric Worall, and in today’s episode I’m going to be getting a little bit nerdy and into numbers, talking about comparing, keeping a property versus selling and reinvesting it in the markets. So we’re going to be a doing a deep dive on this and kind of, uh, bringing in a couple of different minds on this podcast and, uh, sharing those details with you. So, uh, we’re gonna get to that right after this….

00:28 1,2,3,4 ya ya ya…. Welcome to the RentPrep for landlords podcast. And now your host, Steven White and Eric Worral.

00:37 As I mentioned, this is episode 268. And what we’re gonna be talking about here is based on a real world example. Last week I was talking about selling my rental property. I still go back and forth on it, right? It’s always you know, one day you’re like, yes, I want to do this. The next day it’s like, no, I’m crazy. Why would I do with that? Well, I did talk to my buddy who’s a realtor and he goes, you know, the first thing you gotta do is talk to your accountant. He’ll be able to give you better details. So what I’m going to do is I’m going to give you a, the the numbers and details that the accountant gave me and then what those numbers may look like if I was to invest it in other places. So the rental property that I have, uh, is 11 years old. And when I bought it, it was $114,500. According to the realtor. He said that $250,000 is probably a pretty good benchmark to use for the sale price. We think so we could probably get about 250,000. So I shared a bunch of details with my realtor and I will pull those up actually in the email that I sent him, cause he ended up calling me with kind of information back but what I told him is, um, I owe 60,000 on it. It could sell for 250 and I bought it for 114. So when it sells for 250, um, he said, you know, your capital, uh, gains that you be getting a taxed on is the difference between the 250,000 and the 114,500 that you sold it for. Uh, and also I, you’re going to be subtracting your mortgage costs out of it. And he said, you’re also going to want to consider your commission. So he said, for a safe bet, you can figure $15,000 right off of the 250 for commission. And based on my previous year of taxes, so he’s looking at, you know, our tax, uh, information from 2018, uh, he thinks that we would be taxed a total of $36,000. I do not have a great breakdown of how he got that at. That’s just the capital gains. So I apologize because I’m not an accountant. Um, but what he came up with is essentially it looks like about $51,000. Um, so subtract that out, uh, from the, uh, 250. So that’s again for commissions and tax. So that brings us down to 200 a and then subtract another $60,000 for the mortgage, uh, that I still have on the property. It brings us down to $140,000 of profit. Now, not bad, right? So what I’m trying to decide is does that final number 140,000, um, what can I do with that versus what if I hold onto the property and look at other options that are available to me. So really easy thing you can do. Uh, there’s one calculator that I liked this pretty simple. You can just kind of Google it and if you just look, money chimp, uh, interest calculator, what you can do with that is I plugged in 140,000 and I said, you know what, what if I sold my rental and just put all of the proceeds into the stock market, right? Just bought an index fund that buys the entire stock market, which a lot of people are doing these days. A vanguard popularized us. And, uh, typically what you do, if you’re doing this as you, you go with seven or 8% returns, um, that’s kind of your safe bet seven. You know, if it’s low eights kinda high. Um, but either of those numbers are a pretty safe bet for what the average returns will be if you’re looking at a long period. So what I decided to do was look at 20 years to grow. Uh, and the reason I chose that is I’m still, uh, I still got about 20 years left on that mortgage. I did a 30 year mortgage and honestly, like the top of my mind, I can’t remember if I’m technically in year 10 or 11 of the mortgage. Uh, I bought it in 2009. It’s 2019. But you know, my brain doesn’t work that well. That’s why you have an accountant.

04:23 But I put the number that, that, that principle, the, the amount that I would get back from selling after everything’s done, all things considered, I’d have $140,000 if I, if it compounded on average at 7% interest rate for 20 years, the future value of that, that money would be $540,000. All right, so that’s in 20 years. Uh, we actually have somebody that’s, uh, working with us part time, potentially full time in the future. He’s helping us out, uh, with, uh, organizing things, but also, um, really he’s a numbers guy. He’s got a couple of finance degrees. His name’s nick. I was showing him a spreadsheet I was working through and saying, hey, like poke holes in this thing. Tell me, uh, tell me what you would do with this spreadsheet and what the purpose of the spreadsheet was, is I wanted to get a 20 year visual of what the rental property would be worth if I kept it. And also what would it be worth if I were to hire a property manager as well? So what I did is I took the rent amount this year that, um, the property you can take in, which is $2,000. I subtract it out, mortgage and taxes, and then I considered for vacancy rates, also the water city user fees. Um, and then a 1% rule for maintenance. So there’s a lot of different rules that people do for maintenance. One popular one is just take 1% of the rental property, uh, value. So let’s say you have a rental property for easy numbers to $100,000 property, 1% of that is $1,000 that you should just stock every single year. Um, and you know, it can go up as the rental property value goes up just for repairs. Well, in my particular case, um, if we believe that the property is worth 250,000, the 1% this year that you’d stock away is 2,500. And then what we did is we put in, um, uh, calculations and, uh, I should say, uh, not calculations, but formulas to account for, uh, appreciation. So we said, you know, with this home value, uh, annually increases by 3%. Uh, that means my 1% rule is going to go up every year. So in 20 years I’d actually be putting away $4,383, because we’re assuming that the price of the property is increased as well. So I’ve got the big long spreadsheet and if you want, I’m not going to include it in today’s show notes, uh, but if you are interested in it and seeing what it is, uh, you can email me at Eric@rent-prep and I can share it with Ya. Um, but we’re looking at eventually a number that’s net profit before property manager and net profit after a property manager. So there’s a, um, sell that, uh, you can put in what the cost of the property manager is. And what I did is I just put 10% in there. They tend to range eight to 12%. Um, but, uh, I put in a 10% property management fee based on rent collected. So if it’s a monthly rent being collected as 2000 well the monthly cost and yearly cost of that I should say would be $2,400 a year. But again, that number is going to go up as your rents increase as well. So what I’m looking at then for final numbers is, well, if I sold the house to be worth 140,000 what if I took that money and then I put it into an investment that returned 7% what does that look like? Well, we said that’s $540,000 but what if I actually just instead, because maybe I don’t want to manage the property anymore, I hire a property manager. What does that look like? The final number, 20 year cashflow. So after all expenses, property manager, everything 20 year cashflow came out to $229,000 so far less than the 540,000 but at that point in 20 years, I would own the property outright, no mortgage would be on it and the property value. And now this is where it gets kind of fuzzy. But what I did is I plugged it into a calculation and said, if it’s worth 250,000 today in the property, uh, there’s an annual increase of the appreciation by 3% in 20 years it would be worth $450,000. So now what I can do is I can take that property value in 20 years, $450,000 I can add it to the cashflow that I’m getting on this property, which this property does cash flow very well. And the total property value plus cash flow, and this is after property manager expenses would be 679,000 or 679, uh, 207th excuse me, I didn’t sleep a lot last night. It’d be just over $679,000 a couple of extra hundred bucks on top of that. So I’m gonna run through these numbers again. But again, a nick who’s working with us, he’s got several finance degrees and he was really getting into the weeds on it as far as like, uh, he was even looking at a discount rate and considering inflation in different ways in that, uh, but the numbers that we were coming up with are, uh, pretty drastic if you’re assuming a 7% return in index funds in the market, right. And again, if you’re not familiar index funds, it’s just where you’re buying one fund, it’s got really low expenses and you’re just maybe buying the entire market or you’re buying the s and p 500 or you’re buying the top 2000 stocks. Uh, if we assume an 8% return on that, that number does jump up to 652000, uh, pretty close to the 600, nearly 80,000 of the property value in cash flow.

09:47 So it’s kind of an interesting little study. Uh, you’re still not passively investing with rental property. Even if you have a property manager, likelihood of that property manager being with you for 20 years, you know, you’re probably gonna have some, some of that to deal with. Uh, there are risks obviously with rental properties where you could have, you know, you get sued, you could have a fire, you all sorts of stuff that could happen, um, with the rental. Uh, but then again, the market has risks as well. You could, you know, get that hundred $40,000 payday that windfall and invest it and just happened to invest the lump sum at a horrible time right before the market just takes a major downturn where that, you know, at least in my market here in Buffalo, am I going to say we are recession proof, but our housing market’s pretty stable. It doesn’t get too high. It doesn’t get too low. So I would say there’s less volatility overall. I’m looking at the projections that I’m seeing for 20 year projections. I’m keeping the property. Uh, so this is kind of where my head’s at at this point because, uh, I’m trying to take as much data in as I can kind of assess the situation. And just to recap based off of last week, uh, if you caught last week’s podcast, I’m selling the farm. Uh, I have a two unit, but I also have a wife, a two year old, uh, going to be soon two year old and a baby on the way in November. So congrats to me. And uh, I know, uh, ahead of time after having one, it’d be like, wow, this is a lot of work. So from what I hear, having two is more work, uh, surprise, surprise. So what I’m trying to do is I’m trying to reduce my time commitments, right? I don’t want to be going over to the rental property for a leaky faucet and those kinds of things. Yes. I’ve done the DIY thing for over 10 years. It’s worked out great. Uh, fixing everything myself. But, uh, with time I am valuing, uh, my time more than I did 10 years ago, especially more than I did just even two years ago, uh, before my son was born. So I’m trying to kind of think of my future in that way of like, all right, what is my time worth a year from now compared to today and versus five years ago? And it’s very drastically different. Right? So, uh, for the first time I was seriously considering a property manager for that reason and being able to look at all the data and really, you know, it’s based on a lot of variables, right? We, we, uh, put in a 3% annual increase in the property value. Well, you know, the, the, the housing market collapse and suddenly it’s actually down and rents are down or whatever. You know, there’s a lot of different factors that you can consider here. Um, but being able to take in as much data as you can before you make a decision is always good. Uh, and then being able to, uh, one thing I picked up from the author of Principles, Ray DALIO, he is always triangulate, says decisions before you make some major decisions. So he’ll, uh, he’ll reach out if he’s getting a quote on a roof per say, right? A roof is pretty expensive. Uh, don’t get one quote, get three quotes. Uh, if you’re buying bananas, don’t go to three grocery stores. Just go to one. Like, it’s not a big decision, but if you get a, a diagnosis that you’re sick, get three different doctors to weigh in on that diagnosis. Right? Uh, this is a major decision and one of the principles that he lives by is triangulating his decisions. And he actually used that as a reference in the book, um, that he was given a terminal, um, diagnosis. Uh, said he had about like six months to live and then he talked with a different doctor and the doctor said, you know what, we think we could possibly do this and you could be fine. And another doctor said, this is not a problem at all. You gotta do is just get, uh, this is essentially like a sunspot. Like we just treat it and you’re going to be fine. He turned out to be fine. But what he found out from that experience was that even these top of the line doctors, I mean this guy is one of the richest people on the planet. So he has a really, really good doctors. They couldn’t agree on his sickness and he said by triangulating and he could find the information that worked best for him. And he started with the least abrasive option and started working backwards from that and that least abrasive option work best. So that’s kind of what I’m doing right now is I’m looking at the situation and saying, okay, I have this rental property. Uh, it’s been obviously a tug and pole relationship where, you know, you know, any landlord knows this, you, you have times where you’re like, you haven’t heard the phone ring and nine months and you’re just getting paychecks or rent checks on time, uh, every month. And being a landlord is the greatest thing ever. And then all of a sudden it’s just like, oh, the basement flooded and there was some stuff down there and it’s wrecked and you gotta go deal with it. Right. So I’m weighing my options on that and trying to figure out, uh, pretty much look at all the data the best I can so I can make an informed decision on what to do. And today, you know, at things, I’m like, you don’t want it. I may keep it in hire. Property Manager, Andrew Schultz has been on the podcast several times. We used to do the weekly, um, video series as well. Uh, he’d be my first go to on that. Um, but, uh, yeah, it’s just interesting to be able to take all this stuff in. And I guess this is kind of just part of growing up and figuring these things out and living with your decisions on what you end up doing. You know, I could decide to keep this and also in the housing market collapses in a year and I’m like, Oh, I should’ve sold that, you know.

15:21 So, uh, I just wanted to share with you guys again, if you’re interested in the spreadsheet, I can share with you what I got so far. I don’t want to make it public on the, um, website, because I’m going to be tinkering with this a little bit more, uh, with nick as he is a time frees up here and we can kind of start working on some of these resources for you guys. Uh, but just wanted to share with you where I’m at because I’m kind of piggybacking off of last week’s episode. So, uh, yeah, until next week guys, I’m sure I’ll change my opinion 10 times on selling or keeping the property, but I’m still working through it and talking with the professionals, realtor, accountant, uh, nick, who’s really good with the spreadsheets and figuring that kind of stuff out too. So, uh, yeah. And until next week, have a great week. Take care.