You may be thinking should I sell my rental property or keep it? We have discussed the different ideas and models one should review prior to purchasing an investment property. Let’s assume though you have been through those steps, have had a relatively decent track record of keeping the place rented, and now want to analyze whether it makes financial sense to sell or hold.
As we all know, a good investment decision is predicated on a solid review of the numbers. For the purpose here, we’ll say we purchased a $100,000 property that needed about $10,000 in repairs to get it up to speed. Thus, we originally needed about $35,000 in cash to purchase this $100,000 asset. After the updates and finishing touches, we have been renting the property for about $1,500 month. That’s $18,000 over the year. From this we’ll subtract our carry cost, taxes, maintenance expense, and vacancy. This yields us about $3,000 in positive cash flow. That’s an estimated 10% return on our cash. Not to mention the historical rate of appreciation for real estate is 3-5%.
Based upon this return does it make sense to sell? Well it depends. Take the value of your property today and subtract the amount currently owed on the mortgage. Depending on where you live, you may want to figure 5-7% in transactional costs to sell the property. What are you left with?
The question then becomes, can you take that cash from the sale and reinvest into something that would yield better than 10%?
A very quick example for sure, but you can begin to see that with a fairly easy calculation you can continue to base your decisions on the “numbers”. This will help keep you tethered as the headlines and markets pull us all into all sorts of directions.
By Gavin Jackson