exterior shot of a well kept home

Selling VS Keeping Your Rental Property: Generate Wealth

By: Ron Sudman
September 20, 2023  | 

Not too long ago, we were talking about how H-O-T the housing market was. Properties were receiving 15 to– 20 offers at a time and were selling at above-asking prices.

It was a selling frenzy for landlords and homeowners alike. And then inflation hit with a furry. Rising interest rates and increased commodity prices started eating away at buyers’ bottom lines making homebuying less of a priority and in some cases, pushing the affordability of a home out of their price range.

Inventory Supply

Since 2019, we have seen a steady decline in the number of homes on the market, contributing to the super HOT market that we were seeing. The lowest market arrived in January 2022, and since then the number of homes on the market has started to climb back up.

With the slow change in the market, the question now becomes, “Should I sell my property or keep my rental property?”

Before you pick up the phone to call your Real Estate Agent ask yourself these 4 questions:

1. What is your overall strategy for the rental property or properties? Buy and hold for retirement? Or are you active in the buying and flipping of properties?

2. Are you looking to keep it long-term, or were you looking to sell it anyways within 2 years or less?

3. Have you recently made any major improvements to the rental property in the last 2 years?

4. What is your interest rate on your rental property loan?

Knowing the answers to these questions will aid in making the decision.

Watch the full webinar Did You Lose $97,000 in 2021?

Cost of Selling Your Rental Property

When you consider selling your property, I recommend that you break down the overall cost in selling the property.

For the sake of this example, we are going to assume the sales price of your property is $500,000.

RE Sales Commission: typically the commission is 5% of the price of the home. So in this example, selling your $500,000 property will cost you approximately, $25,000.

Closing Costs: usually closing costs run about 2% of the price or $10,000.

Repair Costs: most homes need some repairs before selling especially older homes, the average cost runs about $15,000.

Vacancy Cost: if you are selling your rental property, chances are it will sit vacant while you rehab the property and have open houses. Average time is 2 to 3 months, averaging $7,500.

Capital Gains Tax: If you recall, in our previous webinar, if you don’t use the profits to purchase another property via a 1031 Tax Deferred Exchange, you will be subject to 20% in taxes. In this case, $40,000.

If you add that all up, that’s a grand total of $97,500 that it COST you to sell your property.

And let’s not forget about the tax savings you receive each year just for owning a rental property, which adds another $2000-$4000 a year you will lose.

After evaluating the cost of selling your rental property, you decide that you still need or want to sell, the next question is “When is the best time to sell it?”

Tracking all pertinent data will help make that decision. Data such as how many properties are currently on the market, how many days are properties taking to sell, etc.

Our agents track this data monthly and can help you when and if the time comes that you need to sell your home.

Doing the Opposite Of What Others are Doing: Does It Work?

What if instead of selling your home or rental property, you took a different approach? Instead of selling your property, what if you took out a $200,000 loan at an interest rate of 5% on your current rental property? The loan payment would be roughly $1,073 a month.

When your first property becomes vacant increase the rent on your first rental property to market standards, some as much as $500-$1,000 more per month. Which will cover all or most of the cost of the loan payment.

Use the $200,000 to purchase a second property worth roughly $500,000. Your payment on the second property with tax and insurance will run about $2,350 a month. Rent out the second property with a rent of $3,500, and put $25,000 in your emergency fund.

You have now added to your portfolio and are creating a positive cash flow of nearly $1,000 a month. Had you done this two years ago, both properties would be worth roughly $800,000 each with the amazing appreciation of 29% each year. Compared to if you sold the property costing yourself $97,500.

Here is a great resource for you to help decide if you should Rent or Sell: It’s FREE 

Right now, we have Inflation running out of control at 9.1% but it’s closer to 15-20% on things you buy every day. This is a STEALTH TAX. One of your best hedges to keep your wealth in high inflationary times is Real Estate and other hard assets. However, you should have some cash on hand for reserves.

People who have kept their assets in cash since 2000 have lost significant wealth. If you had $100,000 in cash in 2000 it is now only worth $62,000 in purchasing power, a 38% loss of wealth.

If you want more information, please contact our office and we would love to help.

Tyler sudman of management one property managment

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