Remember Buy and Hold?

There are a number of landlords currently selling their investment.  I do not pretend to know why.

Let us look at some typical numbers.  Rental house purchased for $200,000.  Nice 3BR 2BA 2car garage brick home in a good neighborhood.  Good neighborhoods attract good renters.

20% down at 4% 30 yr term.  Let us say the PITI is $1,000/mo. 

The unit rents for $1,400.  $400/mo cash flow = $4,800 per year. 

Did not have to pay $2,500 in taxes due to deductions on the property.

Property has been appreciating at 2% per year.

• Yr1 $204,000
• Yr2 $208,080
• Yr3 $212,242
• Yr4 $216,487

Every year SouthCoast Properties raises the rent on renewal.

• Yr1 $1400 (cash flow $4,800)
• Yr2 $1425 (cash flow $5,100)
• Yr3 $1475 (cash flow $5,700)
• Yr4 $1525 (cash flow $6,300)

Over the past 4 years, you have cash flowed $21,900 and deductions yielded over $10,000.  The property value went up $16,487.  $48,387 in benefit to you. 

Now sell it?

Move out the good renters.  Do a make ready and staging for the sales market.  Takes 3 months to make ready and get a good offer.  Make ready costs $2,000.  Cost you $3,000 to hold it for 3 months.  Lost opportunity from the rental around $1,575.

You get a contract for $215,000.  6% goes to the realtor.  Let us say another 2% goes to fees and such.  You owe $148,000 to the lender.  $49,800 to you. 

You put in $40,000 as a down payment, so your profit is $9,800.  But you put out $5,000 to sell it (and did not earn $1,575).  Total profit from sale more like $4,800?  You were making that in cash flow yr1.  And the IRS will want their capital gains tax – darn it!

Sell it?  How about:

• Yr5 rent  $1550   (cash flow $6,600, and don’t pay out $2,500 in taxes = $9,100)
• Yr5 value  $220,817

Over the past 5 years, you have cash flowed $28,500 and deductions yielded over $13,000.  The property value went up $20,817.  $62,317 in benefit to you. 

Run the scenario out 10 years, or more.  Consider refinancing to increase cash flow.  Do not forget the benefit to your net worth.  Consider purchasing additional rental property!  Of course, discuss with your CPA.