Have a Property That You Don’t Live In? Thinking of Selling it? WAIT! Avoid a BIG Mistake.
Many people will encounter a situation in their lifetime where they must decide what to do with a property. You could own a home and have to move for work, fall in love with a partner who also owns a home, or receive a property as part of an inheritance. Each situation would be an example of a giant opportunity that most people miss out on. The majority of people in these situations end up making the poor decision of selling a property when they could be creating an additional income stream in perpetuity! Selling a property is almost always the incorrect play.
If a property was held for a period of time without additional debt being added to the original mortgage it is very likely that the operating costs are now well below the current rent it would command if a tenant was placed. This can provide consistent and continuously increasing cash flow as rent rates normally increase along with demand and inflation over time. If you add the rent increase over time along with the mortgage payment decreasing the margins get even better the longer the property is held. During this time the property appreciation would be like an additional savings account you are being paid to have! The combination of leverage, appreciation, debt reduction, rent increases, tax advantages and continuous cash flow make real estate an investment like no other.
Cash In Hand Awakens The Tax Man.
“I can sell the property and cash out $xx,xxx” is what the average person thinks when faced with this decision. We ask clients “so where do you plan to invest the proceeds from the property sale?” As you can imagine the answers to that question do not include investments often and if they do, it is likely to be a less profitable investment. This is an incomplete analysis of the situation. Most people see $50,000 potential equity as a winning lottery ticket. They thank their lucky stars and get in the line to list the property and cash out. This is almost always a big mistake! For an easy example let’s say that the property with $50,000 equity is currently worth $200,000 and could be rented for a $700/month profit and that real estate has been appreciating 3% a year. The complete analysis would be a much different question. It would be a choice between a taxable $50,000 today or $8400/ year extra income plus $6000 extra equity each year plus the same $50,000 equity at the time of a future sale!
The stock market has historically produced annual returns in the 7-9% range. Let’s look at what $50,000 invested at the top end of that range looks like over the life of a mortgage.
The $50,000 from year one can grow to $608,609.10 by year 30 if a 9% annual return is achieved.
Now let’s look at the results of holding the rental property over the same time frame.
Use Rental Revenue To Pay Down Debt On Assets And Reinvest.
The $200,000 rental property appreciates to a $471,313.10 value by the end of a 30 year mortgage. This is $137,296 less than the final value of the stock market investment over the same period BUT this is not the whole story. We need to look at the rents over this time also. This is where it becomes extremely clear what the correct decision is.
Don't Sell Cash Flow Producing Assets, Reinvest!
The property had a $700/month ($8400/annual) profit at year one and as rents increased to match appreciation you can see the annual profit grows to $19,795.15 at the final year and the total profit over the life of the mortgage is $399,633.49! The verdict is clear. Selling the property to get the $50,000 in equity and investing at 9% grew to $608,609.10 while holding the property and collecting the rents produced $399,633.49 over the same period while the property ended up worth $471,313.10 for a total value of $870,946.59 at the end of the life of the mortgage. In addition you would have the added ability to reinvest the cashflow received from the rent and also are likely to have tax advantages from property ownership.
Return on investment is the key metric to consider and 9% is the stock market average used above. Imagine getting 3x that return or on your money! That is exactly what you get when you leave your $50,000 invested in the rental property in this scenario! $14,400 per year ($700/month rental income ($8400) + 3% appreciation on the value of the home ($6000) is 28% or more than three times the average return you could get on stocks! While these numbers are not representative of all property owners, we do see similar scenarios and on occasion even better with Nexus™ Nvest® selected properties for our clients.
One of the main reasons property owners choose to sell real estate vs renting it is because managing property can be a hassle to say the least! Dealing with evictions, emergency calls, tenant conflicts and complaints are not enjoyable. Many landlords choose to give away the potential profit by selling, to avoid the headaches and hassles. A smarter move is to hire a professional property manager to take care of these issues. This way property owners can enjoy the high potential returns from rental property and avoid the day to day hassles.
Nick D'Agnillo is the CEO & Founder of Nexus Property Management™. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.
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