Lately I’ve been debating about selling my home in Vegas. Spurred in part by my father (who is by nature a fiscally cautious and reserved person), I’ve been trying to decide if now might be the time to sell the home and reinvest in another investment property.
I started with a traditional options list –
In the “it’s time to sell” column are:
- The pandemic and the exodus of California have created a housing shortage in the Las Vegas area. The market is at an “all time high”.
- I can sell the property and not incur capital gains taxes, qualifying under the “2 in 5 years” rule.
- The potential elimination of the 1031 exchange
In the “it’s time to rent” column are:
- The potential profit, especially considering the fees incurred by the seller, doesn’t meet my objectives.
- The difficulty in finding a replacement rental property.
- I have limited liability against the home.
I then built a spreadsheet to run the numbers. It includes the calculations if I sell the home:
From the sale price, subtract the purchase price, repair cost, commissions / fees, and if applicable the personal taxes you’ll pay on the profits. What’s left is your net profit.
It also includes the monthly and annual profit if I rent the home.
From the average rental income, subtract the mortgage, the property taxes & the insurance (assuming they are not included in the mortgage payment), HOA fees, home warranty cost, average maintenance and ancillary costs.
This will give you the net cash profit.
Optionally, you can include the estimated earned equity you generate with each mortgage payment.
With these numbers, I’m able to derive three base figures:
- The number of years of renting it will take to generate the same amount as selling.
- The number of years of renting (including earned equity) it will take to generate the same amount as selling.
- The number of “rental years” it will take to pay off the home loan.
In my case, those numbers were:
- 9 years to generate the same amount of income renting vs. selling.
- 5 years 3 months to generate the same amount of income (including earned equity) renting vs. selling.
- 20 years to pay off the loan with rental income.
I also looked at some of the more traditional calculations. Dividing the annual rental income profit (cash only) by the initial downpayment is a 7.4% yield. Including the equity increasing that to a 12.9% yield. The same calculations based upon the current equity is 3% and 5% respectively.
As a side note, for these calculations I did not include the cost to repair the property – as they would be the same if I sold the property or rented it. I did , however, consider the cost the repair the property in consideration of the net profit earned if I sold the home.
So what am I going to decide to do? Well, honestly after the cost of repairing and selling the property, the profit upon sale isn’t tremendous. Which also means that the potential benefit of avoiding capital gains on the sale of the home is minimal.
I’m still working through the numbers, but I’ll let you know what I eventually decide.