I get calls and emails almost every day from people asking if it’s better to hold onto a property they are trying to sell and rent it out or just sell at a discounted price. Based on my experience of owning over 100 units myself over the past 10 years, as well as managing 400 other single family homes, it’s a resounding YES to hold the property instead of taking a loss. I’ll explain some of my reasoning below.
For examples I will use below, let’s use this Indianapolis real estate related property: Property was appraised at $200k in 2006 and is a 4 bedroom 3 bath two story home in Indianapolis, IN. Home rents for $1,600/month in today’s marketplace. Your payments, with taxes and insurance, are $1,300/month.
First, if it appraised for $200k 3 years ago, potentially, this property could be worth 15%-20% less than in 2005. If it’s worth 20% less right now because of the real estate downturn, this property would sell for $160k, or $40k less than 3 years ago. Instead of selling for this loss, what if you were to rent this property out for 3 years? You would come out ahead in the following ways:
1) Not selling for discounted price to unload it now.
2) Depreciation expense right off
3) Interest expense right off
4) Principle pay down
5) Cash flow from tenant renting your home.
I’ll discuss in greater detail how each of these will affect you over a 3 year time period.
Number one reason listed above is pretty simple, by not selling now and waiting for market to recover in 3 years, you are potentially saving yourself from losing $40k, which amounts to $13k/year of savings, or $1,083/month in your pocket.
Reason number two as listed above: You are allowed to depreciate your property with a 27.5 year depreciation schedule. What does this mean for you? $200k home would depreciate 200k/27.5 years = $7,272/year. If you are in the 30% tax bracket, you would save, in taxes each year, $2,181/year in taxes paid. Over three years, this amounts to $6,545 in your pocket. How would you like to put an extra $200/month in your pocket?
Reason number three as listed above: You are allowed to right off interest expense on your home as a loss. Let’s say the interest on your home costs you $900/month. That is $10,800 in interest expense over a year and $32,400 over 3 years. Again, in the 30% tax bracket and you are saving $3,240/year in taxes paid, or $270/month more in your pocket. The beauty here is, your tenant is paying your interest expense here, but you are collecting the tax benefits of this interest being paid.
Reason number four as listed above: Each month when you pay your mortgage, you are slowly paying off the principle of your loan. For simplicity sake, let’s use $150/month as a reasonable amount on a 30 year note you may have been paying on for several years. This is another $150/month in your pocket.
And finally, reason number five as listed above: If you rent this home for $1,600/month and your payments are $1,300/month, you are cash flowing at least $140/month, even after taking into consideration a property a management company managing your property for you for $160/month.
Let’s add up the $$$ you will be ahead if you decide to rent your property instead of selling it n today’s real estate market: $1,083 + $200 + $270 + $150 + $140 = $1,843/month in your pocket! Over 3 years, this amounts to $66,348 in real life savings from not selling in today’s marketplace and waiting for prices to come back to more realistic levels.
One final note, make sure to find a qualified property management company in your area to assist with finding tenant, screening tenants, collecting rent, handling those 2am calls about a furnace issue. Do not do this on your own!